2015 was another stellar year for the startup nation with growth on almost every possible scale. Do the ever-increasing amounts for tech exits really help the startup nation? All the numbers and conclusions in the full report
The report was written by Rinat Korbet (Analyst at Geektime), Yaniv Feldman (Editor-in-Chief at Geektime) and Aner Ravon (Co-Founder & Chief Product Officer at Zirra). Rinat Korbet translated the original version from Hebrew.
After the end of 2015, we stopped for a second to look back and try to understand what really happened this year in the Israeli startup and venture capital scene and imagine how the next year will look.
To get a true reflection of tech companies’ life cycles, it’s not enough to look at the entry and exit moments, such as funding rounds, M&As, and IPOs, but also at what happened for startups operating on a day-to-day basis.
To do so, we’ve collaborated with Zirra, an Israeli startup that gathers information from a variety of sources to assess private companies. They derive their private company rankings from an algorithmic engine as well as crowdsourced knowledge from thousands of raters who were selected based on their background and expertise. Together, we have collected all of the data and got into the thick of it to understand trends and directions that have guided the industry over the past year and are expected to impact the next one as well.
Before we start, it is important for us to mention that unlike other reports that are published about the Israeli hi-tech scene, the current report only relates to Israeli hi-tech companies. We define an Israeli hi-tech company as a company that operates in the different technology sectors and is located or registered in Israel, or one that was founded in Israel and still maintains some kind of presence in the country, such as a local R&D center.
Also, the figures in this report refer only to initial deals. That means the companies that were sold for the second or third time or were sold to other companies after an IPO are not included: Therefore, the numbers in this document may seem lower than similar reports. Our goal was to summarize the figures as they are reflected in the real world and not to try to twist the reality to match what we or other people would like to showcase.
So let’s begin.
Another record year for the startup nation
In 2015, we saw the total number of new startups rise to 1,400, of which about 373 companies raised around $3.58 billion (in this report, we count only rounds that are above $500,000) and 69 companies that were sold for the total sum of $5.41 billion. Other than the fact that there were the same number of IPOs in both 2014 and 2015, all other measures show a significant amount of growth, bringing the startup nation to another record year.
If you look at the ratio of funding rounds v. exits, then 2015 gave investors $1.5 from exits for every $1 invested in new startups. It’s important to highlight that the exits themselves are of companies who got funding during the previous year and not necessarily this year. Still, the trend itself shows that Israel is experiencing a positive “realization” momentum.
On the funding side, the entrance of new foreign investors into the Israeli market as well as the establishment of new funds that specialize in investment in the Series A stage like 83North, Disrupt-ive, TLV Partners, and Aleph has already affected the “Series A Crunch,” a phenomenon that has hurt many young companies in the last several years. This year, we saw a much more balanced and “good” distribution among the different funding rounds, which indicates that there’s enough investors and money around to answer the needs of startups in different stages.
The rise of accelerators
To understand the change the industry experienced during the past year in a more complete manner, one must begin by looking at tech companies when they first launch. The dramatic growth of the market in terms of size, the amount of capital that was poured into it and of course, the number of new startups have caused two phenomena we just couldn’t ignore this year. The first one is that 2015 was a record year in the total number of mentorship programs and accelerators. Currently, there are more than 80 different accelerators, among which are corporate accelerators backed by multi-national companies. One prominent example is Microsoft’s accelerator, Microsoft Ventures, which has already managed to grow some successful companies and even produce a few small exits. AOL’s Nautilus and Yahoo!’s SigmaLabs are also part of this trend. In addition, we see accelerators backed by more traditional industry and commerce organizations such as Barclays and Citi from the banking and investment world. These new accelerators join the more veteran and prominent accelerators, including 8200 EISP — which 8200 graduates (a prestigious intelligence army unit) created but which accepts all kinds of entrepreneurs — The Hive, and the Silicon Valley-Israeli accelerator Upwest Labs. Another trend includes urban accelerators, such as Siftech (Jerusalem), RishonStartUp (Rishon LeZiyyon) and HAC (Herzliya), which provide a bustling base of operations for startups outside the Tel Aviv area.
A second phenomenon worth mentioning is the appearance of co-working spaces. These are work spaces that were converted and adjusted to a work environment suited for startups, including an often upbeat design, fast internet, and many work stations. A few years ago, we could only count on one hand the number of co-working spaces in Israel; according to our latest figures, there are 22 co-working spaces, though 10 of them are in the Tel Aviv area only and some are even spread out across whole buildings among several floors. While they appear similar at first glance, these co-working spaces vary quite a bit in their characteristics, including the number of companies they take in, the range of services they provide, the social ambiance in them, and the pricing, which ranges from regular rent fees to symbolic participation fees. Although this an increase in the number of co-working spaces, they’re quickly filled to their total capacity and even have a waiting list. Co-working’s popularity demonstrates a high level of activity for startups in their early stages.
A record number of funding rounds in 2015
Let’s begin with the bottom line: 2015 was a record year for Israeli startups. Companies raised 373 funding rounds, garnering a total sum of $3.58 billion (as mentioned before, we only count rounds that are above $500,000). This is 69% more than the total sum of funding that was raised by startups in 2014, where “only” 297 funding rounds raised a total sum of $2.2 billion.
Among the biggest and more remarkable funding rounds of the year were INFINIDAT, which raised a Series B of $150 million, Behalf, which raised a Series B of $119 million, and Taboola, which raised $117 million in its Series E.
In the United States, for comparison, $60 billion were invested in startups in 2015. It might seem like a big gap, but if we look at the total investment relative to the country’s population, it will become apparent that Israeli startups receive an almost double sum than their American counterparts — and the rest of the world is very far behind. According to CB Insights, Europe received $12 billion and China raised $20 billion. All of these are much higher in absolute terms but minuscule in comparison to the size of Israel’s population.
2015 was also the year China discovered Israel in a major way. Chinese venture capitalists invested about $500 million in the local startup scene. In 2015, we also saw Israeli companies sold to Chinese and Indian companies like Lumenis, a medical cosmetics device company that was sold to the Chinese-British investment fund XIO for around $500 million, Travelfusion, which specializes in finding low-cost flights and was sold to the Chinese Ctrip for $160 million, and Panaya, an enterprise software solution for organizational resource management and client relations that was sold to the giant Indian software provider Infosys for $200 million.
More funding rounds at higher valuations
Beyond the significant growth in the number of funding rounds and the total sum of money invested, we’ve also seen a 14% growth in the average sum invested in a round: $12.15 million in 2015 in comparison to $10.65 million in 2014. When examining the depth of the data, we can see that the main change occurred in the earlier rounds. This means that startups in the Seed and Series A stages raised bigger sums of money at higher valuations than during 2014. According to Geektime‘s research, the main reason for the average sum’s rise is the higher level of investment available. In other words, there is competition among investors in early stage startups and the startup can compare and choose the best and biggest offer. In addition, the end of the year reports of employment agencies show us that in 2015, there was a 5-10% increase in technological manpower salaries that led to higher expenses, especially for early stage companies where the majority of the company’s expense is manpower.
For companies in later stages, we’ve seen a massive growth of 68% in total funding raised: $2.90 billion in 145 funding rounds in 2015 v. $1.72 billion in 86 funding round in 2014. This growth shows that in 2015, there were a lot more options to raise follow-on rounds in comparison to 2014. We can attribute this change to the new funds and foreign investors who entered the Israeli market this year. It is hard not to attribute it also to the successful growth stage companies in the last few years, who continued to show achievements that attracted investors.
In this report, we count only rounds that are above $500,000.
The Israeli Startup Ranking
Beyond the funding rounds and the exits, to understand what happens in every significant ecosystem it’s important to look at the performance of the companies who are in it all year long. To do so, we’ve created a new ranking system in collaboration with Zirra which is based on a wide variety of data found on the web: from information about the entrepreneurs and employees on social media, through investigations into the registrar of companies and the commissioner of patents website, in-depth analysis of trends, web searches, traffic, downloads, consumer reviews and opinions, the sentiment of news, media mentions, and more.
The information is filtered in a system that contains real historical data of thousands of private companies. The ranking and predictions are based on dozens of different parameters measured in relative terms to equivalent competitors and similar companies. The results are checked through a network of experts that ranks and gives feedback to the ranking’s algorithm, helping improve it on a regular basis.
Through this ranking, we follow the largest private technological companies in order to provide an objective point of view of the industry. It aims to provide a similar level of insight that is available to the public companies’ market. The details that Zirra can provide include a current valuation estimation, chance for acquisition, valuation prediction for exit, and relative rankings of the leading team, market potential, performance, vision, and momentum.
With this new Geektime-Zirra collaboration, this is the first time Israeli companies are being ranked this way.
Here are the top 40 leading companies in terms of market value out of 500 companies that were ranked so far.
Comment: The valuation estimations are based on the algorithm that Zirra created and represent the valuation as their system calculates it from publicly available data and expert assessments. The valuation estimation and the entire set of data presented in the ranking don’t represent the company valuation during its latest round and does not claim to provide a legal or accounting opinion. It also does not purport to provide counsel for investing or not investing in companies.
The road to the exit becomes shorter
To understand the last stage in the life cycle of companies, it’s important to use the right numbers. The current report refers only to “pure” exits, not including companies that were sold for the second or third time. Secondary IPOs aren’t included as well.
2015 was especially generous in terms of exits. VC investors earned about $5.41 billion from Israeli investments in 2015. There was an average of $1.5 earned from exits for each dollar invested in startups. In the United States, on the other hand, there was a change of direction and for the first time, the sum of exits was lower than the sum of the investments. Instead, $40 billion flowed back to investors in the U.S. compared to the $60 billion that were invested in American private tech companies. This is a strong and bright warning sign for the road ahead — for Israel as well.
One of the main reasons for this negative trend is the huge valuations that are given to startups, especially those that have already raised a few funding rounds. The natural dynamic of startup companies is to raise the valuation-on paper in every funding round. If a company raised $100,000 close to its launch with a valuation of $1 million, then by the time it will raise $5 million, its valuation will be $30 million, and when it will raise $20 million it will be worth (on paper, of course) $200 million. This creates a situation where the biggest investor will lose their money on any sale that happened at a lower value from his investment: The result is many companies that still don’t have a steady business model or still aren’t ripe for an acquisition. When there are so many startups, such as there are in this current wave, there aren’t enough buyers for all the dreams that these companies represent and they’ll start to lower their valuations in the good cases and close in the bad ones. At the moment, we’re in the drizzle part. The question is if this drizzle will become a flood or what we call “a bubble explosion,” or if this is a correct and stable fix that is part of a growing and healthy market.
On the one hand, 2015 was a great year for exits. In July, Microsoft confirmed that it was acquiring Adallom, a company that specialized in enterprise data security, for $320 million (we first heard of this deal in March). In general, Microsoft has carried out an impressive number of exits this year in Israel. Besides Adallom, it acquired FieldOne, an IT management startup founded by a Haredi entrepreneur for $39 million, and Secure Islands for $120 million. These acquisitions join Aorato‘s exit, which happened at the end of 2014 for $200 million. These acquisitions have established Microsoft as a huge consumer of Israeli cyber security technologies, which was definitely the main growth sector of Israeli hi-tech in 2015.
On the other hand, if we expected to see a $1 billion exit like Waze, the biggest exit of 2015 was quite different: that of Valtech Cardio. This company is probably not known beyond those in its field. It is located in Or Yehuda and develops heart implants that prevent open heart surgeries. It was sold to American Heartware in a stock exchange deal estimated at about $1 billion.
But 2015 was also surprising in that one of the biggest exits was of an Israeli company buying an Israeli startup. Israeli IronSource, a world leader in the field of distributing free software, has acquired SuperSonic, a company that specializes in monetizing mobile apps, for $150 million.
All in all, 2015 showed a great leap of 60% in the number of exits, with 69 exits in comparison to the 43 exits in 2014. The average exit sum was down by 5 percent. The total sum from acquisitions also jumped by 44% in comparison to the previous year: In 2014, it was $3.75 billion and in 2015, it was $5.41 billion.
The list of exits mentioned here is a bit of an injustice to the rest of the smaller exits. The acquisitions that were “only” for a few million dollars still provided quite a lot of money for investors and created new millionaires that in turn will become burgeoning investors.
One of the biggest questions asked by all the parties in the industry each year is, “Can Israel create a new Amdocs or an Israeli Nokia?” Looking at what’s happening in the market this year, the answer is no. It’s important to remember that when an acquisition offer worth tens of millions of dollars comes, the temptation to sell is huge. This might be seen as a weakness of the entrepreneurship economy in Israel, but this is false: This opportunity — acquiring great companies for relatively low sums — is one of the main reasons foreign investors invest so much in Israel.
All in all, we can determine that during 2015, the ecosystem was still inclined to sell Israeli startups to foreign companies. However, what makes this trend different from Israeli exits in the past decade is that the acquired companies are being bought so that foreign multinational corporations can expand their operations to Israel, rather than relocating Israeli startups to business centers in the U.S. AOL, Microsoft, Facebook, and Yahoo have all acquired Israeli startups that not only remained here but also became the basis for R&D centers and for identifying great companies.
It’s important to remember that alongside the wish to create a big global corporation in Israel, the ability to locate, acquire, and leverage medium-size, valued Israeli startups is a big attraction point for the foreign capital that flows to Israel. The local entrepreneurship scene in Israel relies on this foreign interest to identify companies and invest in them at a relatively lower sum than their equivalent in California and than sell them at high multiples. The acquisition trend has brought a lot of grievances in light of the human capital “stolen” from Israel to other countries, but when the companies themselves stay in Israel and become local anchors of bustling and wide ranging activity, it’s possible to enjoy the advantages and not search for “The Next Nokia.”
Losing the way to the stock market?
In 2014, 12 companies turned to the stock exchange to file an IPO and raised $1.58 billion to do so. While there were also 12 IPOs in 2015, they only raised $718.6 million. The overall decline in the sum raised through IPOs is another indication of the much discussed tech bubble.
The decline of the huge IPOs is a trend we’re also seeing in the U.S. and it’s derived from the high valuations of private companies. This is one reason you can hear Taboola and Outbrain’s names in conversations about IPOs, but they’ve stayed (for the time being) in the private market. This is probably because it isn’t possible for them to IPO for a sum that’s much bigger than what they’ve raised in their last rounds. The Israeli startups are in good company since in the U.S., Dropbox, Snapchat, and many others are avoiding going public due to similar circumstances.
So what will 2016 look like?
While history is always written in retrospect, 2016 (at least at the outset) is expected to be a more “sane” and balanced year. It will be a year when companies and businesses will certainly raise money, grow, and profit but also a year when it’ll be harder to change a workplace with a sabbatical on Rothschild Av.
However, there are significant concerns looming about 2016’s trajectory. There’s one thing that everyone agrees upon: The forecast is cooling down. The huge investments and the inflated valuations of 2015 will give way slowly but surely to more “sane” valuations. The American fund Fidelity outdid others and cut the estimated valuations of many leading companies in November, including the “crown jewel”: The ever popular Snapchat from Silicon Valley. In its prime, it was valuated at $20 billion. So when its valuation was cut by 25 percent, there was a feeling that this is only the beginning. It’s also important to remember that Snapchat is a company with miniscule revenues compared to its valuation and is valued mainly based on acquisition precedents like Instagram and WhatsApp.
The Adtech sector has to prove itself all over again
The valuation downgrades put big and successful companies in interesting positions. The two Adtech giants, Taboola and Outbraim, stand in the center of all that. Both are Israeli, both are successful, both are pioneers, and both — how can they not be — are competitors.
Outbrain and Taboola were considered to be “unicorns” in recent years: companies whose worth in sale is expected to be above $1 billion. You all know them from the recommended stories at the end of every news article that are presented through the systems they’ve developed. But recently they’ve experienced a slight value moderation affected by the general value decline in the United States and the stabilization of their business markets. You can even determine that the window of opportunity for maximum value is over. These companies will have to decide in 2016 if they will settle for lower sums than they had hoped for or if they will take the chance and bet on continued organic growth, which will necessitate going into more fields of activity. Zirra estimates Outbrain’s and Taboola’s valuations to be at $487 million and $377 million, respectively. Even though these are very honorable valuations, it still represents a lowered value in light of their recent funding rounds.
Companies from the media and publication fields, such as IronSource, estimated by Zirra to be valued at $727 million, and Kenshoo, estimated by Zirra to be valued at $703 million, will also face a challenging year. The sentiment in the “download Valley” is on the decline, and Adtech actualizes this trend. New investments in this sector are decreasing and there’s a growing fear that the regulars will intervene with the market in order to protect the consumers. Also, there’s a sense that “everything was already invented,” so these companies find themselves in a critical year and increasing pressure to find new growth vectors.
The cyber security momentum will continue
Cyber security companies will continue to grow this year. In Israel, there are around 200 cyber security companies in all stages and sub-sectors. The effect of the army intelligence background in Israel as well as the general enthusiasm that surrounds this field around the world helps Israeli cyber companies raise large sums of money. It’s hard to believe there is a market for so many companies, but Israel has definitely developed a specialty in this field, an advantage that will likely continue to develop and yield more investments. Among the more prominent cyber security companies is Israeli Cybereason, which is estimated by Zirra to be worth $220 million.
The transition to crowdfunding
2016 will be a test year for crowdfunding platforms in Israel and globally. The past year brought to Israel the crowdfunding platform ExitValley which joined iAngels and OurCrowd as a platform to raise money from a large number of investors to help startups in the beginning of their journey.
The only catch is that the field is getting more mature and many investors are beginning to realize the rate of startups failing is higher than the chance of success. The party the smaller companies experienced so far with these platforms will become more moderate and give way to a smaller number of companies, but of better quality. It is clear that there’s a need for more solutions to match the enormous number of interested investors to the huge supply of companies. These solutions will have to fact check, filter, and evaluate the relevant information.