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Summary of Israeli High-Tech Company Capital Raising – Q2/2011

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Monday, July 18th, 2011

IVC and KPMG Report: Israeli high-tech capital raising in H1/2011 – up 82% Mid to late stage financing leads

The following are the findings of the IVC-KPMG Quarterly Survey conducted by IVC Research Center in cooperation with KPMG Somekh Chaikin Israel. This Survey reviews capital raised by private Israeli high-tech companies from Israeli venture capital funds, foreign and other investors. The Survey is based on reports from 130 investors, of which 53 were Israeli management companies and 77 were other – including foreign – investment entities.

In the first half of 2011, 285 companies raised $1.048 billion, 82 percent above the $577 million raised in the first half of 2010. The second quarter of 2011 was the best in two years, with 145 Israeli high-tech companies raising $569 million from venture investors – both local and foreign. This reflects a 19 percent increase from $479 million raised by 140 companies in Q1/2011 and a 66 percent increase from $343 million raised by 104 companies in Q2/2010.

“High-tech capital raising in the first half of the year almost doubled from the first six months of 2010,” observed Koby Simana, CEO of IVC Research Center. “The increase largely reflects a major jump in mid to late-stage investments. Companies at these stages require substantial financing to continue their expansion. We believe that investor support during a company’s expansion and marketing stages is crucial and evidence of strength and maturity in the high-tech sector.”

In Q2/2011, 84 companies attracted more than $1 million each. Of these, four raised more than $20 million, 17 raised between $10 million and $20 million, and 16 raised from $5 million to $10 million each.

Israeli VC Fund Investment Activity

In the first half of 2011, Israeli VC funds invested $297 million, a 76 percent increase from the corresponding period in the previous year. The Israeli VC fund share was 28 percent, about the same as in the first half of 2010. In the second quarter of 2011, Israeli venture capital funds invested $160 million in Israeli companies – the highest quarterly amount in the last three years in Israeli companies. The amount was up 17 percent from the previous quarter, and 76 percent above investments made in the second quarter of 2010.

Ofer Sela, partner in KPMG Somekh Chaikin’s Technology group, said: “the Israeli VC backed companies are in their best potential ever, with a record number of companies generating substantial revenue and backed by experienced entrepreneurs and investors. The crisis is in the Israeli venture capital funds where significant number of funds are struggling to raise new and follow-on funds. This is demonstrated by the low level of seed investments made during the last 12 months compared to the seed investments made in 2007, the year in which most Israeli VCs raised their last fund.”

First investments in the first half of 2011 accounted for 25 percent of Israeli VC fund investments, compared to 31 percent in the first half of 2010. The average first investment was $1.95 million, while the average follow-on investment was $1.2 million. In the second quarter, first investments by Israeli VC funds accounted for 26 percent of their total investments, compared to 23 percent and 36 percent in Q1/2011 and Q2/2010, respectively. The average first investment by Israeli VC funds was $2 million, while the average follow-on investment was $1.24 million.

Investment Rounds Excluding Israeli VC fund Participation

Investments in Israeli high-tech companies in the first half of this year, where Israeli VC funds did not take part, reached $331 million, 83 percent above the $181 million invested in the year-earlier period.

Capital Raised by Sector

In the first half of 2011, the Internet sector led capital raising with $255 million or 24 percent of total capital raised, a 155 percent increase from the $100 million raised in the year-earlier period. Life Sciences followed with $237 million or 23 percent, an increase of 21 percent from the year-earlier period. Communications attracted $176 million or 17 percent.

In Q2/2011, the Internet sector led capital raising for the first time in the past decade, with $169 million or 30 percent of total capital raised. Communications followed with $121 million (the most raised for this sector in three years) or 21 percent, life sciences with $110 million or 19 percent and Software with 17 percent.

Capital Raised by Stage

Seed companies attracted just 3 percent of capital raised in the first half of 2011, compared to 5 percent in the same period in 2010. Mid stage companies led capital raising in both periods with 46 percent and 48 percent, respectively. Early stage companies followed with 26 percent and 33 percent, respectively. Mid and late stage companies together raised $749 million, an increase of 108 percent from the
first half of 2010 when mid and late stage companies attracted $360 million.
In the second quarter of 2011, seed companies attracted 2 percent of total capital raised, compared with 3 percent in the previous quarter and 5 percent in the second quarter of 2010. Mid stage companies led capital raising with $249 million or 44 percent of the total capital raised.

Ofer Sela of KPMG explained that “the global hype in mobile internet makes its impact on Israel as well, where the mobile and internet applications are boosting both the communication and Internet sectors investments, these two areas of investments are characterized by a short period of uncertainty regarding the business model of these companies this is the main reason why the majority of seed investments made by micro-funds and angels were focused in these areas and we expect this trend to continue”.