Not only is Israel shifting from "startup nation" to "scale-up nation," but the time it takes Israeli startup companies to scale up – even to "unicorn" (valued at $1 billion or more) status – is decreasing, according to a new report compiled by Jonathan Cohen of Catalyst Investments.
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Cohen investigated the numbers behind the recent change in the Israeli startup ecosystem, and found that the shift from "start-up" to "scale-up" reflected a change in the influence of US investors in Israel.
US-based corporate and financial institutions have increased their exposure in Israel and are now predominant, both in terms of investments and exits, Cohen explained.
"If we look at the investment rounds above $100 million, more than 70% (including all the rounds ever) occurred from 2019, and 27 rounds (i.e. 33%) were completed this year, from January to May 2021. Out of these 27 rounds above $100 million, 23 were led or co-led by American institutions. As comparison, only a third of the rounds were led by American investors prior to 2019," Cohen said.
"There are many reasons to explain the increasing amount invested by US investors: First, the Israeli VC and PE ecosystem is maturing, with more companies and experienced entrepreneurs succeeding in convincing US corporates and institutions to invest larger amounts in the country. Second, the 'startup nation' has developed a large number of companies valued between $300 million and $3 billion that are good targets of mid-cap and large-cap investors, for either large investments or buyouts. Third, American investors consider that Israeli companies are cheaper than US companies, and are willing to invest in them as they know that Israeli companies will relocate their headquarter in the US to help for the future exit.
"Lastly, Israel's ability to cope with crises such as COVID-19 was a great advertisement for the Israeli companies and its economy as a whole," Cohen continued.
According to Cohen, the development of the Israeli market also attracts investors from the rest of the world.
"Catalyst receives a lot of investments inquiries from Asia and the EU, as investors want to increase their exposure to the Israeli tech. The fact that the US is the first mover in terms of large investment rounds opens doors to other large international investors, notably Chinese players. With an increasing maturity of other regions such as Asia and the GCC, Israel could expect to be, one day, the home of more than 100 unicorns," he said.
According to the report, capital invested in Israeli high-tech increases every year and in 2020 reached some $10 billion. Over 80% of the investments in 2020 were directed toward growth-stage investments, from $2.5 billion to $8.5 billion over the last five years. In Q1 2021, the trend was similar, with $5.4 billion invested in Israeli high-tech. US institutions generally invest alongside leading local funds, as those funds offer a presence in Israel to support the company.
Meanwhile, the average time it takes for Israeli tech companies to become unicorns has decreased by half in the past decade. For Israeli unicorns established after 2008, it took an average of six years to reach a billion-dollar valuation, compared to an average of 15 years for Israeli unicorns established from 1999 to 2008. The number of Israeli unicorns has soared in recent years, from one in 2013 to 18 in 2019, and 65 in May 2021 – more unicorn companies than in all of Europe.
Exits for Israeli startups show a similar trend. From 2017 to May 2021, 70% of the 102 merger and acquisition deals over $100 million were completed by North American acquirers, compared to 13% from Europe, 7% from Asia, 9% from Israel and 1% from Australia.
IPOs also reflect the same development – with 77% of Israeli IPOs completed on the Nasdaq and New York Stock Exchange, with another 15% on the Tel Aviv Stock Exchange, and 8% on the Euronext.
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