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European VCs in Israel23/04/2008. Source: IVCJ (Israel Venture Capital & Private Equity Journal). Alex Brabers
 Most European VCs that have reached some scale invest in Israel. In this IVCJ article, Alex Brabers, executive vice president of GIMV, examines their reasons and looks at differing investment approaches.
For most VCs, investing in local deals is preferable to investing outside their country. They know the business culture, the business network and the eco-system, and can spend less time reaching portfolio companies and providing local support. The larger European VCs, however, invest to some degree outside their home countries. The size of their funds won’t allow them to invest solely in the home market, and local deals have to be benchmarked internationally. Deals in certain areas often seem to come in batches (e.g. GPS chipsets, micro-projectors, DVB-H) and when comparing these deals, VCs will choose the company with the best risk profile independent of its location. Geography remains a relatively insignificant factor for success.
When benchmarking deals internationally, one soon encounters Israeli deals given its buoyant technology environment, which represents the largest concentration of successful tech firms within ‘Europe.’ Due to existing airline schedules a return trip from Europe takes only one business day (and admittedly one night flight), the same time needed for traveling to the south of France, for example. Israel is therefore a natural market for European VCs to consider.
European VCs adopt different approaches to the Israeli market. The most committed funds, mostly with a US origin, set up local teams (Greylock, Sequoia). These teams operate relatively independently from their London or US offices, but they do leverage the brand and network. They try to become fully embedded in the local market in order to be considered a true Israeli fund, but with excellent access to Europe and the US. Other VCs maintain a local Israeli representative for deal sourcing, networking and deal support. This representative is typically complemented by staff flying in from the head office to support and lead the deals, each in his area of expertise.
Most European VCs support their deals on a fly-in-fly-out basis without having any permanent staff on the ground. In such cases, it is assumed that they can, to a large extent, source deals from their head office in London or the continent.
Deal sourcing, however, remains to a large extent a local activity where you need to be physically close to the market. This is even more so the case for early stage deal flow, especially in such a highly networked country as Israel. In the current generation of Israeli high technology, companies are often founded by a serial entrepreneur on his second or third company, who has already established strong relationships with local VCs.
Will these Israeli tier 1 deals approach international VCs for their first round and, if so, why? This case is comparable with serial entrepreneurs in the UK who prefer tier 1 VCs in the UK rather than tier 2 or tier 3, not to mention continental VCs. Adding value to an early stage deal on a fly-in-flyout basis seems cumbersome, especially considering that one of the initial tasks is recruiting, mainly a local function. Leading a deal in such a scenario is not advisable for a European VC. On the other hand, building a syndicate with a strong locally networked VC is a possible solution to this issue.
Recently European funds GIMV and 3i adopted an original approach. Considering that the Israeli market is highly networked, they decided to partner with a local VC. As both VCs are evergreen funds, with a listed vehicle, they were able to make investments as limited partners in local tier 1 VCs (GIMV in Genesis Partners, 3i in Giza). Both Israeli funds focus on early stage Israeli deals (ICT for Genesis Partners and ICT/medtech for Giza) and have not sought to expand into later stage or international deals. Both parties, the European LP and the Israeli VC, act as complementary teams. The local VC takes care of deal sourcing and local networking, and allows the European VC to co-invest in selected deals. This is possible because Giza and Genesis Partners, in most cases, lead these deals in the first professional capital round and are thus able to invite the other party to the syndicate.
Co-investments by the European VCs only occur where there is a clear European angle to the deal, with strong industry contact from the European VC in order to maximize the potential added value. The follow-up from the European VC is indeed on a fly-in-fly-out basis, but it depends on the local partner for a substantial part of the local issues. The interests of both parties are fully aligned, as both enter the deal at the same time and at the same valuation. There are, therefore, no differences in the respective cost bases nor differences in the exit horizon.
Such partnerships are not only productive for co-investments in Israeli start-ups, they can also be the basis for mutual support in due diligence or business building for deals for which no coinvestment opportunity exists. Indeed, both parties can consult each other to benchmark deals against respective European or Israeli deals. The Israeli funds often seek market access, as Europe is a market which is geographically close and can thus be served out of Israel. The European VCs seek benchmarking of the technology against Israeli technology given the presence of large corporate research centers in Israel as well as numerous technology start-ups.
Not all VCs can pursue this strategy, as investments in other funds are prohibited for most. The specific structure of GIMV and 3i allows them, however, to invest in Israeli funds, thereby creating a strong tie between both teams. This relationship is not based on any contractual obligation (which wouldn’t work anyway) but on goodwill, mutual interest and the strength of an LP investment. It creates a win-win situation for both parties.
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com.
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