Investment in information technology resulted in a 15 percent in third quarter-venture capital for Israel's largest industry, while deal flow was steady with 41 agreements and $302.7 million invested in the period.
According to the Quarterly Venture Capital Report released by Dow Jones VentureOne and Ernst & Young LLP., deal flow to date this year is holding even compared with the first three quarters of 2005 but the capital invested is already up 7% from last year.
Israel saw an increase in the allocation of deal flow to early-stage deals - seed and first round deals represented 29% of total activity in the third quarter, up from 24% in the 2005 period. But a larger percentage of deals, 34%, were represented by later-stage financings.
The US market, meanwhile, experienced the first quarter this year that more seed and first round deals were completed than later round deals. The increased early stage financings was likely driven by the more than $35 billion in new funds raised over the past 18 months. In the third quarter, 38% of all venture capital rounds went to seed and first-round deals, the highest allocation percentage this year.
"It's a positive sign for the future of the venture capital market to see a solid pipeline of early stage investment, although this activity in the US is stronger in healthcare, where 44% of the rounds were early stage, than in the information technology segment, where only 32% of the rounds were early stage," said Steve Harmston, Director of Global Research at VentureOne. "These early stage financings are particularly taking off in some key segments such as biopharmaceuticals, where more than half the rounds are seed and first rounds, and medical devices, where 38% of them are concentrated in these round classes.
Israel's information technology industry remained the stronghold for venture capital activity with 31 deals and $238.7m invested. Investment in the communications segment was particularly robust this quarter with six deals and $63.5m invested, a four-fold increase from the third quarter of 2005. Although there were three fewer software deals, software investing was still up 32% to $115.7m. The largest deal of the quarter was the $18m. later round for PortAuthority Technologies of Ra'anana, a provider of security software.
Investment in Israeli healthcare companies faltered with fewer investments in the quarter, but medical devices activity doubled to four deals and $23m. invested.
A separate report, however, found that venture-capital backed hi-tech companies raised $253m. in Israel in the third quarter, down 19% from last year.
The Money Tree report by Kesselman & Kesselman PwC, which evaluated only funds raised in Israel and the broader hi-tech arena rather than just information technology, found that local venture capital invested about $126m. in the third quarter of 2006 compared with $178m. during the same period last year. About 53% of all the companies raising capital were registered as Israeli, while the remained were registered as foreign companies, mainly US-listed.
This quarter about 66 companies raised venture capital compared with 85 last year; average investment in the third quarter stood at $3.8m. up from $3.7m. in 2005.
According to Money Tree's report, investment in seed and start-up companies slowed down after the record first quarter of 2006, while investment in later stage companies was up slightly. In the third quarter, it said, 12 seed or start-up companies raised $36m. or 14% of the total investment in the quarter, down from the 25 seed companies, which raised $84m. in the same quarter last year.
The number of later stage companies raising capital doubled from five in the third quarter of 2005 to 10, raising $74.5m. compared with $21.5m. last year.