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Investor activity is showing that the tech scene in Israel is hotter than ever. Figures from IVC Research Center and accounting firm KPMG Somekh Chaikin indicated that 2016 set the all-time fundraising record for Israeli high tech. Last year’s total climbed to $4.8 billion, exceeding the 2015 figures by 11 percent, The startups of Israel raised $3.8 billion in investment money in the first nine months of 2016, a 27 percent increase over the first nine months of 2015.
There’s more to this growth than meets the eye.
Despite the increase in total investment, 2016 saw fewer deals than previous years. For example, only 142 funding deals closed in Q3’16, a 26 percent drop from the 193 deals in Q2, 17 percent less than the trailing three-year quarterly average (171 rounds per quarter).
So the grand total of funds is rising, but the number of deals is going down. In other words, investors are putting more money into each deal, so each company raises more money, and the figures bear that out. The average Israeli funding round reached $7 million in the first nine months of 2016, a 9 percent increase over the $6.4 million average in the first nine months of 2015. And the trend is to invest at later stages — C round or later.
The late stage financing went from $1.3 billion in 2014 to $2.2 billion in 2015, and the average time to exit for startups increased from 6 to 7 years in 2015. Financing in late stages also accounted for the lion’s share of funding in 2016, representing 60 percent of the total funds.
This trend indicates a sea change in the Israeli startup ecosystem.
While in the past Israeli startups were satisfied to raise seed money and ecstatic to get as far as an A round – because it gave them more time to shop around their technology looking for an acquisition by Google, Microsoft, or other major tech corporation – they are now holding out. Startups are seeking to build the value of the company, aiming for a massive exit or a high-flying IPO. It’s a sign that entrepreneurs are more confident in their chances for success in the international market and in the efficacy of their technology. Right behind the Israeli entrepreneurs are local and international investors, who are becoming more confident in backing Israel’s innovations for the long term.
This Israeli confidence is relatively new. As late as 2014, entrepreneurs were decrying Israel’s case of “Series A Heartbreak,” when startups were unable to interest investors in providing them with the funds they needed to grow their technology. Given that reality, it’s perhaps not surprising that entrepreneurs built with Google et al. in mind. A lack of patience, and perhaps even a lack of faith in their own capabilities, prompted entrepreneurs to take the first deal they were offered. The economic tribulations that rocked the tech world – the dot com meltdown and the 2008 crisis – certainly didn’t help. In those days, any offer looked like the best offer.
So what drove Israeli entrepreneurs in the new direction?
Waze, of course. Certainly it wasn’t the first billion-dollar deal, but the previous deals didn’t give entrepreneurs the kind of confidence they seemed to get from the Waze deal. Evidently, the denizens of Startup Nation woke up to the opportunities and potential in their midst, thanks to the app. A poll done six months after the Waze acquisition showed that 44.5 percent of Israelis of working age (18 and older) were interested in pursuing a career in high-tech, while only 26.1 percent said they would prefer to work in medicine.
Waze was the key that turned Israel’s startup ignition into full gear. Nearly all Israelis use, and even depend, on the app to navigate the traffic there (over one million new cars were imported into Israel, a country with fewer than 8 million people, in just the past four years, adding to the millions already on the road).
The newly found confidence has also been bolstered by the fact that Israel has become a (perhaps the) go-to place for tech innovation outside the US. The phrase “second largest R&D center outside Silicon Valley” has become all too common when describing the presence of multinationals there. Apple, for example, opened an R&D center in Herzliya in 2014 – its second biggest outside of Cupertino – while Intel has over 10,000 employees in Israel, also its second highest employee group outside the US. Microsoft, HP, and a host of others have major presences in Israel as well. On a visit to Israel in 2015, Tim Cook said, “Apple is in Israel because the engineering talent here is incredible. You guys are incredibly important to everything that we do and to all the products that we build.”
All this action and infrastructure has helped Israeli entrepreneurs come of age, which is also boosting investor confidence. It’s a win for both parties: Investors are happy to invest in successful Israeli companies, and Israeli entrepreneurs are happy to take money in later stages, as they seek to scale. Quick M&A deals are becoming less popular as Israeli endurance sets in. This approach was well expressed by Micha Kaufman, CEO of Tel Aviv-based Fiverr. “Fiverr should be a multi-billion dollar business. This is why we aren’t looking to be acquired,” he told Reuters. “Eventually, a company like ours will go public.” As IVC’s numbers show, he’s not alone. It’s a new chapter for the Startup Nation.
Sergey Gribov is a Partner at Flint Capital.
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