EARLY STAGE FUNDING CRUNCH CONTINUES TO EMERGE ON THE BACK OF A STRONG Q1/2017
As highlighted in our previous newsletter, Israeli venture capital posted another strong quarter in the first three months of 2017 with over US$1 billion raised by Israeli startup companies. Investments in the first quarter of 2017 were characterized by numerous late stage financing rounds and a further decline in early stage investments; the number of seed and round A financing rounds decreased by 16% and 31% quarter over quarter, respectively. This resulted in large declines in the amount of capital raised in these stages which fell to US$247 billion from US$267 a quarter ago, representing an 8% drop on a quarterly basis and an even greater 23% decline from a year ago.
The decline in capital allocation towards early stage financings confirms our earlier analysis that both Israeli and global venture capital funds are rotating towards later stage financings which is accelerating a funding crunch in early financing rounds. Our analysis suggests that this trend has been playing out since 2013, as funding to early stage financing rounds started to decrease, falling by 58% by the end of 2016. The unparalleled 115% increase in the number of new startups formed between 2015 and 2016 relative to 2013 and 2014, is likely to further exacerbate the imbalance between supply and demand in early stage capital, as a slew of startups will be looking for early stage capital in 2017 and 2018. This structural shift in the Israeli venture capital market is creating a favorable environment for early stage investors, as reduced competition leads to attractive valuations of technological companies and augers well for future returns. This stands in contrast to the environment for late stage players, who are facing stronger competition to their deal-flow which is resulting in less favorable investment terms. With limited capital available in early stage, we expect competition to intensify given fewer companies looking for late stage capital. We continue to believe that exposure to Israeli venture capital should be obtained through a balanced strategy, with an emphasis towards early stage funds.
INTEL’S ACQUISITION OF MOBILEYE PROVIDES TAILWIND TO THE GROWING SMART MOBILITY SECTOR IN ISRAEL
Although only three months have passed since the announcement of Intel’s acquisition of Mobileye for a record breaking $15.3 billion, the acquisition is already starting to have a trickle-down effect on the smart mobility sector, as Israel continues to solidify its position as a technological leader in the space. Since the acquisition, we have observed a strong acceleration in investments, with an aggregate amount of $120 million invested in Israeli companies focused on smart mobility. Two of the main investment rounds were headed by OTONOMO, which raised $25 million to continue the development of its secure car data exchange platform, and Autotalks, which raised $30 million to continue the development of its leading V2X (vehicle-to-vehicle/vehicle-to-infrastructure) chipsets. With an estimated 529 companies operating in the smart mobility sector, we expect to see enhanced activity in the sector in the upcoming months. Check Point, the leading Israeli cyber security company, has announced that it will form a “working group in the field of cyber security which will work on specifications required for advanced cyber solutions for connected vehicles”. While this announcement may sound trivial, it encompasses a more strategic shift of Check Point towards cyber solutions for connected cars. With available cash of round $3.5 billion, Check Point is also well positioned to acquire several key players in the field. Gett, better known as the Israeli Uber, announced the acquisition of its New York based competitor, Juno, for $200 million, as part of its larger strategy of pivoting to becoming a solution provider for transportation management in the age of autonomous vehicles. This strategic shift of Gett is being developed together with its main investor, Volkswagen, which invested $300 million in the company, and in direct cooperation with MOIA, Volkswagen Group’s stand-alone mobility services company.
ISRAEL’S MINISTER OF FINANCE COMMITS TO REGULATORY REFORMS AIMED AT INCREASING INVESTMENTS OF ISRAELI INSTITUTIONALS IN ISRAELI VENTURE CAPITAL FUNDS
For the second time in April, Israel’s Minster of Finance, Moshe Kahlon – met with representatives of Israeli institutional investors, heads of the IATI (Israel Advanced Technologies Industries) and numerous Israeli venture capital fund managers, to discuss increasing investments by Israeli institutionals in the local venture capital market.
Historically, Israeli institutionals allocated only a small portion of their portfolio towards Israeli venture capital funds (in 2016 their investments accounted for 13% of capital raised by Israeli venture capital funds). This is largely due to the strong regulatory hurdles which prevent them from increasing their allocations, including limitations on fees, to third party managers, onerous value added taxes on management fees and unfavorable tax rulings for general partners.
Following the meeting, Minister Kahlon decided to form a joint work group headed by representatives of the IATI which will present to the Ministry of Finance a dedicated plan to remove investment barriers and to promote the investment by Israeli institutionals in Israeli venture capital.
NOTABLE INVESTMENT ROUNDS
Next Insurance, a TLV Partners portfolio company, secured its series A funding for $29 million from Munich Re/HSB Ventures, Markel and Nationwide, and has accumulated investments of $42 million to date. Next Insurance develops an online platform for the structuring of insurance products to small businesses.
Loom Systems, secured its series A funding for $6 million from Jerusalem Venture Partners, Meron Capital and 31 Ventures Global Innovation Fund. Loom Systems develops technology for the monitoring of faults in organizational systems.
Fornova, a JAL Ventures portfolio company, secured its series B funding for $17 million from Deutsche Telekom Capital Partners and Waypoint Capital. Fornova is a global provider of B2B data solutions that improve competitiveness and maximize sales in the retail and travel markets.
Taranis, an OurCrowd portfolio company, secured its series B funding for $7.5 million from Vertex Ventures and Finistere Ventures, and has accumulated investments of $9.5 million to date. Taranis is a platform which uses deep learning to predict and prevent crop disease and pest losses.
NOTABLE "EXITS"
Microsoft, acquired Hexadite, a cyber security company focused on the development of an agent-less intelligent security orchestration and automation platform, for $100 million. Hexadite was a YL Ventures portfolio company. .
AID Partners, an investment firm, acquired GeneSort, a molecular diagnostics company focused on integrating molecular genomics with personalized therapeutic approaches, for $23 million. GeneSort was a Singulariteam VC portfolio company.
Stingray, a Canadian digital pay audio service acquired Yokee Music, a developer of an interactive music application, for $40 million. Yokee Music was previously a 2-B Angels portfolio company.
NOTABLE FUND FORMATIONS
YL Ventures announced the closing of its third venture fund, YL Ventures III at $75 million. The fund intends to invest in about 2-3 early stage startups per year, focused on cyber, AI, machine learning, big data and robotics.
RECOMMENDED VENTURE CAPITAL READS
HBO’s Silicon Valley Takes a Direct Shot at the Tech Industry’s Obsession with AI [The Verge] Innovation Nation: Twelve Israeli Inventions That Are Changing The World [NoCamels] Is The Gig Economy Working [The New Yorker] Medtronic To Open Two Israeli R&D Centers [Globes] Israeli Ride-Sharing Startups ‘Gett’ and ‘Juno’ Face Tough Drive in New York [NoCamels]