Venture Capital

Venture capital is a form of financing between venture capital firms and startups, typically early stage. Venture capital is a form of private equity, which are smaller investment funds that are typically organized as limited partnerships, or LLP’s. Private equity firms typically buy companies that are not publicly traded. Venture capital funds invest in start-ups, so there is a large amount of risk involved. These companies have not established themselves yet, so there is typically not a steady revenue stream to rely upon. When venture capital funds invest in start-ups, they are exchanging funding for an ownership stake in the company. They take on the inherent risks of investing in a new company in hopes that the company will be successful, and that their share will be worth more in the future. The start-ups invested in by the VC funds are typically in high tech industries, commonly information technology, biotechnology, or clean technology.

Venture Capital in Israel

Venture capital in Israel is booming because of Israel’s nature of being a “startup nation”. Israel currently has about 70 active venture capital funds; of these, 14 of them are international VC funds with Israeli offices. Many major American and European VC funds have also opened offices in Israel. Some of them are Sequoia, Benchmark, Accel, Walden, etc. According to the IVC research center in 2015:

• Israeli startup M&A exits exceeded $9 billion
• The average exit rose to $87 million
• Software topped all exits with $3.88 billio

How to start a venture capital firm

The 2 and 20 venture capital model

• The basic model in VC
• 2% in committed capital paid in fees annually
• 20% going to the partners

For example, take a fund with assets of $180 million. The limited partners would pay 2% or $3.6 million per year to run it. These payments cover salaries, rent, travel, and various expenses. The partners also invest a similar amount into the firm. Once the firm has paid the $180 million back, the general partners get to keep 20% of the further earnings. If profits are not enough to pay back the $180 million or if they just break even, there is no 20% to be made. Essentially, if the firm is very lucrative, the 2 and 20 model is great.

Israel encourages investment into startups with laws such as the Angel’s Law, which deals primarily with high tech companies. The country has various special tax laws and benefits which encourage foreign investment into Israel’s startups.

Special tax arrangements:

• Income derived from non-Israeli investments are exempt from tax in Israel
• Income derived from VC investments are exempt from tax in Israel

To receive beneficial tax treatment in Israel as a foreigner:

• Fund must have at least 10 investors
• Investors cannot hold more than 20% of the capital for the fund
  • The anchor investor can hold up to 35%
• At least 30% of the investors in the fund must not be from Israel
• Total investment amount must be minimum US $10 million. Of this a minimum of US $5 million needs to come from non-Israelis.
• The fund cannot invest more than 25% of its total commitments in any single company
• Full criteria found here: https://law.asia/establishing-investment-fund-israel/

What legal structures are VC funds typically formed as?

VC funds are typically formed as limited partnerships who invest in parallel with each other. Sometimes, funds are organized as limited liability companies (LLCs) or as publicly traded companies, although this is rarer. They can be registered anywhere although typically in the Cayman Islands, Delaware, and other tax havens. VC funds typically create a management company in Israel, which they typically pay an annual management fee of around 2.5% of the total fund commitments.