Financing rounds of $100 million or more were once a rarity in exit-oriented Israeli high tech. In recent years, however, the number of such financing rounds has risen, according to data from the IVC research institute and a survey by "Globes."
It appears that the hope by Israeli startups of being acquired by global giants is gradually giving way to a desire by entrepreneurs for growth and leading giant companies themselves. Like their overseas colleagues, they are also in no hurry to be listed on the stock exchange: technology companies worth tens of billions of dollars, such as Uber, Chinese company DiDi Chuxing Technology, Airbnb, and SpaceX are staying private for the moment. Israeli entrepreneurs are taking their cue from these examples and acting accordingly.
In order to understand this change at the numerical level, take a look at the map of large-scale financing rounds over the past five years. In 2014, only two Israeli companies held rounds of over $100 million: Landa Digital Printing ($135 million) and Gett ($150 million). The number rose to three in 2015: Taboola ($117 million), Infinidat ($150 million), and Behalf ($119 million). Gett also raised $300 million in 2016 (and $80 million more this year), joined in the same year by Via ($100 million), another shared transportation company.
Then came 2017. Cybereason raised $100 million and Via raised $250 million more, joined in the fourth quarter of the year by Skybox Security ($150 million) and Lemonade ($120 million). There have also been four $100 million rounds in 2018: eToro ($100 million), Landa Digital Printing ($300 million), Trax Image Recognition ($125 million), and this month also JFrog ($165 million), making six Israeli companies that held financing rounds of $100 million or more in the past 12 months, not counting financing rounds in related fields such as life sciences and digital currencies.
"To become a company worth billions"
Yoni Assia, CEO of social investment platform eToro, thinks that global influence has changed the Israeli ecosystem, as reflected by the recent large-scale financing rounds. "Historically, Israel had a good ecosystem for the early stages and less so for the growth stages, but we've been seeing a transition to global investments in the past two or three years. Formerly, when a company raised $100 million, as we did, both it and the investors were American. Today, however, we're seeing them looking for global investments and the same is true for European and Asian investors. Israel has become an attractive target for growth investments with less competition in comparison with Silicon Valley. The result is that Israeli companies can remain private much longer."
eToro's initial vision was to simplify access to investments in financial assets for investors. Early on, the company launched a simple interface for forex trading. Three years ago, the company changed its focus and founded a social network on which an investment portfolio could be discussed, what everyone was investing in could be viewed, and investment strategies could be duplicated. In addition to investments in securities and foreign currency, eToro accommodated trading in cryptocurrencies such as Bitcoin, Bitcoin Cash, and Ethereum. Today, it is the world's largest social investment network, with over 10 million users.
"Already in eToro's early days, I told our investors that we were building a $10 billion company, and I think that they slowly came to believe that it was coming true," Assia says. In the past two years, eToro has grown 400-500% a year. "We want to grow the company even more in the next two years. We're envisioning a company worth billions managing tens of billions of dollars for our customer," he adds.
"Globes": How do you plan to do this - on the basis of your financing round?
Assia: "Creating a local consumer brand in a great number of countries requires a very big investment in both technology and blockchain, which we regard as a very important area, and also investment in marketing. Marketing is our biggest investment. The financing round enables us to make large-scale long-term investments. Once we know that we'll be here 10 years from now, we can plan and build technologies that will be relevant not only two quarters or a year from now, but in another 10 years.
"We're also looking at expanding geographically into more countries. We're now considering launching eToro in the US, which we didn't do before, because we realized that founding a financial entity in the US would require large-scale investment, and we felt that we had to do this when we had the financial balance that would enable us to do this and be competitive."
What about now?
"Today we're giving it serious consideration. Our US competition, incidentally, is raising hundreds of millions of dollars. We now have an office in the US, and we're in the middle of launching our product there. Today, when we enter a given market, we also consider acquisitions, and we've set up a team to do it, which we couldn't do before."
"Raising money to make history"
While eToro is thinking about acquisitions, JFrog has already acquired a number of small companies in order to improve its software update distribution platform. Today, a decade after it was founded, JFrog has 400 employees, seven offices worldwide, and 4,500 customers, including big names like Apple Computers, Facebook, Twitter, Netflix, and major global banks. CEO Shlomi Ben Haim led the company in its $165 million financing round, completed last week - the largest ever in the DevOps sector in which it operates. Ben Haim has a clear answer to the question of what he plans to do with so much money: he told "Globes," "We’re raising money to make history. If you don't raise money to make history, you don't need that much money. Somebody will ask you to give his money back."
This is the second company with three founders: Ben Haim, CTO Yoav Landman, and chief architect Fred Simon. Despite the huge current round, Ben Haim says, "One of the things we have learned - and this is the biggest lesson for entrepreneurs - is that if you raise too much money too quickly, you'll kill your company." On the basis of this experience, JFrog raised its first investment, amounting to $3.5 million, four years after it was founded. In its second round, the company rejected an offer of $25 million, raising only $7 million. Even in the recently completed round, Ben Haim says, "We turned down $350 million more. It was too much for us.
"We won't raise any more money in the coming years. Our goal now is to increase the company's annual sales turnover to over $1 billion. We're around $100 million now, and I think that by 2025, we'll reach it. We're adding 100 new customers each month now, and that will only increase."
Why are you so confident?
Ben Haim: "A company can be amazing, but what makes the difference is the market, and the DevOps and software automation market is on fire. Because the company is growing so fast in a very big market, we didn't need the money. We had $75 million in the bank, with a positive cash flow."
If you didn't need the money, why did you raise it?
"When the board of directors asked me why we were raising the money, I answered that the reason we raised money was that we realized how big our market is, specifically, and how many huge competitors are entering it. When I say huge, I'm talking about companies like Microsoft, Google, and Amazon. In order to build an independent and much larger company that can compete against them, we had to raise a sizeable amount of money that would give us a push on several fronts. One front is organic growth, another is acquisition of companies in order to grow faster, and a third is what we did four months ago: we released a platform that does everything by itself and includes all of the tools from the seven products we had before.
"The money, in these amounts, has to be money that serves a long-term strategic goal. The previous financing rounds were special purpose rounds - I have to build a new product or open an office in Silicon Valley, so I raise money. This was a strategic financing round; I need enough air for five years, not one."
Softbank's investment in the artificial intelligence-based Lemonade insurance company was also not the result of need, according to Shai Wininger, the latter's cofounder and "chief lemonade maker." "As an investor, you want to help a company only to the level it needs, not more than that," he tells "Globes," "but when a company raises money, it's good to raise it at a stage when it doesn't need it, so that it can use it for future growth. The investment wasn't designed to help the company survive until it reached a given milestone; it was to provide with breathing room, so that it would be able to grow consistently."
"The entrepreneurs set the terms"
83North Venture Capital partner Arnon Dinur thinks that there has been a profound change in the market. "The money exists, and I think that it's possible to build big companies and take advantage of it. In the past three years, the market has matured, with big opportunities being created. Entrepreneurs have courage, and they're going for broke. There's just one question: will this eventually result in enormous independent companies listed on the stock exchange generating billions of dollars in returns for their investors? This will be a model for entrepreneurs in the coming years, and will make them ambitious to build big significant companies, which is the point that marks success."
The fund participated in financing rounds in the tens of millions of dollars for companies such as Via, Ebury, Actifio, and Pioneer. "In a sense, it's an easier investment than seed investments, because you see the company growing before your eyes," Dinur says. He adds that in a decision whether to participate in a large-scale financing round, 83North examines three aspects concerning the company raising money: "The first is that you want to see it grow substantially - a company growing rapidly and on a large scale. The second is seeing that there is potential for growth to continue, and that the market is growing enough. The third is that the team is capable of making this leap with the company." As for the terms that prevail in such rounds, Dinur says, "It's all a matter of supply and demand. These are usually very competitive rounds in which the entrepreneurs set the term."
Pitango Growth managing general partner Isaac Hillel believes that the relationship with startups has not changed. The fund participated in rounds amounting to tens of millions of dollars in companies such as Riskified, AppsFlyer, Foursquare, and Signals Analytics. Pitango also led Via's $100 million financing round two years ago. Hillel says, "Our relations with the entrepreneurs are not affected by the amount of the investment, but by our ability to connect with them and help them cope with the challenges of a company raising $200 million.
"In our opinion, the challenges facing growing companies are how to build the sales and marketing machine quickly and globally, not just in the US. It's not like growing from $10 million to $20 million. In the past two years, the market has been looking for rapidly growing companies - for the market, good growth rates start from 40-50%. Growing quickly takes money, and we're seeing companies, as soon as they reach a scale of around $10 million in sales, start to raise tens of millions of dollars in order to accelerate their growth rate. The money is used for acquisitions or in order to develop supplementary products that can lead to additional growth."
"A healthy process for Israeli industry"
Together with financing rounds of $100 million or more, the number of financing rounds of $20 million or more at earlier stages is also increasing. Does the increase in large-scale financing rounds mean that we will see more and more global technology giants coming from Israel?
Assia believes that the answer is yes. "Israel today has more mature companies in the same stage as eToro that realize that you don't build a company for an exit; you build it so that it will be here in another 10-20 years, and will go public and be worth billions of dollars. They also realize that in order to build such companies, you need resources. I think that it's a very health process for industry in Israel, that there are more large companies capability of raising significant money and can make acquisitions both in the local market and outside it, because this enables us to build really significant companies that will come from here."
Published by Globes [online], Israel business news - en.globes.co.il - on October 11, 2018
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