Funding Options in Tel Aviv, the World’s 2nd Startup Ecosystem

Last November (2012) Tel Aviv was ranked second (after Silicon Valley) on the world’s top startup system report published by Startup Genome.

What makes Tel Aviv so innovative?

In the last two years we have witnessed a tremendous development of a Start Up Eco-System in the city. Tel Aviv brings together people from various regions – Russia, Europe, Middle East and Asia. Each one comes from a different culture and brings to the table a different point of view.

An additional factor that influences the success of the Tel Aviv Eco-System is that many Entrepreneurs have a military background. This kind of background usually means that they have gained some experience and they have a good network to start with.

Entrepreneurship in Israel has become part of the culture and being an entrepreneur is admired within the Israeli society, and especially in Tel Aviv.

So, we have a solid startup output, but alas, what about funding?

According to IVC, 2012 was Israel’s best year for hi-tech M&A in the last decade, yielding $9.95 billion in exits.

Accelerators and Incubators

In Tel Aviv alone you will find more than 10 Acceleration Programs and co-working spaces offered for startup companies. Let’s go through a quick drilldown of the most successful ones:

The Entrepreneurship and Innovation Support Program (EISP).

The program was established in 2010 with the vision of utilizing the vast 8200 alumni network to aid entrepreneurs in their early phases and accelerate the fulfillment of new ventures, visions and dreams in various fields, such as hi-tech, internet, mobile/media, biomedical, energy and environment, social responsibility etc. The program targets entrepreneurs who are in the early stages of forming their own venture.

8200, an IDF Intelligence unit, which until a few years ago was top secret, is considered one of the leading sources for Israeli innovation, a foundation for a vivid community of technology, entrepreneurship and venture financing. The program offers a five-month workshop program, a shared working space, mentoring program and special events for entrepreneurs.

8200 EISP is a non-for-profit program. As such, the program organizers do not take equity nor do they provide funding. There is a symbolic participation fee, and the requirement that entrepreneurs contribute 1 day (in total) of volunteering in community activities.

A more standard acceleration program (with funding options) is the IDC Elevator:

IDC Elevator provides each admitted startup with a package of perks worth up to $140,000. Each startup receives $20,000 in cash and the rest in essential services (business consulting, accounting, legal support, top designers, development, HR, PR, etc.). In return, the program takes up to 10% equity in each invested startup.

One of the most professional and active entrepreneurship centers in Israel is StarTau, Tel Aviv University Entrepreneurship Center.

Only 9% of the Israeli entrepreneurs are women.

To change that, StarTau is offers women who are co-founders in start-ups a special acceleration program titled: We Dream- a 15 weeks long workshop and mentoring program for women entrepreneurs and their co-founders.

StarTau hosts many other activities such as: Acceleration, Founderschool, Events and Global Networking.

Angel Capital and Micro Funds

What is the difference between Angel Capital and Micro funds? Angel investors are investors who back start-up companies or entrepreneurs. The capital they provide can be in the form of a one-time injection of seed money or support to carry the company through difficult times. Angel investors invest their own money and are typically focused on helping the business in which they invest to succeed. Micro funds, by contrast, invest their investors’ money and are more interested in reaping a large and relatively quick profit. Angel investors thus often offer more favorable terms than other lenders. Both are usually investing in startups about 500K$ in seed investments.

If you want to meet the angels, the best option in Tel Aviv is to register for Pitch Night events.

Israel VC’s model

Venture capital in Israel has rapidly developed from the early 1990s, and has about 70 active venture capital funds, of which 14 international VCs with Israeli offices, and additional 220 international funds which actively invest in Israel.

According to IVC Research from 2012: Israel’s VC funds’ investments were about $516M. Ofer Sela, Partner in KPMG Technology group, commented: "The year 2012 was a record one in terms of the number of companies raising capital over the past decade. In early stage investments, micro-VCs and angel investors succeeded in filling the void left by Israeli VCs. The Internet sector proved, by far, to be the most attractive sector as more than twice as many early stage Internet companies were funded in 2012 than in 2011. Technology developments in recent years in both cloud-based infrastructure and content delivery platforms have enabled Internet companies to mature and develop their intended technology with greater capital efficiency than any other sector.”

The shift

The Israeli government's Yozma program is widely acknowledged as the seed of what is now an industry in full bloom. Launched in the 1990s, the mechanism was simple. The government shared investment risk by providing capital commitments to VC funds alongside that raised by the fund manager, but later sold its stakes in successful firms for the same price as it paid upon purchase. In the last two decades we have witnessed the prosperity of this program which has developed into the Israeli VC industry.

However, VC activity is dwindling while the seed activity is increasing. VCs have a hard time raising money lately, since institutional investors are less prone to invest in them (due to the Kauffman report testing their yields during the last two decades). The VCs are also suffering from a severe competition with Private Equity firms.

On the other hand, the accelerators and angel investors are much more active, bringing into Israel new investment models copied from the US (Ycombinator style) while also creating new investment models.

Israel's start-up scene is unlike any other. It boasts a long-standing entrepreneurial community characterized by seasoned entrepreneurs and investors who serve as mentors to promising start-up founders. This phenomenon, coupled with a local resource of world-class technological talent, perpetuates a globally networked ecosystem, making Tel Aviv the ideal city for startups and innovation.

Elena Donets is VP, Operations and Strategic Planning at StarTau, Tel Aviv University’s Entrepreneurship Centre. Experienced in social entrepreneurship, she was part of the founding team of two non-profit organizations: "Heseg Zioni" and "Alone-Not Anymore". Elena currently studying Mechanical Engineering at Tel Aviv University.

Image courtesy of Boaz Yiftach /FreeDigitalPhotos.net

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