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Opinion Articles

High-Tech & Technology -






Opinion Article


he year 2016 is turning out to be one

of the most prosperous years of the

Israeli High-tech industry in the last

couple of decades. This prosperity, reflected by

the enormous sums invested in local technol-

ogy firms, brought about a change in local VC

transactions, which is reshaping the traditional

mindset. It has also enhanced the effects U.S.

VC trends have on the Israeli market.

In accordance with a recent study published

by the IVC Research Institute and KPMG, ap-

proximately $4 billion was invested in Israeli

High-tech and Bio-tech companies during the

first three quarters of 2016 alone. This trend

seems to have continued into the fourth quar-

ter, leading the index to new records since its

establishment. The sums invested represent

an increase of approximately 400% from the

total investments in 2012, approximately 250%

from the 2013 figures, and approximately 150%

from the sums invested in 2014 and 2015 cal-

endar years. These are certainly paramount fig-

ures, which indicate the strength of the Israeli

High-tech sector. On the basis of past data, it

is reasonable to believe that some of these in-

vestments will bear fruit over the next few years

and lead to an increase in M&A transactions

involving local companies.

The study demonstrates another trend, which

may indicate a change in the industry and its

characteristics. Despite the meteoric increase in

volume of investments, the number of reported

transactions remained stable and even identi-

cal in comparison to the data from 2012-2013

– considered to be relatively poor years from

the VC perspective. This signifies that there has

been an incremental rise in the size of VC trans-

actions, namely that the sums invested in each

transaction and the amount of companies re-

ceiving significant investments has increased.

The reduction in volume of transactions and

simultaneous increase in investment sums per

each transaction naturally creates unique char-

acteristics, which represent this industry trend.

The increase in the magnitude of investments

leads to a certain increase in the valuation of

fundraising companies, which in turn supports

the entry of new investors or the completion of

significant follow-up transactions. It is a well-

known fact that, when compared to the average

company in Silicon Valley, the Israeli market suf-

fers from a significant valuation gap. This gap is

a familiar source of frustration for Israeli man-

agers and entrepreneurs, a fact which pushes

them to the streets of San Francisco and Palo

Alto in pursuit of foreign investors.

The increase in the volume of investment pro-

ceeds also triggers an increase in the equity

dilution of founders, managers and employees,

and as a result, their share of the desirable Exit

transaction is bound to decrease. One reason

for this stems from the equity structure of com-

panies raising VC investment and the industry’s

investment model, under which most commonly

the investors receive preferred shares. Among

the rights attached to these shares is the right

to receive their investment funds back prior to

company shareholders. In turn, the sharehold-

ers receive Exit transaction proceeds in accor-

dance with their relative pro rata share in the

company’s share capital. Therefore, as a result

of the requirement to repay the investors their

investment proceeds, considerable pressure is

applied on the founders, managers and other

company executives. Evidently such pressure

leads many of these executives to seek other

solutions that will guarantee they will not be

left behind if an Exit transaction occurs. In

other words, they attempt to ensure that they

will receive an appropriate sum, which would

reward them for their hard work throughout the

years. It is also in the investors’ best interest,

while observing the broader framework in which

they and the company operate, that founders,

managers and employees of these companies

would receive their fair share when the company

is involved in an Exit transaction. As long as they

have the power to influence the decision-making

procedures in the company and to guarantee the

adoption of resolutions that are favorable and

protective of their interests, management has

several tools in its arsenal to ensure that these

important elements are remunerated.

Some companies have adopted a “Carve Out”

Plan, aimed at guaranteeing that management

members would be the first to receive Exit

transaction funds or at the very least receive a

predetermined share of available proceeds. Oth-

er companies have adopted non-equity-based

programs, which are integrated as part of the

manager and founder employment terms. No-

tably, these two mechanisms may also be used

in combination with each other. Furthermore,

there are also other arrangements for handling

the remuneration of managers and employees

in the event of an Exit transaction, such as pay-

ing future pay-per-performance payments from

the surviving or acquiring entity. This toolbox

reflects a new set of considerations that mature

companies face as the industry progresses, the

investment size increases and the local market

becomes more complex. Such demands are usu-

ally favorably regarded by the investors, but in

more mature companies, where founders less

often fill managerial roles, this is not always

the case.

The aforementioned trends are typical for

mature companies and are closely related to

trends currently impacting Silicon Valley tech

companies. These trends are basically aimed

2016 Trends in the Israeli Venture Capital Industry

By Adv. Atir Jaffe & Guy Lachmann, Partners at Pearl Cohen Zedek Latzer Baratz

Atir Jaffe

Guy Lachmann

Adv. Atir Jaffe and Adv. Guy Lachmann are partners in the High-Tech group at Pearl Cohen Zedek Latzer Baratz