December 2018 - Monthly Insights - Israeli Venture Capital
Updated: Jan 10, 2019
ISRAELI STARTUPS ON PACE TO RAISE RECORD AMOUNT IN 2018
Following record-breaking capital raising by Israeli startups in 2017, Israeli venture capital continued its strong upwards trajectory in the first three quarters of 2018, with over US$4.54 billion raised, accounting for 82% of total capital raised in 2017. Investments were characterized by numerous late stage financing rounds and a further decline in early stage investments, as rounds of over $20 million represented a record amount of US$1.1 billion invested, while the number of seed stage rounds in Q3 declined to 21, the lowest since 2013.
This trend continues to solidify our strong views of the maturing Israeli venture capital market, as more companies look to raise growth stage capital as opposed to opting for an early exit – supporting the growing returns of Israeli venture capital funds. The decline in the number of investments in seed stage financings confirms our earlier analysis of a funding gap in early financing rounds. Our analysis suggests that this trend has been playing out since 2013, when 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 2017 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 the remainder of 2018 and 2019. At the same time, late stage deals have seen an increase in valuations, not just in Israel but also globally, driven by the strong inflow of international capital, led amongst other by private equity funds and corporate venture capital funds. We also believe that the recent correction in US technology stocks, if sustained, will add pressure on late stage valuations as exit markets become more demanding.
In a recent report issued by IVC, the activity of corporate investors in Israeli venture capital was specifically highlighted. While corporate investors have been active in Israeli venture capital for quite some time, we have seen a stark increase in their investments since 2013, up by 30% between the first three quarters of 2018 alone vs. 2017. While corporate investors have been traditionally known for late stage investments, it is clear that many have pivoted their investment strategy towards earlier rounds, up from a mere 32 early stage investments in 2013 to 77 in 2017 and 59 in the first three quarters of 2018.
While it would appear that the increase in early stage investments by corporates contradicts the trend highlighted above of fewer early stage investments, our view suggests that these trends are in-fact complementary - as corporate investors are mostly opting to co-invest in such stages, with venture capital funds leading the investment rounds. While we are generally favorable towards venture capital funds co-investing with strategic corporates in early stage, it is critical to ensure, on a case-by-case basis, a strong alignment of interest between the startup and all of its investors (financials and corporates).
A particular focus should be given to the geographic origin of such corporate investors. While in 2013, European investors only invested US$93 million in Israeli venture capital, in 2017 they have accounted for US$280 million – an increase of over 200%. As we actively seek to promote European investments in Israeli technology, we tend to meet with large European corporates on a weekly basis. Our meetings strongly indicate that while many have already established their investment strategy into Israeli venture capital, a large number of players are only in the early days of devising such strategies. As a result, we believe that we will continue to see an influx of European investors into Israeli venture capital, through a variety of investment strategies, as European corporates begin to recognize the value of Israeli technology to their core business.
Notable Investment Rounds
Taranis, an Vertex Israel portfolio company, secured its series B funding of $20 million from Viola Ventures and current investors. Taranis is an ag-tech company using aerial scouting and deep learning to identify potential crop issues.
Lightricks, a Viola Ventures portfolio company, secured a funding round of $60 million from Insight Venture Partners and Clal-Tech. Lightricks is a developer of mobile applications, mostly in the imaging space. It has been reported that over 100 million users have downloaded applications developed by the company.
Cognigo, an State of Mind Ventures portfolio company, secured its series A funding for $8.5 million from Prosegur, Mivtach Shamir and current investors in the company. Cognigo develops an AI platform for compliance with GDPR regulations.
Recommended Venture Capital Reads
What happens when a former unicorn known for its post-capitalist, peer-to-peer vision starts to pay attention to quarterly profit? Ask Etsy. [New York]
Two years later, Apple's decision to get rid of the iPhone headphone jack still makes no sense at all. [Fast Company]
A new generation of computer science students is on the rise. And they don't really want to work for Facebook. [The New York Times]
Ford's self-driving cars are good. Are they good enough to win one of the most hotly contested battles in tech? [The Verge]