Relative to population, Israel has long been the world leader for venture capital investment, but even by its high standards, 2014 is set to be an exceptional year.
By October, technology venture funding had exceeded the previous three full-year totals and a bumper crop of exits from 2013, including the $1 billion purchase of Waze by Google, have helped to put Israeli funds in the spotlight.
Beaming back has been Carmel Ventures, which has welcomed Chinese search engine Baidu and insurance company Ping An as LPs into its fourth early-stage IT fund.
The fund closed in mid-2013, only for Carmel to pause fundraising while it exhausted dry powder in its third fund.
“Last year was a bit more difficult but in 2014 the appetite for venture in general and Israel in particular is definitely on the rise,” said Carmel General Partner Daniel Cohen.
Fellow Herzliya-based firm Pitango Venture Capital also counts Asian LPs in its new fund, and Cohen believes that Asian strategic investors are now backing Israel as an alternative to their Silicon Valley positions.
“In a way it’s the perfect marriage,” said Pitango General Partner Ronen Nir. “Israel has a lot of technology and a small local market, while in Asia-Pacific the adoption of mobile and the beginning of the adoption of cloud computing for business have opened up the market for complimentary technologies.”
Despite the new investments from China, Carmel has kept the new fund near the size of its predecessors with a final close at $194 million, a total comparable to other venture funds in the Israeli market.
Carmel is also sticking to its Series A sweet spot, although it may commit more to consumer Internet opportunities than previously, and perhaps less to the semiconductor sector.
Cybersecurity, the hottest sector in Israel this year, and fintech also feature heavily in the firm’s current dealflow, Cohen said.
Competition between investors at the Series A stage has remained steady, although that picture changes for later-stage financings, where Israeli firms are outnumbered by U.S. investors.
“Israel has a lot of technology and a small local market, while in Asia-Pacific the adoption of mobile and the beginning of the adoption of cloud computing for business have opened up the market for complimentary technologies.”
Pitango Venture Capital
Foreign capital, whether directly investing or as an LP source, underpins Israel’s venture sector, and Carmel itself raised less than one-tenth of its new fund from inside Israel.
Most of Carmel’s LPs are U.S.-based, such as fund-of-funds Horsley Bridge Partners, and the firm retains stronger connections to the United States than Europe, both in terms of its investors and its preferred exit avenues.
New ties to Asia, however, create realization opportunities, such as this year’s sale of Carmel portfolio company Kontera to Singapore Telecommunications. Kontera had raised about $36 million from VCs, including Carmel, Sequoia Capital, Tenaya Capital, Globespan Capital Partners and others before it was sold for $150 million in June.
That purchase was made by an Israeli unit of SingTel, which, like many multinationals, has established a business center in Israel in recent years.
That presence further boosts the potential for M&A exits in Israel, spurring in turn a new generation of startups. “Up to a few years ago we counted about 600 new companies a year, now we are talking about over 1000,” Cohen said.
Among these are interactive content creator PlayBuzz and game developer LuckyFish, two of the five investments made thus far by Carmel’s new fund.