Israeli Venture Capital Funds Shift Strategy Amid Funding Downturn
Translated & summarized from Globes by baba
Venture capital fund NFX is shifting to a self-funded model, ceasing external capital raises and focusing on existing investments, citing AI's impact on the industry. This move reflects a broader trend in Israel's venture capital sector, where overall fundraising has dropped significantly, down about 70% from its peak. Many Israeli funds are struggling to attract investors due to lower returns compared to U.S. mega-funds, leading to expectations of further fund closures or independent operations. The sector also faces challenges with conservatism in AI and deep tech investments, alongside reduced interest from Israeli institutional investors.
The story in 6 lines · by baba
- Venture capital fund NFX is ceasing external fundraising and will operate independently, investing its partners' capital.
- Israeli venture capital fundraising has fallen approximately 70% from its peak, with total 2024 projections around $2 billion.
- Limited partners are increasingly favoring U.S. mega-funds over smaller or established Israeli venture capital firms.
- Many Israeli venture capital funds are struggling to attract investors due to lower returns and a lack of specialization in AI and deep tech.
- Israeli institutional investors have reduced their investments in local funds, preferring opportunities in the U.S. market.
- Industry experts anticipate more Israeli venture capital funds will either operate independently or exit the market.
Venture capital fund NFX has announced a significant shift in its operational model, ceasing to raise additional capital from external investors, primarily foreign institutions and American funds. Instead, the fund will concentrate on managing its existing investments. Co-founder Gigi Levy-Weiss, an early investor in major companies like Playtika and Sunflower and former CEO of 888, explained that the changing landscape, particularly the impact of artificial intelligence on startup creation and the venture capital ecosystem, necessitates this move. NFX will transition to a leaner structure, leveraging AI tools for investment identification and management. Its employees have been informed of upcoming layoffs, with partners and investment managers seeking new roles or attempting to raise their own funds.
This strategic pivot by NFX, which includes investing smaller amounts ranging from $100,000 to $3 million without board seats, follows a similar move by U.S. fund Homebrew in 2022 and Israeli fund 38North last year. However, NFX's decision has become a major talking point in the local venture capital market. Many see it as a logical step, allowing partners like former Meta executive Stan Chudnovsky to invest their personal capital and detach from traditional limited partners (LPs), institutional bodies and private equity funds seeking high returns.
Industry insiders note that LPs are increasingly disappointed with the returns from most established Israeli and smaller global funds. They are now concentrating capital in mega-funds from Silicon Valley that can secure stakes in Israeli "unicorns" at various stages. While some smaller, well-connected funds like Omri Casspi's in Israel or Quiet Capital in the U.S., and specialized funds like Gili Raanan's Cyberstarts, are finding success, established funds lacking connections to major U.S. firms or failing to demonstrate at least 30% returns are struggling to attract investors. These investors can find lower-risk returns of 17%-20% from private equity funds.
Data from research firm IVC and the Israel Innovation Authority paints a grim picture of Israeli venture capital fundraising. In the first half of the year, Israeli funds raised only $630 million, projecting a full-year total of around $2 billion, a figure not seen since 2016 or the war year of 2024. This is approximately 70% below the 2021 peak. The need for more capital is driven by expensive AI ventures requiring significant hardware. Industry professionals anticipate more Israeli funds will cease fundraising and operate independently or exit the market.
"Most Israeli funds are facing a problem," stated a partner at one fund. "The giant American funds like Sequoia, Andreessen Horowitz, and Lightspeed are now reaching sought-after Israeli entrepreneurs, leading major funding rounds. Israeli entrepreneurs are drawn to them, as experienced entrepreneurs often find themselves courted by U.S. funds, diminishing the need for local Israeli funds." This is evident in major exits like Waze, where foreign funds dominated the returns, and in the funding of promising unicorns like Siara, Deekart (being acquired by Amazon), and EON, which are primarily backed by U.S. investors. Israeli presence is often through affiliated funds or Israelis living abroad.
Furthermore, traditional Israeli venture capital funds are criticized for conservatism in AI and deep tech investments, having thrived in ad-tech, online, cloud, and enterprise software. They lack expertise in deep tech, chips, and hardware, which are increasingly in demand. Cyber security, while attracting 40% of capital, is largely channeled through U.S. funds or Cyberstarts. Many in the Israeli industry are considering changing their business models or seeking employment elsewhere. The high uncertainty in the market leads to "safer bets" on large investments in a few companies controlled by a small group of entrepreneurs and investors.
Israeli institutional investors have also reduced their investments in local funds and companies due to lukewarm returns, preferring U.S. deals. While a government program aimed to encourage institutional investment in Israeli funds, it has not gained traction. Israeli investors complain that quality funds not needing institutional capital are pursued, while those requiring assistance are perceived negatively.