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Foreign venture capital investors are expected to increase their stake in the Israeli market in 2007 extending the "post-bubble" peaks reached last year.
"In our view, foreign VCs will continue to play an ever-increasing role in Israel," said investment bank Leap Capital in its Israel Tech and Venture Capital review for 2006, which included for the first time a separate report on the activity of foreign VCs in the local market. "The growth in activity of such investors here is a reflection on the increasing importance of Israel tech in areas such as wireless communications, security, storage, Internet and medical devices to name a few. If you are going to be a player in these areas globally you simply must be here."
Leap estimated that foreign VC firms today account for more than half the capital deployed in the Israeli hi-tech investment market with Benchmark Capital, Greylock Partners and Sequoia Capital leading the pack with their Israel specific funds.
"If funds such as Benchmark Israel 2 (with $250 million in investment funds) and Greylock Israel 1 (with $150m.) make successful investments and churn out healthy internal rates of return for their LPs, then these funds and others will continue to proliferate here," Leap said. "Whereas in earlier years foreign VCs restricted their activities mainly to later stage investing or co-investing alongside Israeli VCs, there was a marked growth during 2006 in their leading deals and becoming more involved in general deal flow."
Leap counted $1.5 billion invested by VCs in 2006 across 183 transactions, well above the $809m. total of 2005. It also noted a healthy balance in the distribution of the investments as communications companies received 33 percent of the funds, life sciences 25% and software and Internet 24%, with the remaining 18% spread between the wireless, biotech and semiconductor sectors.
Leap backed its forecast for continued growth by citing the strong level of exit activities for VC backed companies in 2006, particularly through mergers and acquisitions.
"If Israel remains one the few (and possibly only) places in the world where companies such as Cisco, Intel, H-P, Microsoft, Lucent, Broadcom et al continue to be comfortable making large acquisitions, then the industry will continue to flourish," it said.
Last year was the second most successful ever for M&A exits in Israel as 73 transactions totaling $13b. were completed, showing 8% growth over 2005, as Google, Xerox, Oracle and Verifone all made their first acquisitions in the country.
Leap said M&A exits would continue to be the primary driver of the success of the Israeli tech industry, as opposed to initial public offerings through which half the capital was raised last year as in 2005, and further refuting any criticisms that the M&A phenomenon may be preventing the growth of Israeli companies into major players in their own right.
"When a company gets sold its not the end of the story, money typically gets reinvested directly and indirectly in the technology community here, making way for continued growth and continued partnerships with companies abroad," said Gerald Segal, managing director of Leap. "It's a very healthy phenomenon."