The most active investor in the nation last year was Insight Partners, one of the major venture capital firms that have swept Israeli tech in recent years. According to the IVC-Gross Investors Report 2021, which rates venture capital fund activity in Israel, Insight Partners invested in 37 new companies, nearly three times as many as it did in 2020.
However, Insight Partners might find it challenging to hold onto its top spot. Website with tech news The Information recently disclosed that the fund decided to reduce its investment in mature growth companies by about a third over the course of the previous year. In parallel, Gigi Levy-Weiss’ NFX raised the number of its investments to 15, and Vertex Ventures, an Israeli fund founded by the Oron family (investors in SolarEdge, Verbit, and Yotpo among others), increased the number of its investments to 16. The first investor in Monday.com and Riskified (15 investments), Entree Capital, Tiger Global, the US-based hedge fund known for its quick check-writing, and seasoned fund Pitango Venture Capital round out the top five (13).
Not all venture capital firms increased their investments in Israeli technology in response to 2021’s economic success. Maybe they wanted to avoid making investments at prices that turned out to be too high. Other funds might be holding off on making new investments in new businesses until they can raise more money. These include, for instance, the TLV Partners (founded by two Pitango veterans), which last year invested in just six new companies, down from nine in 2020, or the F2 Venture Capital fund of Genesis Partners, which decreased its new investments from 14 to nine last year. While some funds, including SoftBank, Grove Ventures (founded by Dov Moran), and European fund Target Global, made the list this year with investments in the single-digit range, others, including Lightspeed Venture Partners, Jerusalem Venture Partners (JVP), and Russian fund Altair, were not included in the ranking due to the low number of new investments.
Will Israeli investments ever reclaim the spotlight?
The IVC-Gross Investors Report co-author Adv. Ayal Shenhav of law firm Gross & Co. GKH claims that the massive inflow of foreign capital into Israel was what caused the sharp rise in technology investments in 2021. Accordingly, since the start of the year, we have noticed a change in reality, which is evidence of the significant impact recent months have had on foreign funds.
He believes that Israeli investors will once again take the lead. Israeli funds have enough money to take advantage of any deals that foreign funds might pass up thanks to the fresh capital raised for funds like Vintage Investment Partners, Aleph, StageOne Ventures, Vertex Ventures, Glilot Capital Partners, and TLV Partners, which raised a combined total of about $2 billion during the boom period of 2021. “This is what’s known as dry gunpowder,” Shenhav claims. It is a threshold that is awaiting an investment opportunity.
The CEO of Bright Data, which private equity firm EMK Capital recently purchased, Or Lenchner, is also upbeat about the future. According to him, the shift in investor strategy toward growth will attract lots of private equity firms to Israel in search of lucrative businesses. He added that “these companies are focused not only on investing in businesses but also, on occasion, on acquisitions to strengthen or even rescue businesses from crises. As soon as this year or the following, private equity funds could surpass venture capital funds in market share.
In addition to EMK, significant funds like Permira Private Equity, TCV (Technology Crossover Ventures), Hellman & Friedman Private Equity (H&F), and General Atlantic, which recently significantly increased its investments in Israel, are already present in Israel or are considering setting up shop here.
Global investment volume decreased by 50%
The shift in major fund investment has an impact on more than just Israel’s tech industry. Greenoaks, Index Ventures, and Coatue Management are among the large funds with the largest decline in global investments, at a rate of at least 35% compared to the same period last year, according to a study by research firm PitchBook Data and The Information. All are making sizable investments in Israeli high-tech.
Greenoaks, which has only made investments in Israeli unicorns like Wiz, StarkWare, and Tipalti, has drastically lowered the number of its holdings from 13 at this time last year to just five at the start of this year. Coatue, which has a similar investment profile to Greenoaks and has portfolio companies in Israel like Melio, Rapyd, Snyk, and Fireblocks, decreased its investments from 28 last year to 18 in the first few months of this year.
These funds all invest in tech companies relatively recently, which is something that they have in common. These are crossover funds, or investment companies with a history in hedge funds or private equity. Due to the influx of easy money into the technology sector and the rise in the price of large company shares, these organizations have raised enormous sums of money over the past two years.
After the stock market crash that started last summer, the trend turned around, and those same funds, like Tiger Global, which owns a hedge fund, suffered significant losses on the US and Chinese stock exchanges. Tiger’s hedge fund has lost over 50% of its value since the beginning of the year, and its investments in growth companies have decreased by 50% to $5.7 billion in the first five months of this year compared to the same period last year. However, it has increased its investments in startup businesses, including those in Israel.
It should be noted that over the past five months, the number of funding rounds for mature high-tech companies has decreased. Tiger Global, one of the most active funds in Israel, was responsible for several venture capital investments in unicorns with particularly high values, including Rapyd and Snyk. When compared to the same period last year, this represents a reduction of 17%. In a similar vein, Insight Partners, as previously mentioned, decreased investments by 30% from last year, while SoftBank decreased investments by 27%.
Funds like Lightspeed and Sequoia, on the other hand, remained neutral and made investments that are similar to those from the previous year; it appears that they were leery of holding investments with excessive valuations. The fund run by Salesforce also slightly reduced its investment in established businesses. Prior to Monday.com’s IPO, it had invested; this year, it has only cut back by 10%.
R&D collaborations have not been successful.
A significant weakening of R&D limited partnerships is another phenomenon mentioned in the report. These publicly traded investment funds, including Millennium Food-Tech, Big Tech 50, Unicorn Technologies, and Feat Investments, saw a decline in share price ranging from 40% to 70%. Menara Ventures was the sole exception, declining by 20 percent overall. Comparatively speaking, these are small partnerships; however, the total capital raised by the 16 large partnerships is just slightly above $200 million, which is typical of a small VC fund today.
Adv. Shenhav stated, “In the past, this was thought of as a traditional investment channel, but it didn’t happen.” “Their tradability is poor, their business model is unproven, and the amount of capital raised is small in comparison to the time period. It turned out that because venture capital funds are still closed to it and the publicly traded funds haven’t gained traction, the general public doesn’t really have a serious investment channel in high-tech companies.”