June 2018 - Monthly Insights - Israeli Venture Capital
Updated: Aug 15, 2018
ON THE BACK OF STRONG M&A ACTIVITY IN 2017, EXPECTATIONS REMAIN HIGH FOR FUTURE GROWTH
2017 was a record breaking year for M&A activity in Israeli venture capital, with over $21 billion in acquisition activities, mostly driven by the acquisition of Mobileye by Intel for $15.3 billion. Based on a recent survey issued by international law firm, White & Case, it appears that the market continues to maintain high expectations for the future growth in M&A activities (both in tech and in general). Based on the survey, the vast majority of respondents (about 75%) indicated that they expect to be involved in ‘moderately more’ or ‘significantly more’ M&A activity in the upcoming 12 months. In comparison, in 2017 only 35% of respondents believed that they would be involved in ‘moderately more’ or ‘significantly more’ M&A activity in the upcoming 12 months. While the market is expecting additional activity, it appears that it does not expect competition to rise at the same pace, as about 58% of respondents anticipate a ‘moderate increase’ or a ‘significant increase’ in the competition for assets in the Israeli market. In the tech market, specifically, we believe that this discrepancy is driven by the strong supply of acquisition targets, as more Israeli startups continue to scale.
Interestingly, the respondents expect that the added M&A activity will originate from foreign PE firms and foreign public corporations. We believe that these results are very much in line with the global changes we are seeing in the venture capital industry, which include a greater involvement of PE firms in late stage deals (creating secondary sale opportunities for venture capital funds) and non-tech corporates in M&A activities. In Israel, particularly, we have seen these two trends evolve over the past few years. One example is the sale by Viola Ventures (formerly Carmel Ventures) of part of its holdings in Payoneer to two PE groups during the latest round in the company. We tend to favor such moves, which allow venture capital funds to reduce risk, generate liquidity, while maintaining sufficient upside, specifically in an environment in which companies remain private for longer periods. On the non-tech acquisition front, we have seen the acquisition of Argus by Continental in 2017 which marked one of the largest acquisitions by non-tech acquirers in Israel.
In 2017 we have seen a strong drop in global M&A activity of Chinese investors, due to considerable regulations on the outflow of foreign capital from China issued by the Chinese government. These restrictions also had a strong impact on Chinese M&A activity in Israel. While in 2016 Chinese M&A activity accounted for 4 of the 10 largest deals, in 2017 there was only one Chinese acquisition in the top 20 deals. The majority of survey respondents (51%) indicated that they are anticipating a reversal of the trend in the next 12 months. With the ease of regulation in December 2017 by the Chinese government we also strongly believe that this would be the case. The strong excitement around the recent visit of Jack Ma in Israel, co-Founder and Executive Chairman of Alibaba, provides tailwind to our views. Overall, the involvement of Chinese and Asian players in the M&A market will provide support to returns of venture capital investors.
NOTABLE INVESTMENT ROUNDS
SQream, secured its series B funding of $26.4 million from Alibaba, Hanaco Ventures and current investors. SQream develops a GPU-powered SQL database designed to quickly relieve big-data analysis.
StoreDot, a Singulariteam portfolio company, secured its growth funding for $20 million from BP (LON: BP). StoreDot develops lithium-ion based batteries from organic compounds.
MinuteMedia, a Gemini Israel Ventures, Qumra Capital and Battery Ventures portfolio company, secured its F funding for $17 million from Vintage Investment Partners and current investors in the company.MinuteMedia is a sports media technology company powered by social media driven content.
Electronic Arts Inc. (NASDAQ: EA), a U.S. based gaming company, acquired the cloud division of GameFly, a developer of cloud based gaming solutions. As part of the acquisition, EA will open its first R&D center in Israel.
Canon Inc (TYO: 7751), a Japanese imaging and optical products company, acquired Briefcam, a developer of video synopsis solutions for rapid video review and search, for an undisclosed amount.
NOTABLE FUND FORMATIONS
Entrée Capital, announced the formation of a new $80 million fund targeting investments in early stage and later rounds (up to growth). Entrée Capital was established in 2009 as a private investment fund and this new fund marks its first fund open to 3rd party investors.
RECOMMENDED VENTURE CAPITAL READS
Why Melinda Gates has been backing female VCs through her secretive investment fund. [Fortune]
As part of a major push to expand its private equity operations, BlackRock is going back to college. [Bloomberg]
Xerox and Fujifilm's recent failed merger is a lesson in how not to negotiate a $6.1 billion deal. [Bloomberg]