Israeli Startup Funding is Down, Should We Worry?

From the outside looking in, the frequent occurrence of Israeli startup exits in 2012 represents solid proof of the country’s ingenuity, technological prowess, and entrepreneurial spirit.  And thus far in 2012, more than a dozen Israel high-tech companies have already been sold for a combined three billion dollars.

And with three billion reasons to champion a positive trend here in Israel, a deeper look into the financial data suggests that venture capital may be slowing as recent statistics show that Israeli and international VCs are currently investing less venture capital into Israeli startups thus far in 2012 as compared to 2011’s funding statistics.

According to the IVC Research Center of Tel Aviv, during the first six months of 2012, Israeli VCs invested $225 million into Israeli companies, a dip when compared to the overall local investment of $297 million that took place in the previous year.

Koby Simana, CEO of the IVC, explains that the dip represents a larger trend emerging whereby, “The percentage of high-tech investment from Israeli venture capital firms is continuing to decline as capital available for new investments is shrinking.  In light of their ongoing difficulties in raising new funds, we expect a further decline in VC high-tech investments throughout this year.”

Comparatively in the United States, venture capitalist Fred Wilson says that many US VC firms are (also) having a tough time in 2012.

“The returns haven’t been very good in the venture capital industry for a long time. I think if you talk to the investors in venture capital partnerships, they’ll tell you that they’re very much on the fence on venture capital, and if venture capital continues to put up mediocre returns, they’re not going to stick with it forever,” said Davis in a recent blog post.

Despite Davis’ somber outlook, U.S. venture capitalists are aggressively spending in 2012. During Q2, American VC’s invested $8.1b into 812 deals, a staggering figure that represents the largest spending quarter since the days of the dot-com boom.  These US VCs are investing big in photo, video, wireless telecom equipment and storage & systems management.

Yaron Kniajer, Managing Director & CFO of Rhodium, an international consumer focused investment firm which sold its share in to Facebook in June 2012, thinks that there is room for optimism in the Israeli arena.

“We continue to be bullish on the consumer space on which we consistently focused on. Despite some arguments we hear, we strongly believe in the ability of Israel to nurture large, standalone internet companies. In this regards, we always encourage our portfolio companies to expand their reach to U.S. and other foreign investors,” commented Kniajer.

Despite the relative dip in 2012 funding for Israeli startups, international confidence and willingness to invest in Israel remains very high. A recent Deloitte publication titled, “The 2012 Global Venture Capital Confidence Survey,” says Israel ranked fourth overall in investor confidence worldwide, ranking just behind the US, Brazil and China.  In addition, Israel also ranked third globally in home economy confidence, trailing only Brazil and Germany.

“Despite the challenging environment, we see ongoing activity at different levels in Israel, with recent funds such as Sequoia’s $200m fund and Pitango’s $150m, strong activity of micro VCs and angel investors, and with many new and promising young ventures. We feel that funding alternatives, especially for strong entrepreneurs with groundbreaking ideas, are definitely opened, and are happy to play an important part in this,” said Kniajer.

Though if Sequoia and Pitango’s investments are economic anomalies amidst a larger international trend of diminishing VC funding, is the slowing of local startup funding a potentially negative condition for the startup/tech based economy of Israel? The answer might not be what you would expect.

If both local and international venture capital firms continue slowing their Israel investments in the coming quarters, then the weakening of a vast majority of early stage startups from a lack of funding could be quite beneficial to the better funded, late stage startups growing in the Israeli arena that are seeking an exit.

The diminishing of the competition for the available funds is essentially entrepreneurial Darwinism – survival of the fittest entrepreneur – where the VC will go to the strongest startups with the most potential to exit and yield returns.

In clearer terms, if your idea or technology is groundbreaking – chances are that it will get funded whether the global VC economy is on a downslide or not.

This is because the strongest Israeli startups will most probably be purchased and their founders will eventually play a future role within the Israeli VC ecosystem.  This recycling of talent and capital within Israeli startups should be viewed as a very positive development despite an economic dip in funding.

These founders will presumably continue creating locally and may potentially become investors in other ventures in the Israeli startup ecosystem in the future.

In a country where the entrepreneurial impulse has always been to move fast and to exit quick rather than to go for the more conservative growth approach, Israeli startups surely must move fast to secure what limited VC funding is currently available, otherwise they will fail by not having enough capital to grow. But this is the case whether VC is currently strong or weak.

Regardless of the statistics showing that there is a slowing of VC investments in 2012, what is certain is that the strong Israeli startups will survive and many others will eventually fail.  In the end, eventually all Israeli entrepreneurs will exit, whether it’s the one that makes them a millionaire is another point in itself.

About the Author
Brian Blondy is a social media specialist at Blonde 2.0 in Tel Aviv, Israel.