Six Israeli companies surpass $2b valuation this year

$2 billion unicorns / Design: Globes
$2 billion unicorns / Design: Globes

More Israeli tech companies are raising large financing rounds at "double unicorn" valuations. Is a tech bubble forming?

Young entrepreneurs like to say that they are building companies that will be worth $1 billion. Back in 2013, Cowboy Ventures founder and seed investor Aileen Lee coined the term 'unicorn' to describe these companies, which at the time were a rare phenomenon - there were just an estimated 40 'unicorns' worldwide back then.

But in recent years the rapid expansion of the global tech industry, and the discouraging environment for initial public offerings on stock markets worldwide, before this year, saw hundreds of startups develop into unicorns, including dozens in Israel.

As unicorns have become more common, an even more exclusive club has been created of companies worth $2 billion. In Israel in the past few months, in the midst of the Covid-19 pandemic, no fewer than six companies have been given as valuation that crosses above the $2 billion threshold: Monday, which has developed a platform for managing work teams in organizational projects; Snyk, which finds and fixes vulnerabilities in code; Via, which has developed a dynamic smart transportation platform; Gong, which improves sales performance using AI; digital insurance company Next Insurance; and Tipalti, which automates management of payments to suppliers.

Some of these companies like Gong and Tipalti have tripled and quadrupled respectively their valuation over the past year. Both have generated revenue of just tens of millions of dollars (they have not published precise figures), so that the multiples by which they have raised money are high.

The spread of software and technology

The Covid-19 crisis has hit many sectors hard in the global economy but it has also changed the way people consume products and services as well as the way that organizations manage themselves with employees often no longer sitting near each other in offices. Because the use of digital means has grown so significantly, customers have become open to options that allow additional digital performance. All this extends far beyond Zoom conferences and buying food from the supermarket online to such areas as digital insurance, and contacting the bank. Organizations, for their part, need to switch to providing more online services and also change the way their operations and employees are managed.

Behind all this there is more and more use of software. The leading US investor Marc Andreessen said already a decade ago that "software is eating the world" and today this is proving to be truer than ever with software intruding and accelerating into almost every form of endeavor.

Accordingly, tech companies that assist programmers are also gaining traction including Israeli company JFrog, which provides automatic software updates, and which held an IPO on Wall Street last month at a $4 billion valuation and is already worth nearly $7 billion, and the aforementioned Snyk, which has joined the $2 billion double-unicorn club last month, and more companies.

Entrepreneurs and investors say that the pandemic crisis has pushed revenue growth and that they see businesses adopting more and more technology solutions. The widespread perception is that Covid-19 has sped processes that were anyway happening and that the switch is taking place sooner. Tech companies don't want to miss the opportunity and are investing large amounts on marketing and sales as well as developing products that are adapted to customers.

2. Free money is looking to flow

But business opportunity is not the only factor pushing up the valuation of companies. The share indices on Wall Street are at very high levels and Nasdaq reached an all time high last month, although since then it has fallen back 8% but is still 30% higher than the start of 2020 and 70% higher than it was at its low-point in March.

The Wall Street rises are being led by tech companies. The trillion dollar company valuation barrier was only broken last year by companies like Apple and Microsoft and yet by August Apple broke the $2 billion barrier. The stock market rises have been assisted by the US Federal Reserve, which has injected $2 trillion into the markets and consequently the belief is that zero interest bank rates will be with us for a long time to come.

There is a connection between the public and private markets because institutional bodies back the venture capital funds and private equity investment funds that put their money into privately-held tech companies. They may have already committed to invest in funds but if for example there was a crisis on the stock exchanges, there would be pressure for them to slow their investments in the private market. At the same time the multiples on the stock markets, and the option of conducting public offerings at high valuations, is also pushing up the level of valuations on the private market.

Is a bubble developing?

There is certainly logic in the optimism about the ability of tech companies to continue performing well because customers genuinely are adopting technologies in a rapid way. Yet it is still unclear whether a bubble is developing here. The markets are awash with money, among other reasons because funds came into the crisis with large amounts in their coffers and seeking investments. The desire of investors not to miss the companies that are benefitting from the crisis is causing the market boom.

Tipalti's CEO Chen Amit said that his company was receiving offers of investment from funds on almost a daily basis and that they were able to raise money just two weeks after showing a presentation and only four days after meeting with investors. For their part investors say it is taking less and less time for them to raise money.

Benchmark general partner Bill Gurley, whose venture capital fund was one of the first to invest in Uber, warned last week about what is happening and compared the current period to 1999 shortly before the dot.com bubble burst. He told CNBC, "There is certainly what I would call a highly speculative nature to the markets today, a willingness to take on risks, a willingness to get excited about projects that may be five or 10 years in the future, that we haven’t seen since the ’99 time frame."

There is a question mark over whether companies are actually able to adopt the technologies they are buying. Many enterprises, including in traditional industries, are open to technology options and are genuinely looking for solutions that will help them become more efficient. However, for companies and organizations to succeed in doing this, and continue to buy and integrate additional solutions, they need to change their DNA and internal procedures, and that can be much more difficult than they initially think.

On the other hand, Amit insists that in Tipalti's case, there is a large market of companies that are innovative and still need its solutions, and they are not dependent at this stage on traditional customers adopting their payments management systems.

The significance of large companies in Israel

One way or the other, it is impossible to ignore what is happening in Israel. If in the past, a company reaching a valuation of $1 billion was a sign of maturity of Israel's tech industry and the ability of Israeli companies to grow and become large companies, the fact that so many companies are now exceeding $2 billion valuation marks a further maturity. This is because the more valuable a company becomes, the less likely it is to be acquired, among other things because there are fewer potential buyers.

Looking ahead, this is all good news for Israeli industry. If these companies continue growing and maintain even more stability, this will provide more jobs in Israel. At some of these companies including Monday this involves more than in the field of development. There is also emerging in Israel more and more senior managers capable of leading these large companies and that is not something that can be taken for granted.

All that said if these companies want to become independent, whether in the private or the public market, they will have to become more efficient in terms of unit economics with a business model based on efficiency and profitability and not acquire customers at a loss. In order to expand their customer base and grow rapidly, tech companies frequently tend to forego profit and only subsequently achieve a sustainable business model. However, when companies are completing financing rounds at a $2 billion valuation and even more, they must stress sustainability much more in order to survive in the longer term.

Published by Globes, Israel business news - en.globes.co.il - on October 8, 2020

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

$2 billion unicorns / Design: Globes
$2 billion unicorns / Design: Globes
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