Venture capital activity in 2006 showed robust growth with specific strength evident in early stage financings two reports released Monday confirmed.
A year-end analysis by Dow Jones VentureOne and Ernst & Young found that a total of $1.44 billion was invested in Israeli companies last year, 13 percent above 2005 levels, while another report by the Israel Venture Capital Research Center put the numbers even higher at $1.62b. A study released last week by PriceWaterhouseCoopers LLP placed total capital raised in 2006 from private sources at $1.2b. A spokesperson for the IVC cited "different methodologies" to account for the discrepancies in the numbers.
"The expanding opportunities for venture-backed companies to achieve liquidity through an initial public offering, merger or acquisition are having an impact," said Gil Forer, global director of the Ernst & Young Venture Capital Advisory Group. "It was a relatively strong year for these transactions with investors recognizing the need to support their companies for as long as six years before they can achieve a successful exit."
Figures indicated in the DJ-EY report were five-year highs, with the study saying one indicator was strong merger and acquisition activity for venture-backed companies both in Israel and the US.
The fourth quarter saw a boom in investments; Israeli start-ups raised $412 million in 57 deals during the period, up 34% from the same period of 2005, according to the DJ-EY report, including a $26m. investment for the Jerusalem-based software company Double Fusion.
Investments in the information technology industry in Israel drove the growth in 2006, the DJ-EY report indicated, with total investments just over $1b. Israeli software companies raised significant amounts of capital - also at five-year peaks, reaching $519m. through 79 deals for the year. Meanwhile, the information services industry, such as many Web 2.0 companies, with a total of 12 deals and $52m. invested, also came in at a five-year high, the report said.
Health care activity rounded out the year with 49 deals and $330m. invested in Israeli companies, the DJ-EY report said. One of the largest was a $44m. later stage investment in Chiasma, a drug delivery development company in Netanya.
Nevertheless, it was early stage financings, which showed big gains in the year, with seed-and first-round deals making up 30% of the deal flow in Israel in 2006, up from 27% in 2005. Later stage deals comprised 35% of the deal flow allocation locally in 2006, according to the DJ-EY study, which also indicated that the average financing round remained the same as the previous year at $5m., whereas the IVC report put the average at $4.5m.
The IVC report said Israeli venture capitalists contributed $651m. in domestic hi-tech firms, which accounts for 40% of the total global amount invested, according to their study. That amount remained about the same as last year, but the percentage of the total fell from previous years because of increased foreign investment in Israeli companies, the study showed.
By sector, the IVC report showed communications, life sciences and software with the biggest percentages of capital raised.
In 2007, analysts predict investments in Israeli start-ups will continue to show growth.
"Foreign participation in investments in Israeli companies increased in 2006 since Israeli hi-tech is regarded as a material part of the global technology sector, prominent even against the growing activity in China and India," said Zeev Holtzman, chairman of IVC Research Center and Giza Venture Capital. "We therefore expect foreign investment in 2007 to remain similarly high."