Israel-based early-stage venture capital funds have a new source of capital to tap in the midst of a global economic downturn.
Sweetwood Ventures, which recently closed on $70 million for its first fund-of-funds, is looking to capitalize on early-stage opportunities in Israel at a time when the market heads in the other direction.
Early-stage funding has been steadily declining in Israel since 2017, according to the IVC Research Center and law firm Zag-S&W. Funding for that slice of market dropped 19 percent from $184 million in 2017 to $148 million last year.
However, Sweetwood partner Amit Kurz said that the early-stage ecosystem stands out as the most attractive opportunity for the fund and offers a chance to tap into Israel’s strong engineering talent before deals and funds get too competitive.
“There are a lot of non-Israeli investors that tend to invest later on in the life cycle,” Kurz said. “We think the best place is before they come. We invest in pre-seed up to Series A. You want to get a big US fund to follow-on.”
Sweetwood will invest 80 percent of its capital into Israeli venture funds and split the remaining 20 percent between direct and secondaries opportunities.
The firm targets a fund bite size of $6 million to $10 million and has already invested in five managers and expects to make two to three more fund commitments this year. It has also made one direct investment in a cybersecurity company and made one secondaries commitment.
Sweetwood prefers generalist firms over sector-specific outfits because they have a better mix of potential top-tier companies and also offer portfolio diversification.
“Sector-specific funds versus sector-agnostic, it’s just a numbers game,” Kurz said. “You have a better chance of getting the top companies in [generalist] funds.”
Sweetwood Ventures is the venture capital arm of Sweetwood Capital, which launched in 2011 to offer asset management and family office services for high net-worth individuals, family offices, trusts and foundations.
Sweetwood Capital began building out its venture arm three years ago. During that process, the firm realized a fund-of-funds structure made the most sense to access both the top managers and the top deals, which have been getting increasingly competitive, Kurz said.
“We realized at one point that the opportunity is quite interesting, but you need a pool of institutional capital to get into the top managers,” Kurz said.
Leveraging ties to Europe
The fund was able to tap an LP base of European investors such a private Belgian bank, high net-worth individuals and family offices in Luxembourg and Belgium from legacy relationships the founders hold in those areas.
Kurz said the firm hopes to leverage these European ties to potentially differentiate itself from the other Israeli funds and to offer access to corporate connections for its portfolio funds and companies.
“Europe could be a big advantage to the Israeli ecosystem, but there isn’t a lot of European presence,” Kurz said. “It’s a good sales pitch for us. We have a very unique LP base that we bring to the table.”
Kurz said that while this expansion into venture is recent, the asset class has been top of mind for Sweetwood Capital since its founding nine years ago. The firm launched around the same time the Israeli VC market really started to take off, and its partners have watched the asset class in Israel become an increasingly attractive market.
He added that the firm is excited to check out what may be on the secondaries market later this year and may even look to start fundraising again next year.
“Since we are done with fundraising, it’s time to really focus and double down on the positions we already have and continue allocating,” he said. “I firmly believe we will do at least two or three investments by the end of the year.”
It is unclear how the covid-19 crisis will impact the Israeli venture market, which posted strong growth last year. A total of 522 Israeli tech companies raised a record $8.3 billion in venture capital in 2019, a 30 percent rise from 532 companies that raised $6.35 billion 2018, according to IVC Research Center and Zag-S&W.