VC funding in local tech firms rises in 3Q

Number of investments into start-up companies declines.

computers 311 (photo credit:
computers 311
(photo credit:
Venture capital investments in local technology companies grew in the third quarter, while the number of investments into start-ups continued to decline, according to the PricewaterhouseCoopers, Kesselman & Kesselman Israel MoneyTree report published on Tuesday.
“Our latest report indicates a number of mixed trends. On the positive side, there was a significant growth in the amounts invested, the number of companies raising capital and the average investment per company. On the other hand, this quarter we saw the largest number in the last decade of funds making no investment at all,” said Rubi Suliman, partner at the High-Tech Assurance Practice of PwC Israel. “This trend of investments being concentrated with fewer funds is not new, but it continues to intensify and point to how hard it is for funds to raise money.”
Suliman added that even today, the capital raising options for early-stage hi-tech companies was limited in the Israeli market, where funds contribute the lion’s share of financing.
“In the absence of available financing alternative, the hi-tech market is expected to suffer, mainly in the long run,” said Suliman. “There were a lot of discussions lately regarding government interventionist incentives that would encourage angels and Israeli institutional investors and even create a government cleantech fund. It seems, then, that even the hitech engine needs a boost every once in a while to keep its lead... and the sooner the better.”
The report showed that overall venture capital investments into local technology companies amounted to $253 million during the third quarter of this year, representing an increase of 23 percent from the previous quarter, when $206 million was raised, and a 42% increase over the corresponding quarter last year, when $178m. was raised.
In the third quarter, 68 Israeli hitech companies raised capital in the third quarter of 2010, compared to 60 in the preceding quarter and 55 in the corresponding quarter of last year.
The average investment per company in the quarter under review was $3.7m., compared with $3.4m. in the preceding quarter and $3.2m. in the corresponding quarter of last year.
At the same time, however, the number of investments in seed companies continued to decline as reported since the fourth quarter of 2009, while investments in later stages of development companies rose. Three companies at the start-up stage raised $11m. during the third quarter of 2010, representing 4% of total investment for the quarter, compared to six such companies that raised $13m. in the preceding quarter and four companies that raised $4m. in the corresponding quarter of last year.
“This quarter also marked a significant 186% increase over the previous quarter in later stage investment rounds,” stated the report.
Nineteen companies raised $91m. in the third quarter through later investment round transactions (i.e., fourth investment round or later).
This compares to seven companies that raised later-round investments of $49m. in the previous quarter and to eight companies that raised $64m. in the corresponding quarter of last year.
Sector by sector analysis found a significant increase in the amount and number of investments in the Internet sector. In the third quarter, 13 companies raised $48m., compared to seven companies raising $27m. in the previous quarter and four companies raising $24m. in the corresponding quarter last year.
“Internet sector investment this quarter is the highest since this segment was first reported as a separate sector in the second quarter of 2008,” the document said.
Venture capital investment also continued to increase in local technology companies operating in the miscellaneous category such the clean-tech, media and other sectors.
Fifteen companies classified under this category raised $46m. in the third quarter, representing 18% of the total investments in the quarter.
These figures are compared to eight companies raising $14m. in the previous quarter, and 16 companies raising $43m. in the corresponding quarter.
The share of the clean-tech sector of the miscellaneous category was $25m. invested in two companies, compared to $3.8 million invested in three companies in the previous quarter.
In contrast to this growth, the life sciences sector, which combines medical devices and biotechnology, saw a sharp drop in investments compared with the preceding quarter and the same quarter last year. During the course of the third quarter, 10 companies raised $30m., compared to $67m. by 19 companies in the preceding quarter and $65m. by eight companies in the corresponding quarter of last year.