In the past few months, valuations of early-stage Israeli technology startups have risen, venture capital investors say. The assessment is on the basis of seed rounds, and is contrary to the global venture capital investment trend, which is characterized by a decline in the valuations of early-stage companies.
"We are seeing seed rounds being closed at high valuations," a senior capital market source says. "The lowest valuation stands at $18 million, and even $25-27 million post money, which compares with $20 million in the past. This is at a time when, in the US for example, the valuation of a company after the seed round has fallen to the order of $9-10 million, even in leading, hot fields."
At the same time, the number of financing rounds taking place in Israel has also risen this year. According to a report by Tech Review for the first half of 2024, published this week by IVC Research Center, in the first six months of this year, $1.18 billion were invested in these rounds, 44% more than in the second half of 2023, when early-stage companies raised just $818 million. IVC CEO Ben Klein says that there was a substantial rise in the number of deals in early-stage companies: 163 in the first half of 2024, compared with just 114 in the second half of 2023.
Wrecked plans
Why is Israel bucking the global trend? First of all, because of the war. Last year, company founders planned financing rounds at the end of the summer and after the Jewish holiday season, and then came the outbreak of the Swords of Iron war and wrecked the plans. "Today, we are seeing an accumulation of interesting things that were supposed to come out a year ago, but because of the war they’re coming out now, right in the last few months," says Yonatan Mandelbaum, a partner at venture capital firm TLV Partners. "If you look at previous years, the fund would generally invest in between five and fifteen interesting startups over the course of a year. In the past few months we have seen that number concentrated into a much shorter time span."
At the same time, venture capital investors say that valuations have risen together with the appetite for investment, among other things because of the size, or more precisely the smallness, of the local market. "There’s a sense that we are even more expensive than the US at the moment," says Kobi Samboursky, managing partner at Glilot Capital Partners. He says that prices of companies are rising mainly in "good areas."
By that, he means primarily cybersecurity and artificial intelligence, which are succeeding in attracting investors. "Still, this is a phenomenon that I wouldn’t have guessed," he says. "The background is a financial crisis, high interest rates, and besides all that a war and political instability." He adds, however, "It’s important to remember that we’re not comparing apples and apples, and in our world it’s not always easy to get to true numbers on valuations. But there is a feeling that the deals we are doing here, those that we see as good deals, are more expensive than what is happening around the world."
Samboursky points out that investors too understand that in the current reality, "you have to give a company a certain amount of money for it to succeed in a competitive world; a company can’t start with too small a check." In any event, he says, "I think that in the end this is amazing and positive testimony for the Israeli industry; there are excellent companies here that demand and receive premium prices."
Mandelbaum adds that it’s actually continuation rounds that have been hit in recent years. "In the past two-and-a-half to three years, A rounds, say, have become much more difficult to raise. So we are also seeing companies ask for more money at the start, in order to be able to keep going for longer."
"Separate market for cyber and AI"
Several investors point out, however, that the figures are skewed. They say that a number of local cybersecurity companies are responsible for pulling the average upwards, and that the rise in valuations of early-stage companies is not taking place across the board in the whole local market.
"I think that there’s a separate market for cybersecurity and artificial intelligence companies. If you look at the seed market of founders for whom it’s their first time, and they’re developing technologies that aren’t actually in the cybersecurity area, you can’t necessarily say that valuations are rising. There’s a feeling that, today, investors are looking for the good companies under the streetlight, so the companies that everyone is tracking down are the ones whose valuations are rising," says Nate Meir, a partner at Israeli venture capital fund StageOne.
"Because the industry here is so crowded, and everybody knows everybody and everything that moves, the fear of missing out on good companies in Israel is much stronger," Meir adds. "There are also many Israeli founders for whom this is the second time they are coming to the market to raise money. They don’t necessarily build a presentation and raise money on the basis of an initial idea, but they have a resumé of successes behind them."
It’s important to mention that, in the case of early-stage companies, the valuation can sometimes be notional or theoretical, and arises from negotiation between the founders and the investors. "In a seed round, the valuation is a derivative of how much companies in the same field are raising, that is, it derives from the territory, and how much the investors and the founders want to hold," says Mandelbaum.
Apart from that, the information that the companies report about financing rounds often include an SAFE (simple agreement for future equity), allowing investors to make a fairly immediate investment in the company, when its value is still unknown, so that the stake that the investors will receive will be determined only in the future, if the company takes off.
Why have seed rounds been less impacted than later ones?
"In 2021, the local venture capital market, like the markets in Europe and the US, was very much affected by the entry of funds that, historically, had not invested in venture capital, such as funds that invested only in the public market, and these pushed the traditional venture capital funds to start investing more at the seed stage," Vintage Investment Partners managing partner Asaf Horesh told "Globes". As a result, he says, "there was a significant rise in seed stage investment, because the investors received a sort of incentive to invest at earlier stages, in order to gain from the higher valuations at the later stages.
"This created a gap in the investment market, whereby, despite the fact that a lot of money had come in at the seed stages, the next stage, the A round, became harder to raise. This stemmed from, among other things, the fact that seed companies that raised money at high valuations in 2021 and 2022 were insufficiently mature to move on to the next stage.
"As a result, the supply of good companies setting out to raise money at in A rounds is smaller, leading funds to continue to invest at the seed stage."
Published by Globes, Israel business news - en.globes.co.il - on July 31, 2024.
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