At the end of September, venture capital firm NFX announced it would cease raising new capital from external investors — including foreign investment institutions and U.S. funds — and instead focus on managing its existing portfolio. Once current capital is fully deployed, the partners plan to invest from their own personal funds, writing checks of between $100,000 and $3 million, without taking board seats or leading funding rounds. The move, reported by Globes, Israel’s business news publication, has reverberated across the local venture capital industry.
Among NFX’s founders is Israeli venture capitalist Gigi Levy-Weiss, the first investor in companies including Playtika and Sunflower, and a former CEO of 888. In a blog post explaining the decision, the partners wrote that AI is changing how startups are built, and thus how the entire VC ecosystem is going to work, prompting them to reconsider whether a large fund is necessary to maintain their impact. NFX’s structure will also become leaner, incorporating greater use of AI tools for identifying and managing investments, and staff members have already been informed they will need to find new employment. NFX cited the 2022 decision by U.S. firm Homebrew — whose partners stopped raising external capital and shifted to investing their own funds — as an inspiration. In Israel, veteran firm 83North has taken a similar path.
The structural pressures on Israeli VC extend well beyond NFX. According to a study published by research firm IVC in collaboration with the Israel Innovation Authority, Israeli funds collectively raised only $630 million in the first half of this year. A senior Israeli venture capital executive, speaking anonymously, said that limited partners and institutional investors are disappointed with the returns generated by most established Israeli funds, and are consequently concentrating their capital in massive Silicon Valley-based funds. The executive said that an established fund unable to demonstrate connections to major U.S. firms, and failing to deliver a return of at least 30% on paper, will not attract investors who can instead place capital in private equity funds offering returns of between 17% and 20% with lower risk.
The funds that captured the largest share of returns from the $32 billion sale of Wiz to Google were primarily foreign: Index, Sequoia, Insight, Thrive, and Andreessen Horowitz. Among the investors in unicorns such as Cyera (valued at $12 billion), Decart (currently being acquired by Amazon for $7 billion), and EON (valued at $4 billion), firms like Sequoia, Benchmark, and Lightspeed are the dominant names. Israeli involvement typically runs through affiliated funds that partner with foreign entities, such as Omri Casspi’s Swish, or through Israel-linked investors based abroad.
A senior industry figure cited in the Globes report attributed part of the problem to a skills gap: partners at many Israeli funds built their expertise during the era of ad-tech, online services, cloud computing, enterprise software, and cybersecurity, and lack depth in deep tech, semiconductors, and hardware — areas that are becoming increasingly sought after in the AI era. A partner at one Israeli fund put the competitive dynamic plainly, noting that the largest American funds are finding their way to the most sought-after Israeli entrepreneurs, leading those entrepreneurs to question what value a local fund adds. Industry insiders now believe more Israeli VC firms are likely to withdraw from fundraising, shift to independent operational models, or exit the market altogether.