Startup Success — The Israeli Formula Driving $100m+ Exits Every Week
How an insatiable appetite for the future and a lack of a fear of failure is propelling Israeli entrepreneurs to great success, and why we think this will continue.
Founder Collective recently published an insightful post quantifying the various startup hubs across the globe using exit value as the key metric. David Frankel and Joseph Flaherty contend that “There’s never been a better time to build a company outside the Bay Area.” — As regards Israel, we couldn’t agree more!
Surprisingly (or perhaps not), Israel’s exit values surpassed those of Germany and France combined over the past decade. In fact, over the same period, Israel has stood second only to the US in terms of total exit value — a phenomenal feat given the difference in both size and resources.
To start let’s put things in perspective : The USA is 160x the land mass, 38x the population and 53x the GDP of Israel. Germany is 15x larger, has 9x the population and almost 12x the GDP of Israel.
Why does Israel punch so high above its weight belt?
The first half of 2019 has been yet another incredible period for the Israeli technology startup scene. Israeli startups attracted nearly $15bn in financings, M&As and IPOs.
On average, one Israeli startup was acquired for over $100m every week in the first half of 2019!
Also noteworthy, are the non-mega-deals: the ones that we’ve become accustomed to as a consequence of the stunning startup success of the Startup Nation. Of the 66 Israeli exits in H1 2019, 23 were valued over $100m.
Looking at 10 mega-deals worth at least $1bn in the last decade (excluding life sciences), one can see the dexterity of Israeli entrepreneurs and the variety of challenges they continue to solve. It is thus no mystery as to why the country has seen over $60bn in exits since 2010.
Israeli entrepreneurs have a unique ability to come up with inventive solutions to global challenges. These startups command high exit premiums for their solutions from the likes of Facebook, Cisco and Google — companies that currently define our way of life and the way we interact with one another.
The impressive performance of Israeli startups is showing no sign of abating, and here’s why we think this trend will continue:
1. Demand: With a record number of funding rounds in the first half of 2019, Israeli startups are attracting interest from companies across the globe and in every vertical. So Israel has a ready ‘inventory’ of Startups. A report by MIT found that over 360 of the world’s largest companies have offices or R&D centers in Israel and more are arriving, each hoping to secure their slice of Israeli innovation, and thus expanding the pool of potential acquirers.
2. Ongoing Investment: While one might expect that Israeli startups are overvalued due to the vast demand described in the first point, they’re actually priced at a small discount to similar startups in the US. Specifically, the median value of a pre-seed stage Israeli startups is 50%-66% of that in Silicon Valley, and seed stages are done at prices that are generally a bit lower than or in line with Boston and NY. Consequently, most Israeli investors operate at the earlier investment stages and benefit from increased IRR, which in turn creates greater recycling and investment opportunities. Mid- and late stage opportunities are highly sought after by global tier-1 VC’s as well as strategic investors (as explained above), many of which have local presence — which brings us to our next point…
3. Resources to Grow Fast: Following a record breaking $6.5bn funding in 2018, the momentum (and 5 year uptrend) has continued into 2019. The second quarter of this year saw $2.32bn raised across 232 deals. A close knit ecosystem, from accelerators, and multinational design partnerships with POC’s enables fast access, a lower overhead and rapid information sharing. The tax and government grants environment rewards technology export oriented companies. All this enables faster go to market.
4. R&D and Innovation: Israel’s position as a thriving hub of research and development created by its unique geographic, political and economic environment, has shaped its startup scene. Startups continue to formulate and execute on some of the most innovative ideas and solutions in the world, most of which come from universities and the defence forces (IDF). Education in universities and in the IDF is geared to free thinking and deep technology expertise. As a result, Israeli startups have fast emerged as pioneers in the verticals of Cyber, Digital Health, AgTech, Autonomous Vehicles, AI and more.
5. Greater than the Sum of the Parts: The four points described above have essentially resulted in the creation of a dynamic and vigorous startup ecosystem with a robust support structure culminating in a breeding ground of effective founders and startups alike. As the last decade has shown, Israeli startups are more than equipped to compete on a global scale — attracting enormous amounts of capital and creating exceptional returns in the process.
So what do we predict?
In our view and solely based on areas that we specifically track, the next 10 Israeli mega-deals will come as a result of the country’s position as a global pioneer and driving force in areas such as: AI meets HealthTech, Mobility, DeepTech, solutions for SME’s and disruption of traditional models are all areas we believe will produce winners.
Look to companies such as monday.com, FundBox, Riskified, Cybereason, Hippo Insurance, IRP, Innoviz, Rapyd, gong.io, Cato Networks, Lemonade, AIDoc and AppsFlyer that will, in all likelihood, be among the big successes in their respective areas.
While the future is uncertain, one thing is clear: the unparalleled combination of capital, Israeli innovation and perhaps chutzpah will undoubtedly continue to propel the Startup Nation to startup success in the years to come.
Contributor: Saul Levin, Analyst — Entrée Capital