Startup/Seed Stage Investment by Venture Capital

Topics: Venture capital, Private equity, Startup company Pages: 41 (12298 words) Published: March 21, 2008


What constitutes venture capital and what constitutes angel financing is a natural question. In the time period after the bubble burst in 2000 it became easy to differentiate:

1.Angel investors: usually “high status” individuals, former successful technology entrepreneurs who use their financial wealth, which financed birth and initial growth of ventures.

2.Venture capital (VC): independently managed, dedicated pools of capital that focus on equity-linked investments in privately held, high growth companies needing mid stage financing. Startup/seed financing were usually not acceptable VC funding phases, because of the greater risks involved.

The growth in “Startup/Seed Financing” by VCs (almost 100% in Israel during FY 2004 alone), shows that Israeli VCs contrary to their Silicon Valley counterparts are interested in participating earlier in the venture’s life. In the post Google IPO era, since 2004, Israeli VC partnerships are eagerly pursuing “good” startup/seed ventures, by using a combination of new programs like the “Entrepreneur/Executive in Residency (EIR)” programs among others. No academic papers that analyze these phenomena or even describe it have been found. On the other hand, newspapers and VC magazines have mentioned and described the work of EIRs in the VC industry in Israel. The purpose of this paper is to conceptualize the characteristics of and relationships between: “VC partners” and the “Entrepreneurs” who received financing in the startup/seed phases. This will allow comparison between many types of VC-Entrepreneur relationships in startup/seed stage ventures and shed light on the nascent entrepreneurs and the EIR programs in particular. We believe that knowledge concerning this type of program will help VCs in other countries by either encouraging them to adopt this practice or to abandon it. The question of how VC equity financing will evolve over the next decade and how it will work with startup/seed ventures is a particularly critical one.


Discovery, Innovation and Entrepreneurship13
The Conceptual Model18
Research Questions34
List of Figures
Figure 1: Amount Raised by Israeli High Tech Companies ($M)7 Figure 2: Capital Raised by Israeli Seed Companies ($M)8
Figure 3: Number of Israeli High-Tech Companies by Sector and Stage (2/05)9 Figure 4: The Conceptual Model19


Venture capital has proven to be one of the most capital efficient mechanisms for building high-tech companies and job creation in Israel. Since 1995, the Israeli economy has experienced an inflow of $43 billion ($16 billion through VC investments, $20 billion in proceeds from these ventures and $7 billion from VC backed IPO’s) (IVA 2005 Yearbook). A combination of regional advantages and historical accidents conspired to produce in Israel the second greatest (after Silicon Valley) "Science Park" in the world. In terms of recent patents per capita, Israel stands third after USA and Japan (Trajtenberg, 2001). During the last three decades, Israel has shown dramatic growth in technological startups and is one of the world’s largest recipients of venture capital financing. By virtue of Israel’s entrepreneurial culture and close ties to America, Israeli startups have a strong presence in the United States. Check any technological start-up in the USA, and odds are that one of its competitors is an Israeli company (Bednarz, 2005). More Israeli companies are listed on NASDAQ than those of any other country outside North America- 70 out of 340 foreign listings (Canada has 80). Israeli start-ups have raised more than $5.2 billion in initial public offerings on NASDAQ in the last 5 years. This continued growth is directly related to the number of serial...
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