Israel becomes unicorn nation

Unicorn Illustration: Gil Gibli

As IPOs outstrip acquisitions and unicorns abound, it's time for Israel to drop the startup nation moniker.

Buried among the many figures in yesterday's IVC-Meitar report on fund raising by Israeli tech companies in the first nine months of 2021 was something that indicates a profound change in the country's startup eco-system. For the first time ever, money raised in initial public offerings (IPOs) on stock markets outstripped the amount raised in exits through acquisitions.

In the first nine months of 2021, Israeli tech companies raised $9.8 billion in IPOs (including SPAC mergers) compared with $7.6 billion in exits (acquisitions by larger tech companies). Over the same period Israeli startups raised a whopping $17.8 billion, which has already reached $19 billion during the first half of October, nearly double last year's $10 billion, which was itself a record.

Most of the money raised by so-called startups, is actually raised by unicorns, tech companies worth more than $1 billion, in large financing rounds of over $100 million. Even though 15 of these Israeli unicorns have held IPOs this year, five of them are or have been worth over $10 billion (SentinelOne, Monday.com, ironSource, Playtika, and Global-e), there are still over 50 such Israeli unicorns, and dozens more nearing the magic $1 billion valuation threshold.

Although still referred to as startups, these unicorns are companies with hundreds of employees in offices around the world and tens of millions of dollars in sales but usually not profitable, as they invest heavily in product development and marketing expansion.

This trend is in contrast to the first three decades of Israel's startup revolution, when the holy grail for entrepreneurs was to sell their companies to a tech giant. From the legendary ICQ instant messaging program Mirabilis sold to AOL in 1996 by four twenty-somethings for $407 million to the $15.3 billion sale of autonomous car technology developer Mobileye to Intel in 2017, and $6.9 billion sale of big data connectivity chipmaker Mellanox to Nvidia in 2019, this was the pattern that made Israel the startup nation.

Almost no Israeli startups have bucked this trend and grown into large companies and it is perhaps no coincidence that Israel's three largest tech companies - Amdocs founded in 1982, NICE Systems founded in 1986, and Check Point founded in 1994 - pre-dated the emergence of the country's startup culture and the establishment of venture capital funds.

Before the past few years, one of the only startups to scale-up seriously was cloud-based web building company Wix founded in Tel Aviv in 2006. But the trickle of companies holding IPOs on Wall Street,which began in 2019 with Fiverr, Lemonade, and JFrog, has since turned into a flood.

CB Insights lists 863 unicorns worldwide including 50 from Israel. Fintech and cybersecurity are the sectors dominating the list with 12 unicorns each, followed by AI with six and big data with four. Two of these unicorns, eToro and Pagaya, both fintech companies, have already agreed SPAC mergers to list on Wall Street at valuations of $10.4 billion and $8.5 billion respectively.

According to CB Insights only 18 of these more than 50 unicorns have their registered headquarters in Israel with most based in Silicon Valley, New York and London. The two largest unicorns on the list are fintech company Rapyd and cybersecurity company Snyk valued at $8.75 billion and $8.6 billion respectively. Both are officially UK company but the fact that Rapyd recently leased 15 floors in Tel Aviv's landmark Azrieli Center shows where the real nerve center of the company is located.

Meanwhile rarely a week goes by without new Israeli unicorns being proclaimed. This week both AI chip developer Hailo and human resources management platform Hibob officially became unicorns and expect many more over the next few years.

Over the years, many warned that the startup nation model was unsustainable over the long-term and that if Israel did not develop large companies, the well would eventually run dry. Tech guru, Yossi Vardi, the father of Arik Vardi, one of the founders of Mirabilis and an investor in the company himself, always insisted that the model was sustainable and that Israel did have large companies that were called Intel Israel, Microsoft Israel and Cisco Israel.

In any event the dispute is no longer relevant. Israel's young entrepreneurs, usually backed up by older serial entrepreneurs, have taken matters into their own hands and started building big companies.

Some companies may be overpriced and will see their valuation fall significantly. Other companies may never manage to swing from loss to profit and their investors will be disappointed. But the shift online is irreversible and the need for cybersecurity, fintech, big data, AI, connected cars and much more will only grow. The question is not so much will the bubble burst as which Israeli company will be the first to achieve a valuation of $100 billion.

Published by Globes, Israel business news - en.globes.co.il - on October 14, 2021

Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Unicorn Illustration: Gil Gibli
Unicorn Illustration: Gil Gibli
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