May 2018 - Monthly Insights - Israeli Venture Capital
Updated: Aug 15, 2018
PERCENTAGE OF ‘UP-ROUNDS’ IN ISRAELI VENTURE CAPITAL CONTINUES TO SURPASS SILICON VALLEY
A recent report published by Shibolet & Co. and Fenwick & West LLP has identified that during 2017, 81% of financing rounds in Israeli startups attained a higher valuation than previous rounds (a “upround”), compared to 75% in the U.S., with 15% of U.S. financing rounds being made at lower valuations than the previous rounds (a “downround”), compared to only 11% in Israel.While the ratio of up-rounds in Israeli tech continued to be favorable vs. Silicon Valley during 2017, Israeli venture capital did see a decline of 9% in the ratio of its up-rounds from 2016. Nevertheless, the 81% mark remains above the four year average measured in previous reports. Interestingly, the vast majority of downrounds in Israeli venture capital took place in later rounds (D and later). This is very much in line with our views for 2017, in which we anticipate increased competition in later rounds pushing valuations upwards. The increased number of downrounds in later rounds are mostly the combination of such increased valuations and the lack of ability of companies to justify such valuations. This will lead, in due-time, to the need to raise subsequent rounds at lower valuations to sustain the company. As the amount of capital dedicated to later stage financings continues to grow (up 60% between 2015 and 2017), increased discipline from later stage managers is key in assuring that the ratio of downrounds remains low and returns for investors in such stages do not diminish. According to the same study, investment terms in Israeli venture capital continued to be more aligned with those of Silicon Valley in 2017. In 31% of deals in 2017 investors negotiated superior liquidation preferences (i.e. liquidation preferences which include participation rights and not only downside protection). This marks the lowest ratio of deals with liquidation preferences in recent years. However, the number was still much higher than that observed in Silicon Valley based deals, which accounted for 15%. While these liquidation preferences provide investors with superior economic rights that entitle them to receive a return in preference to the common shareholders, and subsequently receive a share greater than their prorata share in the company, leading to outsized returns upon ‘exits’, we do observe the decline in the number of such transactions as a strong sign of maturity in the Israeli ecosystem. In the past, these sort of favorable preferences were required to ensure that venture capital funds could return significant capital from small and mid-range liquidity events. Today, as companies tend to stay private for longer and target larger exits, a stronger alignment of interests between investors (holders of preferred shares), entrepreneurs and employees (holders of common shares) is required. When investors hold preferred shares with only downside protection, the incentivisation of both fund managers and entrepreneurs to grow larger companies which account for most of the returns of venture capital funds is stronger, and therefore, we encourage such ‘upside’ oriented investment terms.
NOTABLE INVESTMENT ROUNDS
Guesty, a Magma VC portfolio company, secured its series B funding of $20 million from TLV Partners and current investors in the company. Guesty develops a reservation management platform for property managers on AirBnB and other platforms.
Global-e, a RedDot Capital Partners portfolio company, secured its D funding for $20 million from Apax Partners and current investors in the company. Global-e facilitates the localization of online retail shops by calculating and costs of shipping and taxes for each local purchaser.
LawGeex, a lool Ventures portfolio company, secured its B funding for $12 million from Aleph and current investors in the company. LawGeex enables businesses to automate their contract approval process, improving consistency, operational efficiency and getting business moving faster through AI based technology.
Palo Alto Networks (NYSE: PANW) a U.S. based cyber security company, acquired Secdo, a developer of cyber security solutions for end points, for $100 million.
Nike (NYSE: NKE) a U.S. based athletic apparel manufacturer, acquired Invertex, a developer of a show sizing application, for an undisclosed amount.
NOTABLE FUND FORMATIONS
Tau Ventures, announced the formation of a new $20 million fund targeting investments in early stage companies from Tel Aviv University. The fund marks the first time that an Israeli University (Tel Aviv University) is launching its private venture capital fund, deploying a similar model tothose used in MIT and Stanford.
RECOMMENDED VENTURE CAPITAL READS
The founding CEO of PayPal says bitcoin is the greatest scam in the history of the world. [Recode] Silicon Valley wants to cash in on everything—even people starving themselves.[Bloomberg] How finance is killing the news. [The New Republic] You could make a case that Amazon should acquire Best Buy. You could also make a case that it doesn't need to. [Recode]