Early Israeli start-ups face fewer funding rounds, greater challenges

Yet more mature companies’ fundraising nearly double that of 2016.

By MAX SCHINDLER
Updated: NOVEMBER 2, 2017 06:22
Technology. (Illustrative) (photo credit: INGIMAGE)
Technology. (Illustrative)
(photo credit: INGIMAGE)
Fledgling hi-tech start-ups in Israel may face greater difficulty raising funds, as the total number of investment deals has sharply decreased since 2016, according to a study released by Start-Up Nation Central on Wednesday.
The first three quarters of 2017 saw some 356 funding rounds, a 30% decline from the 507 deals during the same period in 2016. During the third quarter of 2017 alone, there were 35% fewer funding rounds than in the same period in 2016. Despite the decrease in the number of rounds, the total amount invested in the third quarter was up 28% since last year, showing a mixed picture.
“It’s become harder for pre-seed and seed startups to raise money from VCs [venture capital funds], who now prefer more substantial investments in more mature companies,” said Ben Yaron, an analyst at Start-Up Nation Central, a non-profit institute which seeks to help Israeli hi-tech companies get off the ground.
The decline in the number of preseed and seed rounds may indicate that local investment funds are more mature and have access to more capital, thus requiring a higher minimum threshold to invest in a company.
“The quality barrier for early stage companies to receive funding is getting higher,” said Yaron, who was the report’s author. Median and average values for seed-stage or early investments in Israeli start-ups have flatlined, hovering at just over $1 million.
The average funding round has gone up for later-stage companies while flat-lining for more recent start-ups. / COURTESY: START UP NATION
The average funding round has gone up for later-stage companies while flat-lining for more recent start-ups. / COURTESY: START UP NATION
At the same time that early-stage companies face greater barriers to entry, more mature companies are raising nearly twice as much as last year in terms of average funding rounds. Companies in the third quarter raised on average $15.4 million during the third quarter of 2017, an increase of 93% from the same period last year.
In the past four years, the compound annual growth rate – the rate at which the initial investment value has increased to the final value – has risen by 28% for average funding rounds.
“Israeli tech investment used to be very focused on early stage startups.
Now there’s a good mix of early and later-stage opportunities, which could invite additional later-stage players we haven’t seen in the market before,” said general manager Guy Hilton of Start-Up Nation Central.
Today, the average funding round size for Israeli hi-tech start-up stands at $15.4 million, nearly double the $8 million average in the third quarter of 2016. The median has also gone up, nearly tripling in value to $5.7 million today from $2 million last year.
In terms of how companies are faring internationally, European hi-tech companies enjoyed an increase in funding rounds until 2015, but never doubling its rate in one year. In contrast to the Jewish state, European funding round sizes have stabilized or even declined since 2015. Israeli hi-tech start-ups have been an anomaly in terms of increased average funding rounds, raising possible concerns of a valuation bubble.
The report was published based on 2014-2017 data collected by Start- Up Nation Finder, Start-Up Nation Central’s “innovation discovery platform.”