Israel Secondary Fund (ISF): Completing venture capital in the start-up nation Custom Case Solution & Analysis

Evidence Brief: Israel Secondary Fund (ISF)

Financial Metrics

• Fund I Capitalization: 45 million dollars raised in 2009.
• Fund II Capitalization: 100 million dollars raised in 2017.
• Market Context: Israeli high-tech companies raised 4.8 billion dollars in 2016 across 673 deals.
• Secondary Opportunity: Estimated 500 million dollars to 1 billion dollars in annual secondary volume within the Israeli market.
• Exit Timelines: Average time to liquidity for venture-backed companies increased from 4 or 5 years to 8 or 10 years.
• Management: Standard venture capital fee structures apply with carried interest as the primary performance incentive.

Operational Facts

• Team Structure: Led by three partners: Dror Glass, Nir Linchevski, and Shmuel Zisapel.
• Investment Focus: Secondary transactions involving Israeli or Israel-related technology companies.
• Deal Types: Direct secondaries (buying stakes in individual companies) and complex secondaries (buying entire portfolios from limited partners or funds).
• Portfolio Activity: Over 100 companies funded through direct or indirect holdings via Fund I and Fund II.
• Market Position: First dedicated secondary fund in the Israeli market environment.

Stakeholder Positions

• Dror Glass: Managing Partner focused on the necessity of providing liquidity to early investors and founders to sustain the venture cycle.
• Institutional Investors (LPs): Seeking exposure to mature Israeli tech assets without the 10-year lock-up of primary venture funds.
• Venture Capital Funds: View ISF as a partner to clean up tail-end portfolios or provide liquidity to specific limited partners.
• Founders and Employees: Require partial liquidity to de-risk personal finances while continuing to grow their companies.

Information Gaps

• Internal Rate of Return (IRR): Specific realized returns for Fund I are not explicitly stated.
• Administrative Overhead: Exact headcount of support staff and analysts beyond the core partners is omitted.
• Competitor Terms: Precise pricing models used by international entrants like HarbourVest or Lexington in the Israeli market are not detailed.

Strategic Analysis

Core Strategic Question

How does ISF defend its dominant position in the Israeli secondary market against large-scale international competitors while managing the transition to larger fund sizes and more complex deal structures?

• Maintaining the local network advantage as the primary differentiator.
• Balancing fund size with the ability to execute smaller, high-yield direct secondaries.
• Mitigating the risk of capital oversupply in the Israeli tech sector.

Structural Analysis

The Israeli secondary market is shifting from a niche opportunity to a competitive arena. Using a value chain lens, the ISF advantage lies in deal sourcing and asset pricing. Local networks provide access to information that global firms cannot easily replicate. However, the bargaining power of sellers is increasing as more capital enters the market. The threat of new entrants is high, specifically from global secondary funds that can write larger checks for simple transactions. ISF must move toward complexity where local knowledge acts as a barrier to entry.

Strategic Options

Preliminary Recommendation

ISF should pursue the Specialized Complexity path. The firm should not attempt to outspend global giants on simple transactions. Instead, it must double down on its ability to price and manage messy or distressed portfolios that require local intervention. This strategy preserves margins and utilizes the unique expertise of the founding partners.

Implementation Planning

Critical Path

The transition to a complexity-focused model requires immediate shifts in capital structure and human capital. The following sequence is mandatory:

• Month 1-6: Raise Fund III with a target of 150 million to 200 million dollars. This size is sufficient for larger deals but small enough to avoid the pressure of indiscriminate investing.
• Month 3-8: Recruit two mid-level principals with backgrounds in corporate law and structured finance to handle the increased technical load of complex secondaries.
• Month 6-12: Formalize a proprietary database of secondary pricing benchmarks for Israeli startups to accelerate the valuation process for multi-asset portfolios.

Key Constraints

• Talent Scarcity: The pool of professionals in Israel with both venture capital experience and secondary transaction expertise is extremely limited.
• Information Asymmetry: As companies stay private longer, obtaining accurate financial data for non-lead positions remains a constant friction point.

Risk-Adjusted Implementation Strategy

Execution success depends on maintaining the deal funnel while increasing the technical capability of the team. A contingency plan must be in place if global competitors drive prices to unsustainable levels. In such a scenario, ISF must pivot to a GP-led restructuring role, helping older Israeli funds manage their end-of-life assets. This ensures the firm remains relevant even if direct secondary pricing becomes unattractive.

Executive Review and BLUF

Bottom Line Up Front

ISF must reject the temptation to compete on capital scale. Global secondary firms possess a lower cost of capital and larger reserves. The competitive advantage for ISF is its proximity to the Israeli tech market and its ability to resolve structural friction in complex transactions. The fund should target a size of 200 million dollars for its next vehicle, focusing on portfolio acquisitions and structured liquidity solutions for founders. This maintains the return profile while insulating the firm from price wars in the direct secondary market. Speed of execution and deep local integration are the primary defenses against international entrants.

Dangerous Assumption

The analysis assumes that Israeli founders and venture funds will continue to prefer local partners over global brands when liquidity is the primary objective. If global firms offer significantly higher valuations or faster closing times, the local network advantage will erode rapidly.

Unaddressed Risks

• Market Liquidity Freeze: A global downturn would stop the IPO and M&A activity that secondaries rely on for eventual exits, potentially trapping ISF in mature but illiquid assets for years.
• Concentration Risk: By remaining exclusively focused on Israel, ISF is highly vulnerable to local geopolitical instability or changes in Israeli tax law regarding capital gains.

Unconsidered Alternative

The team did not evaluate a move into the primary venture market. While ISF is a secondary specialist, a hybrid model could allow the firm to lead rounds in its most successful portfolio companies, capturing more upside from the assets it already knows intimately. This would transition ISF from a liquidity provider to a full-lifecycle investment partner.

Verdict