Israel transforms into scale-up nation

High-tech Photo: Shutterstock

For the past decade Israel has been known as startup nation, but with less early stage startups and more growth tech companies and unicorns, the emphasis is changing.

In the 2020s, the times are clearly changing in Israel, as startup nation becomes scale-up nation. The new emphasis has been growing in recent years with dozens of Israeli unicorns emerging (private companies with a valuation of more than $1 billion) and at least seven with a valuation of more than $2 billion. Israel has 37 unicorns, according to "Geektime," with a combined value of $60 billion, which have raised $32.9 billion.

In 2018, according to IVC, five Israeli tech companies completed financing rounds of more than $100 million and an additional 13 companies raised more than $50 million. In 2019, 17 Israeli tech companies completed financing rounds of more than $100 million and an additional 15 companies completed financing rounds of more than $50 million. In 2020 so far, despite the Covid-19 crisis, 17 companies have completed financing rounds of more than $100 million and 18 companies have completed financing rounds of more than $50 million.

Most of the companies raising more than $100 million in a financing round have hundreds of employees and offices around the world and it is probably no longer appropriate to call them startups. The seven companies worth more than $2 billion are: digital insurance company Next Insurance; cyber security company Snyk; dynamic smart transportation platform Via; sales performance enhancement company Gong; supplier payments automation company Tipalti; cyber security company SentinelOne; and work teams management platform developer Monday.com.

So it's looking like startup nation is developing into scale up nation.

The next stage in the evolutionary 'scale-up' process for these growth companies is either an exit through a Wall Street Initial Public Offering (IPO) or being acquired by a tech giant. Two large Israeli growth companies that have taken this second route over the past year are AI chipmaker Habana Labs and journey planner app Moovit, both sold to Intel for $2 billion and $900 million respectively.

But more and more Israeli companies are looking to grow independently through a stock market offering, and the four major Israeli IPOs on Wall Street over the past 18 months have been: freelancer platform Fiverr, which raised $100 million at a company valuation of $600 million in June 2019 and has seen its value increase twelve-fold to more than $7.2 billion today; digital insurance company Lemonade raised $319 million at a company valuation of $1.6 billion in July and has since nearly tripled in value to $4.3 billion; software update automation company JFrog raised $352 million at a company valuation of $3.9 billion in September and is already worth $6.3 billion; and medical device company Nano-X Imaging raised $190 million at a company valuation of $800 million and is today worth $2.4 billion despite being attacked by several short-trading analysts.

Major IPOs in the pipeline in the coming months could reportedly include Monday.com at a company valuation of $4 billion and ad-tech company ironSource at an even higher company valuation.

For the past decade Israel has been known as the start-up nation, even though, Israel has actually been the start-up nation since the early 1990s. But Saul Singer and Dan Senor published their book, "Start-up Nation: The Story of Israel's Economic Miracle" in September 2009 and shortly afterwards the moniker stuck.

But the relevance of still calling Israel start-up nation is now being questioned by many, and not only because of the large number of growth companies, that have gone beyond the classic startup phase. The number of startups in recent years has been decreasing. According to Israel's Central Bureau of Statistics there were 4,363 early stage startups in Israel in 2018, down 6% from 2017 and the number has since probably declined.

That is still a very large number and the Central Bureau of Statistics speculates that it might well be that the fall in early stage startup is actually a very positive thing. The Israeli ecosystem has matured since the early 1990s and the hit and miss nature of venture capital back then has been replaced by a more seasoned judgment by investors of whether an enterprise is likely to succeed. So only the fittest startups are likely to find the investment to get them up and running.

In its most recent report for the third quarter of 2020, IVC Research Center noted that less than $100 million was raised by just 95 seed deals, in the first nine months of 2020, indicating a dramatic drop in seed funding amounts compared with previous years. The seed median investment reflects the change in the last quarters, dropping from $900,000-$1million in 2016-2019 to $150,000 in 2020.

It should be noted however that many previously successful entrepreneurs are returning with new startups and coming out of stealth with large financing rounds that skip the seed funding stage.

Moreover, while the Covid-19 pandemic and resultant economic crisis have boosted many tech companies by acting as a catalyst for the shift to doing things online and remotely, there can also be little doubt that the difficulties of international travel and the recession have also stymied much development and deal-making, especially for earlier stage companies.

Where Israel's startup and high-tech ecosystem will go from here is unclear. The pessimists feel that the fall in early stage startups will be translated into a drought in the coming years while the optimists see a higher proportion of the smaller number of early stage startups going on to become successful larger companies.

Published by Globes, Israel business news - en.globes.co.il - on November 29, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

High-tech Photo: Shutterstock
High-tech Photo: Shutterstock
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