Israel’s venture capital industry, which has about 70 active venture capital funds, including 14 international VCs with Israeli offices, continues to thrive even in the face of a global tightening of credit due to the financial crisis. In 2008, 483 Israeli high-tech companies raised over $2.1 billion – the highest amount in the past 7 years, 18% above the $1.8 billion raised in 2007 and 28% above 2006 levels. 

In the fourth quarter of 2008, 109 Israeli high-tech companies raised $394 million - 22% below the $503 million raised in the fourth quarter of 2007, and 34% below the $600 million raised in the previous quarter – the highest third quarter reported in the last eight years. Though venture capitalists expect the global recession to lead to a slowdown in investments for 2009, they are confident that the Israeli high-tech industry will continue to be a highly productive source of technological innovation.

Thriving VC Market in Israel

International Venture Capital Firms: Several leading U.S. and European VC funds have Israeli branches, namely Alta Berkeley Venture Partners, Battery Ventures, Bessemer Venture Partners (BVP), BlueRun Ventures (BRV; formerly Nokia Venture Partners), Blumberg Capital, Bridge Capital Fund (BCF) LP, Canaan Partners, Defta Partners, Lightspeed Venture Partners, Partech International Inc., Susquehanna Growth Equity (SGE) LLC, Venrock, YL Ventures, Ziegler Meditech Equity Partners (ZMEP) LP. Additionally, there are some 220 international funds, including Polaris Venture Partners, Accel Partners and Greylock Partners, that do not have branches in Israel, but actively invest in Israel through an in-house specialist. The VC divisions of  leading multinationals, among them Intel, HP, TimeWarner Inc., Sony, Cisco and others, which have opened R&D centers and acquired companies in Israel , have also found that the country offers a profitable VC market.

Israeli Venture Capital Firms: The great interest shown by the International VC's in Israel is in part due to the existence of a thriving local VC industry. In 2008, Israeli VCs invested $780 million in Israeli high-tech companies, accounting for 38% of the total amount invested in Israeli high-tech companies. In 2008, first investments made by Israeli VCs were 31% of the total amount invested by Israeli VCs, compared to 43% in 2007.

Delivering Successful Exits

The Boom in Mergers & Acquisitions: In 2008, there were 84 mergers and acquisitions in the Israeli market worth a total of $2.64 billion, compared to 85 in 2007 which reached about $3.2 billion; In 2006 mergers and acquisitions totalled $10.5 billion, reflecting several very large acquisitions including that of Iscar by Warren Buffet.

M&As of Israeli VC-backed companies in 2008 totaled $1.5 billion, down 22% from 2007 figures. In numbers, VC-backed M&A deals in 2008 edged up slightly to 34 from 33 in 2007.

Global Financial crisis puts freeze on IPO's:

For the first time since 2003, Israeli high-tech companies had no initial public offerings on international exchanges during calendar year 2008, reflecting the problematic global technology IPO markets.

Investment Trends in the Israeli VC Market

In 2008, the  Communications Sector led the market with $516 million or 25% of total capital raised, followed by the Software Sector with $407 million or 20% and the Semiconductors sector with $323 million or 16% of total capital raised. Internet firms continued to attract investor attention with 14% of capital raised in 2008 and 15% in 2007. Within seed investments, software companies attracted the largest share – 41% – followed by life science companies with 20%.

Investment by Stage

In 2008, 70 Seed Companies attracted $104 million or 5% of capital raised.

156 Early Stage/R&D Companies raised $755 million in 2008, compared to $557 million raised in the previous year. early stage companies had a 36% share of capital raised, versus 32% in 2007 and 30.5% in 2006. Of all early stage investments, life science companies attracted the largest share of capital – 32% – followed by firms in the Semiconductor and Communications Sectors, each with 19%.

194 Mid-Stage Companies (with up to $10 million in revenues) raised $780 million, the largest sum of funding in 2008, accounting for 38% of the capital raised. This compares with 182 companies that raised $668 million or 38% in 2007 and 169 companies that raised $675 million or 42% in 2006.  Within mid-stage investments, communications companies attracted the largest share – 34% – followed by Internet companies with 21%.

With start-up companies continually moving through the pipeline and reaching the revenue growth stage, there were 63 Late Stage Companies that raised $437 million or 21% of the total raised in 2008. This compares with 46 companies that raised $383 million or 22% in 2007 and 37 companies that raised $313 million or 19% in 2006. From among late stage investments, software companies attracted the largest share of capital – 34% – followed by communications companies with 24%.

Sources: IVC Research Center , IMD Competitiveness Report