Click here for printer friendly page
Seeds are still being planted
18/07/2007. Source:IVCJ (Israel Venture Capital Journal).
 Seed investments are of high importance in sustaining Israel’s high-tech industry over the long term. In this IVCJ article, Zeev Holtzman, founder and chairman of Giza Venture Capital, describes the latest trends in seed investment within Israel.
Those numbers can be problematic
In the third quarter of 2006, according to the IVC Research Center, five percent of the total capital raised by technology companies went to seed investments, compared to 10 percent in the year-earlier period. On the surface, it appears to be a very significant decline. However, I would suggest that we not be overly concerned about the apparent drop.
Precise figures for seed investment are somewhat of an unknown because the statistics that are available are incomplete. Seed investments are often made quietly without fanfare and without press releases. They often first become known when subsequent investment rounds are raised. In some cases, they may never be publicly reported.
Another factor impacting the seed numbers is angel investment. While accurate figures are hard to come by, it is clear that angels are back in the market in a major way, with this year’s level of investment well exceeding that of the previous year. Adding VC and angel investment together, the total is likely to be considerably higher this year, compared to 2005.
Seed becoming attractive to foreign investors
Foreign VC funds that are active in Israel are increasing their seed investments here. More are willing to jump into the cold water but, in most cases, prefer to do so holding the hands of local venture firms.
Experienced entrepreneurs opt for VCs
There is a recent tendency of VC funds to make seed investments via incubators because of the leverage created using Office of the Chief Scientist financial incentives. This substantially lessens the risk for venture firms, yet many experienced entrepreneurs – those that have received venture funding in the past – prefer to bypass incubators and go to angels or directly to VCs for funding.
The best quality deals will generally not go to incubators. Experienced entrepreneurs are not willing to give up the amount of equity required to be part of an incubator. They prefer to go directly to VC funds that are interested in seed situations – and there are more and more of them – where they can negotiate a better deal.
It’s true that VCs often ask for rigid terms, but because of competition, many VCs are willing to be more flexible about conditions that were insisted upon only a few years ago. Also, to the delight of entrepreneurs, the valuation is likely to be more attractive.
Seeding Internet firms gains popularity
Internet start-ups are again back in vogue. We are seeing many seed situations in which young entrepreneurs are seeking valuations that are reminiscent of the bubble years of 1999-2000. There is no question that VCs have their antennas out for finding another YouTube, that is, content Internet companies that can eventually be sold for a billion dollar valuation. I just doubt if they will find such firms in Israel.
In two to three years, we might have an explosion of the new Internet bubble that appears to be forming, as start-up valuations reach $8 million to $12 million. Only a few years ago, VCs weren’t budging from funding offers in the $2 million to $4 million range. With seed funding in this area increasing, at the end of the day, one is hard-pressed to see companies having successful exits with 20-40 multiples.
Setting a good foundation
We believe that seed investment should be about 10 percent of investments on a long-term basis, which will provide a good pipeline for later A, B and C rounds. Today, experienced entrepreneurs looking for seed don’t find it difficult to get VC support from Israeli or non-Israeli sources.
Seed investments are being used to verify the business model, understand the pulse of the market, begin development activities and obtain the agreement of potential clients to perform testing when products are ready. Seed money should sustain a company up to a year, after which it should have a much larger round to carry it forward for another 18 to 24 months.
For experienced entrepreneurs, seed can run from $3 million to $4 million. The amount should enable companies to achieve significant milestones, preferably with strategic partners, before going to the next round.
The VC industry is always asking the question: should we invest in a small number of seed companies and support them with relatively large amounts of capital in the follow-on rounds? Or, should we invest a little in large number of seed situations – assuming some will close – but where one or more can deliver a home run? When it comes to seed investing, each VC fund has its own strategy.
This article 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
|
