Middle East family backing of Israeli venture sector will hyperdrive growth

Middle East families are preparing to back Israel’s thriving venture capital industry, following the normalisation of its relations with the United Arab Emirates and Bahrain.

Jon Medved’s Our Crowd venture capital group has signed a $100 million deal to develop a platform with Abdullah Al Naboodah’s family enterprise of the UAE.

Co-operation between Mubadala and a few family offices would be enough to turn Israel from a start-up to a scale-up nation, capable of funding more of its deals at a later stage

Jerusalem Venture Partners chairman Erel Margalit has welcomed the Israel deal and confirmed he is talking to potential UAE partners. 

Chemi Peres, general partner of VC firm Pintango, and son of the former Israeli president, has expressed confidence that partnerships will develop.

Several discreet relationships between the two sides have now emerged leading to expectations that future deals can be struck more quickly than many would expect.

The Abu Dhabi Investment Authority’s $775 billion sovereign wealth fund has not, as yet, commented on the Israeli accord. 

But Mubadala, a $230 billion sister organisation dedicated to growth and tech investing, has expressed support for the Israeli deal, as has the Abu Dhabi Investment Office, which seeks inward investment.

There is emotional baggage to overcome, say some. Sheikh Hamad bin Khalifa al-Nayan of the Abu Dhabi ruling family, wanted to invest $92 million in Beitar Jerusalem FC. But the deal is frozen because of financial issues and supporter opposition.

“The emotional part is definitely a roller-coaster ride and will take a substantial time to overcome,” says a UAE investor. Saudi Arabia has postponed a decision on Israel relations while it sees which way the Biden administration will jump.

But intermediaries are swarming. Co-operation between Mubadala and a few family offices would be enough to turn Israel from a start-up to a scale-up nation, capable of funding more of its deals at a later stage.  

Sabah Al-Binani, head of the Gulf region at Our Crowd said each side shared ambition: “Both are very experienced at striking cross-border deals.”

The momentum behind Israeli tech is strong to judge by a 32% rise in seed funding to $10.4 billion in 2020, according to Start-up Nation Central.  January saw a leap of 44% to $1.44 billion.  

But Mubadala invested even more in 2019 – equivalent to $14.4 billion – thanks to its country’s oil wealth. It recently spent $2 billion to strike a partnership with Silver Lake, whose clout easily trumps Israeli VC.  

Silver Lake and Mubadala jointly own UK Premier League football club Manchester City FC although Mubadala retains control of its holding company. They have invested billions in Mukesh Ambani’s Jio online platform of India, also backed by Facebook.  Mubadala has invested $15 billion in Softbank’s Vision Fund.

Israel has seen the growth of several family offices, as detailed by Family Capital here. It has also been able to count on support from US wealthy investors.  But its ambitions have been circumscribed by circumstances.

According to a February survey by Group Up Ventures, 56% of VC funds said there was too much capital available to invest in Israeli startups.  They added that they did not expect to use UAE funding.

To invest capital at speed, 43% of respondents averaged less than four weeks to invest following an initial meeting with candidates, against 26% in 2019. Around 61% of them reported an increase in their deal flow.

Israel can be forgiven for being protective of its achievements. It was less than thirty years ago, when former Prime Minister Yitzhak Rabin’s 1993 Yozma programme put life into the sector by investing state money into new funds led by overseas investors. 

State insurers agreed to provide funding guarantees. Overseas firms were given exemptions from capital gains tax. Nasdaq provided support for listings. The military offered a range of spin-offs.

Yozma became a collective learning experience applied over decades. The funds generated returns of 56% between 1993 and 2000 compared to 14% from a broad universe of Israeli startups.

The funds were privatised but their clients stayed loyal thanks to their gains. In the years that followed US corporates and venture capital managers invested far more.  By 2019, US VC firms were participating in 182 deals worth $3.2 billion. A clutch of Israeli companies have become US acquisition targets.

Israel is proud of its achievements. But access to the UAE’s oil wealth can help it achieve a great deal more.