Israeli investors’ enthusiasm for start-ups bucks global trend

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Investors around the world are growing wary of backing the tech sector, but there is little sign of any slow down in Israel.

According to Israel Venture Capital Research, which tracks the country’s high-tech scene, Israeli tech start-ups raised a record $1.2bn in the fourth quarter of 2015 — a ten per cent increase year-on-year. In all, Israeli tech start-ups raised $4.43bn in 2015.

In the rest of the world, meanwhile, venture capital investments fell 30 per cent in the fourth quarter of 2015, falling to $27.3bn globally, according to CB Insights, a research group.

Arnon Dinur, a partner at 83 North, one of Israel’s most prominent venture groups, says that the global slowdown will reach Israel eventually, but it may prove to be less painful as the country’s tech scene has not had the same level of hype as California’s Bay Area.

“[Investing] has been less extreme, both on the up and down side,” he says.

The venture capital industry in Israel began to take off in the early 1990s, thanks to a government scheme known as Yozma, or “initiative” in Hebrew, which offered, among other things, tax breaks for investors. Today, an estimated 50 venture capital groups are active in the country.

Israel’s VC firms come in two guises. There are local venture funds, of which the most prominent include Jerusalem Venture Partners, Carmel Ventures, Pitango, 83 North, Genesis, Magma and Aleph.

Large international groups, particularly US companies, invest in the country. Some, such as Sequoia Capital, the California-based group known for its investments in Apple and Google, operate by setting up a special Israeli fund.

Others, such as Silicon Valley-based Bessemer Venture Partners and Massachusetts-based Battery Ventures, have set up Israeli offices, where local partners make investments on behalf of the global fund.

“Potentially the amount of money that can be available in the country is very large,” says Mr Dinur. “There are multimillion dollar [global] funds who can write a cheque, but it’s not a committed capital, it doesn’t have to be spent in Israel.

“I think that’s very healthy for the country because it forces Israeli entrepreneurs to compete on the same playing field as Silicon Valley entrepreneurs. You see a much higher level of Israeli entrepreneurs as a result.”

New avenues for investment are becoming available. One is from “equity crowdfunding” groups, which allow start-ups to raise investment from a large number of people, each contributing relatively small sums of money.

OurCrowd, the world’s largest platform for equity crowdfunding, is based in Israel. It has raised $200m for 91 companies — most of them Israeli — from about 11,000 private investors.

“We’re . . . opening up venture capital to a much broader audience of participants,” says Jon Medved, chief executive of OurCrowd. “[Investing in tech companies] has really been an old-boys club. If you’re in Silicon Valley and you’re connected to Peter Thiel [co-founder of PayPal] or Marc Benioff [founder and chief executive of Salesforce.com], then maybe you get access to a deal.

“Even in most cases, you don’t . . . it’s really this completely rarefied, limited thing.”

New investment is also coming from China. The country’s largest tech companies — including Baidu, Tencent, and Alibaba — have all invested in Israeli start ups in recent years.

One of China’s top investors, Li Ka-shing, has backed around 30 Israeli start ups. He was one of the early investors in Waze, the transport navigation app acquired by Google for $1.15bn in 2013.

Yet Israeli investors maintain that the strength of the country’s tech scene is due to the support of local venture capital groups.

“At least at the early stage, it’s still important to be on the ground and be connected,” said Mr Dinur.

“At the end of the day, venture is a local business. Having a local office and heritage counts a lot. It’s not just getting a cheque, it’s getting the support and attention. Smart entrepreneurs know that.”

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