Medtech VC Plentiful in Israel

It’s official: Medtech venture capitalists are abandoning the United States for Israel.

Israeli high-tech firms raised $493 million in venture capital during the second quarter (ended June 30), up 4 percent from the first quarter and 3 percent from the same period last year, the Israeli Venture Capital (IVC) ResearchCenter reports.

The life sciences sector attracted the largest share of quarterly investments for the fourth time in three years. Thirty-three companies raised $121 million (25 percent of total investments), a 33 percent increase from the $91 million (19 percent) raised in Q1 and a slight rise from the $120 million (25 percent) garnered in the second quarter of 2012. The Internet sector raised the second-largest share of capital with $87 million, or 18 percent.

“The uptick in investments in the second quarter reflected in part relatively robust activity in the medical devices segment,” noted Ofer Sela, partner in KPMG Somekh Chaikin’s Technology group. “Yet more than two years after the launch of the Israeli government initiative to promote investments in the life sciences, the sector as a whole is still not showing the expected results, although we believe new investors have been brought to the Israeli market and have provided some stimulation to the overall life sciences industry.”

The country’s flourishing medical devices sector has grown considerably this year, amassing a total of 656 companies as of June 30, with 35 of those firms publicly traded. Outside investors are showing a keen interest in the sector, as evidenced by the $10 million Japanese consumer electronics giant Sony sank into Israeli device incubator Rainbow Medical, which has portfolio companies focused on various technologies including stents and stimulators.

The overall high-tech investment for Q2 has a large international component – Israeli venture capitalists invested $118 million of the total high-tech VC in the quarter, a 19.7 percent decline from the $147 million invested in the first quarter of 2013 and the lowest quarterly figure in three years. While Israeli VC share in capital invested is declining, more than 60 perent of financing rounds include Israeli fund participation, researchers contend.

“Israel is clearly falling behind the U.S. in the relative level of biotechnology investments,” Sela said. Few of the most remarkable success stories of technology transfer from Israeli research institutions have been in biotech. While the risk in this industry is obvious, overall returns are still considered very rewarding. The Israeli government needs to continue to intervene in order to create the right eco-system for Israeli biotech companies to flourish and prosper, as it did with the venture capital industry in the early 90s.”

Thirty-two seed companies raised $27 million (5 percent) in the second quarter of this year, a decrease of 13 percent from $31 million raised by 53 companies in the previous quarter, but 29 percent above the $21 million (5 percent) attracted by 31 seed companies in the second quarter of 2012.

Sixteen companies attracted more than $10 million each, accounting for 52 percent of the total amount raised in Q2.

Eighty-five VC-backed deals attracted $399 million, or 81 percent of the total amount raised in the second quarter of 2013, a solid rise from the 77 percent captured in the first quarter and significantly more than the 67 percent attained in Q2 of 2012.

The average company financing round was $3.5 million, while the average financing round on VC-backed deals was $4.7 million.