Over the last decade or so, foreign investors looking to Israel for portfolio diversification have been met with limited opportunities. While the venture funds roaming the plains of Tel Aviv and hills of Haifa certainly have had access to attractive opportunities, high fund minimums and long holding periods have made them almost exclusively opportunities for big institutional money. Aside from a few publicly traded Israeli stocks or an Israel-focused ETF, the average accredited investor has been, generally speaking, left out in the cold when it comes to investing in the country’s best pre-IPO innovation. However, that is starting to change.
As the VCs rode the wave of the late 90s internet boom to raise massive funds into the early 2000s, M&A trends in Israel’s tech market have gone through a quiet evolution marked by smaller buyouts of earlier stage businesses. With competition increasing amongst global technology firms, many have lost their appetite for multi-year post merger integrations accompanying large scale acquisitions. Competitive advantages are being fought, not over mature companies in Israel, but over intellectual property and a handful of brilliant minds. Thus, with the growing need to identify and acquire the best technology the fastest, companies like AOL and IBM have turned Israel into the world’s incubator.
While “new” tech giants such as Google and Facebook have appeared on the Israeli scene with their proverbial shopping carts, most VC fund managers in Israel still struggle to turn a profit given the continuation of smaller exits. Their new strategy: Invest more money in later stage companies with significant revenues, traction, and big dollar acquisition potential.
With the VCs investing almost solely in growth stage Israeli technologies, in between friends and family money and where the venture funds are now participating at the $3-5M mark, a serious lack of capital has threatened Israel’s vital seed technology pipeline. Recognizing this capital vacuum and the huge potential, Israel’s Angel investment community has, in the last few years, mobilized in a way that it had not previously. Given the lack of capital available to these young startups, valuations have fallen significantly for investors providing them with the ability to negotiate more meaningful equity positions, board control, dilution protections, and much more.
At the same time as Israel’s Angel investors have been digging in to the immense opportunities now presented to them, the aforementioned smaller, shorter-term exits have continued – turning from what some viewed as a trend to what has now become commonplace. Google’s $25M purchase of LabPixies provided quite a nice return to its Angel investors that had put in less than $2M over the course of the company’s four years of operation. Israeli startup Playtika, which had raised roughly $1M from Angels after its founding in 2010, was bought by Harrah’s Entertainment a year later for $85M. You do the math on that one. And even though Tel Aviv-based Face.com went through some larger rounds of funding with almost $6M raised since 2007, a Russian investor and a handful of Israeli Angels made out extremely well when Facebook bought the company for $100M.
While many industry experts point to these early stage acquisitions in claiming that these companies sell out too early, Israel’s Angel investors are responding with “too early for whom?” The challenge for Israel-based or Israel-focused VCs is in trying to change the culture of Israeli entrepreneurs to better reflect that of their American counterparts on which the entire venture investment industry is based. This has proven to be an impossible task.
Yet, despite the ideal market conditions in Israel for Angel investors, most folks outside the country have no way of capitalizing on these great opportunities. With the venture funds too expensive and the idea of investing alone in one or two companies too risky, the average accredited investor in places like the U.S., Canada, and the UK is sidelined. However, as more investors are looking for ways to diversify their portfolios, and to do so in Israel, so too are the number of foreign Angel and microcap funds appearing to accommodate their liquidity and risk appetite. With relatively small capital commitments, non-tech, non-venture investors can participate in a Limited Partnership, for example, which distributes that capital across 10-15 Israeli companies at a time as part of a greater risk mitigation strategy. Combining this with a legal and compliance framework based in their home countries, foreign investors’ path to investing in Israel without unnecessary tax exposure abroad has never been easier. Additionally, because of the ability to profit on a number of small exits, these Angel and microcap funds don’t need 50-100x returns, but rather can succeed on 3-5X per company. Over the course of two or three years, this could result in very nice gains for investors, thus paving the way for more individuals abroad to get involved in the aptly titled Start-Up Nation.
Brian Rosenzweig is a co-founder and Managing Partner at JANVEST Technologies, a U.S.-based Angel fund providing individual accredited investors, family offices, and foundations with a portfolio diversification mechanism targeting Israeli emerging technology companies. Email: Brian@JANVEST.com