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Israeli Venture Capital

Scott Shane, professor of entrepreneurial studies at Case Western Reserve University has done an analysis of venture capital in the US and came up with the following factoids:

• Venture capitalists are doing fewer deals and investing less money than they did before the financial crisis and the Great Recession.  According to data from Price Waterhouse Coopers and the National Venture Capital Association, the number of venture capital deals shrank from 4,211 in 2007 to 3,698 in 2012.

• The amount that venture capitalists put into companies is also down substantially. Measured in inflation-adjusted terms, in 2012 venture capitalists only invested 75 percent of the amount they did in 2007.
• Deals are also smaller than they were before the Great Recession.  In real dollar terms, the average deal size declined from $8.4 million in 2007 to $7.2 million in 2012.
• For entrepreneurs looking for a first-time investment, the numbers are also discouraging.  In 2012, VC’s made 1,163 “first sequence” deals, down from 1,418 in 2007, a decline of 18 percent.

• The amount invested dropped even more.  In inflation-adjusted terms, VC’s put a whopping 52 percent  less into first-time deals in 2012 than in 2007.

• The average deal also has been shrinking since the Great Recession, as the figure above shows.  In inflation-adjusted terms, the average 2012 first investment was only 59 percent the size of the average 2007 initial investment.
• The shrinkage in “first sequence” deals has occurred across all investment stages, with the decline in the inflation-adjusted amount invested heaviest in the seed and expansion stages.  For number of deals, the decline was present for all stages, except for the early stage.
• First sequence deals have become more focused at the early stage.  In 2012, early stage deals accounting for 51 percent of all first sequence venture capital funding, up from 38 percent in 2007.  The number of early-stage deals increased from 42 to 65 percent of the total.

But Israel did significantly better than the situation in the US.  Israeli startups raised $2.14 billion in 2011, an 11-year high, 70 percent more than the $1.26 billion raised in 2010 and 91 percent more than the $1.12 billion raised in 2009, according to Israel’s IVC Research Center and local accounting firm KPMG Somekh Chaikin’s Quarterly Survey.  Five hundred forty-six startups raised capital in 2011, up from 391 companies that raised capital in 2010.

Figures for 2012 did show a 10 percent drop in venture capital raised in Israel against the prior year, which still positioned Israel better than most other countries during these difficult times.

It is difficult to tell exactly why Israel does so much better than the US in this area but, no doubt, a number of factors contribute to this.  First of all, Israel ranks first in total expenditures on R&D as a percentage of GDP ahead of second-ranked Finland, third-ranked Sweden and fourth-ranked Japan.  In a ranking of entrepreneurship of managers, Israel ranks first again ahead of Malaysia, Colombia and Taiwan.  Israel is also first in the availability of scientists and engineers ahead of Japan, the US and India.

In that vein, Startup Ecosystem Index’s 2012 report noted that Tel Aviv is the second most supportive place for startup companies in the world, behind only Silicon Valley.

Finally, of course, the continued expansion of R&D centers in Israel of major multinationals generates a feeling of confidence on the part of the investment community that Israeli tech development will continue to provide cutting-edge solutions to the world’s problems.

No one expressed it better than Microsoft CEO Steve Ballmer when he said in February, “The range of innovative things that Israel is doing is remarkable.  There is such a wide scope of exciting things going on there.  Israel is a start-up center, and there is always something to challenge us here, or one that we can acquire.”

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