Investments in Israeli startups are considered attractive thanks to their innovative technologies and thinking out-of-the-box. But according to data from Tel Aviv-based S-Cube Financial Consulting, that is not the only reason. S-Cube found that the 'price' of investing in an Israeli startup is cheaper than investing in a US startup and the valuation level of an Israeli company is lower than similar US companies. US investors sometimes call this the "Israeli discount." S-Cube found that this discount makes a significant difference and in growth stage financing rounds Israeli valuations can be tens of percentages and even more than 100% lower.
S-Cube's report includes examining the sums raised externally by Israeli and US startups and the external valuation given and the stake in the startup that the investor receives. Thus S-Cube found that investors in a Series C or later financing round of a Israeli company would typically receive a 20% stake compared with a 10% stake in the US company for the same sum invested. S-Cube examined its database which includes investment agreements for 500 Israeli tech startups connected to Israel. Data about US companies was taken from the report by US law firm Wilson Sonsini.
According to S-Cube, in recent years the amounts being raised and the valuations have been rising both in Israel and the US. But while the gap in the amounts being raised in Israel and the US have narrowed, the gap in the valuations remains high. S-Cube also found that the gap in valuations between the US and Israel rises, the later the financing round.
Thus S-Cube found that in the past five years the valuation gap between US and Israeli startups in Series A financing rounds is 46%, rising to 142% in Series C financing rounds. In the first half of 2019, the gap was 111%.
At the same time the average Series C financing round in the first nine months of 2019 was $23 million in the US and $20 million in Israel.
"More difficult for Israeli companies to raise capital"
The valuation of Israeli startups might be lower during financing rounds but the gap with the US narrows when it comes to exits. The average price for an Israeli tech company being sold in 2018 was $81 million while in the US it was $60.5 million. In both countries this was down from the average exit price in 2017 - $106 million in Israel and $74 million in the US. In other words, it could be that in Israeli companies the investors are left with a smaller stake of the company but enjoy a bigger exit. The data on exits in Israel was taken from PwC and in the US from KPMG.
"For Israeli entrepreneurs it is easier to raise in Israel but the price at which they raise the money is at worse terms," said S-Cube managing partner Gidi Shalom Bendor. "That in the US they would receive better terms is in theory but it is not fdor certain that they would succeed in raising money there. Over time, in later financing rounds, we see that companies make the transition and begin to raise in the US, while US investors also come here to scout for good companies."
TLV Partners CFO and partner Adi Yarel Toledano said, "We have got used over the years to the Israeli discount, which moves between 40% and 60%. For Israelis it is more difficult to raise money and therefore the prices were always lower than in the US. That probably comes from the level of competition on the deal and it could be that it results from our conservativeness as Israelis. Compared with the US, we are less 'explosive' in our valuations and we don't feel that they have a basis. I encountered a US entrepreneur who came with an idea and no experience and wanted to raise according to a valuation that nobody in Israel would dare to ask for and no fund in Israel would invest at such a valuation at such a stage."
She added that because of these gaps, it is worthwhile for Israelis to transfer part of their presence of their management to the US. "The moment you move around there as an entrepreneur and become part of the American ecosystem, you are more exposed to investors and what entrepreneurs there are doing and it has an influence."
Pearl Cohen Zedek Latzer Baratz senior partner Adv. Guy Lachmann said, "I think that the reason it is like that is liquidity. You are in market in which the investors are dominant, so as a company you have to give in when it comes to the valuation, compared with a situation in which there is larger competition for investment in companies."
He added, "Valuation is not an exact science. It stems from many factors. It can be the negotiations by both parties, the company's maturity, the company's results, the capabilities of the managers and the background they have come from."
These reasons are even more crucial, he adds, when the startup is from sectors like agritech and digital health where there are fewer investors in Israel. "They can be counted on the fingers of one hand," Adv. Lachmann said.
However, he speculates that because Israel is considered more attractive because of the lower valuations of startups, this will bring more investors, and eventually the level of valuations will rise and the free market will balance out the differences.
Published by Globes, Israel business news - en.globes.co.il - on December 26, 2019
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