Geektime reveals: Israeli startups prefer growing to selling
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Image credit: Geektime

Image credit: Geektime

Geektime’s Biannual Report exposes a major change in Israeli high-tech. Israeli entrepreneurs no longer want an exit – they prefer to grow

Our business intelligence unit recently published a biannual report that shows the first six months of 2017 ended on a better note than the last half of 2016. Although the number of investments in startups declined, the amounts invested in each startup per funding round grew substantially: as they say, it’s not the quantity, but the quality. However, we saw that the downward trend in mergers and acquisitions has continued since 2014.

The full report includes quite a few data points and analyses about the capital market and startups all over the world, especially in Israel. It presents a detailed picture of the financing rounds, exits, mergers, and public offerings we had in the first half of 2017, together with forecasts about which sectors will likely become the next big thing. Whether you are an entrepreneur, investor, high-tech employee, or just interested in the industry, we have picked out the juiciest figures from the report for you.



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Seed and growth rounds going up, decline in series A rounds

We noticed an increase in the amount of money invested in seed and growth rounds, while investments in series A rounds — the “tough” rounds where risk is concerned — decreased. It appears that many investors are choosing to sit on the fence, and instead, putting their money in safer investments, such as growth stage startups. This has resulted in early stage startups receiving fewer investments in the past six months.

The downturn in mergers and acquisitions has also continued at a regular pace since 2014. Following three years of exits and mergers involving large and sometimes disproportionate sums, it appears that we are entering a period of lower valuations, or to put it another way, a bit more realism.

Before you panic, however, allow us to calm you down: This does not mean that investors have lost their appetite or capital for investing in you. Actually, the opposite is the case, because more potential capital for investment in future ventures is accumulating. Our assumption is that as the global economic situation becomes clearer, investors’ confidence will return, including their investment activity in startups in the early stages.

Another point of interest is that somewhere in the not too distant past, seed rounds were considered the exclusive domain of angels, accelerators, and incubators. Recently, however, venture capital funds have also begun to take part in seed rounds, and as a result, these have also increased. In addition, there are more investment instruments to help early stage startups get seed money, such as equity crowdfunding and SAFE.

The situation in Israel

In the first half of 2017, 673 new startups launched. This is considerably less than in the second half of 2016, when 754 new startups were founded. Israeli startups raised $2.17 billion in 168 financing rounds over the past six months, only slightly fewer than the 171 rounds in the second half of 2016. In line with global figures, this number highlights the slight reduction in the number of investments (239 startups raised money in the first half of last year), but a significant 17% rise in the amount of money raised, in comparison to the second half of 2016 ($1.85 billion).

The sector with the largest number of investments over the past six months was the cyber field, which raised $434 million in 28 financing rounds, followed by analytics, which raised $355 million in 22 rounds, and after that, artificial intelligence (AI), which raised $186 million in 26 rounds. Sectors that proved less popular with investors over the past six months included agritech with eight investments, drone companies with five investments, and two startups that obtained investments in the AR/VR field.

Image credit: Geektime

Image credit: Geektime

Financing rounds raising as much money as exits

Fifty investments were made in seed rounds over the past six months, 62 investments in A rounds, and 60 investments in growth rounds, the latter figure a drastic 40% rise. The amount invested in seed rounds totaled $111 million, with the average investment being $2.2 million. At the A stage, $478 million was raised, with the average investment being $7.7 million, while at the growth stage, a whopping $1.57 billion was raised, with the average investment totaling $26 million. If you think about it, this is an amount for which quite a few companies decided to bow out at the peak by taking the exit option in the past.

While we are on the subject of acquisitions, it appears that no significant changes occurred in the amount and number of mergers and acquisitions in the first half of 2017. What is true is that there was a drastic increase in the number of IPOs, with the most prominent stock exchange being the Tel Aviv Stock Exchange (TASE) with three IPOs out of a total of six. To emphasize just how successful the first half was in this regard, there were only three IPOs by Israeli companies in all of 2016, of which one was on the TASE. If this trend continues in the coming six months, we are likely to equal or break the record of 12 IPOs in a year that was set in 2015.

Image credit: Geektime

Image credit: Geektime

If we look at the figures for individual sectors, we see than the largest number of exits was in adtech, with eight exits (a 167% increase), followed by startups in the cyber and analytics fields, in which four companies each were acquired. Although there were more acquisitions in adtech, the aggregate amount of these exits was only $31 million, while the four cyber startups were acquired for $272 million altogether.



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Our report does not comment on Intel’s acquisition of Mobileye, despite how significant an accomplishment this was. The reason is that the company held its IPO on the New York Stock Exchange in 2014, the largest IPO ever of an Israeli company in the US, in which $1 billion was raised at a company valuation of $5.3 billion. This makes the recent acquisition a secondary acquisition.

Still, this figure does not alter the fact that it was the most important acquisition for the Israeli ecosystem. One of its effects, of course, is the creation of more jobs. Afterward, Mobileye announced that it was expanding its Jerusalem offices and building a giant campus that would enable it to increase its staff to 4,000 employees (it currently employs 660 workers).

Beyond that, the purchase further reinforced Israel’s status as the Startup Nation, as we like to call it. Following this buyout, Israel found itself on the map again (as in Google’s acquisition of Waze), which helped to strengthen Israel’s status as a prominent player in the smart transportation field. This will likely contribute to an interest in Israeli startups among potential investors and buyers.

Image credit: Geektime

Image credit: Geektime

Towards the future: Forecasts

In the coming six months, we expect another slight dip in the number of investments, combined with a substantial rise in the amount invested, in accordance with current and global terms. It also appears that seed rounds will continue to be larger than in the past, because investors have realized how difficult it is to advance from the seed stage to the A round. For startups to survive this transition period, they must raise more capital at the seed stage. It is logical to assume that the growth trend in everything pertaining to IPOs will continue in the number of IPOs, the amount raised in them, and the value of the companies in the IPOs. Our expectation is that more and more Israeli startups will choose to hold IPOs on the local stock exchange, thanks to better conditions and support.

In recent months, blockchain technology has frequented the headlines, and there is no doubt that it is one of the hottest trends in the world of finance and fintech. In regulation also, it appears that both in Israel and the rest of the world, countries have begun to recognize the advantages of this technology. Israel is regarded as a leader in everything pertaining to blockchain and cryptocurrency, with more than 40 startups operating in the sector as of June.

According to our forecasts, sectors that will make headlines in the coming six months are product security in the IoT slot. This includes CyberX, which is offering a solution for real-time detection of cyber attacks and operational malfunctions on the industrial Internet. Similarly, Israeli startup Augury, which only recently raised $17 million, is operating with the aim of “listening” to industrial machinery and continuously monitoring its activity, detecting malfunctions, and dealing with them in real time.

The third realm that may cause some raised eyebrows is agritech, which wants to introduce innovation into the old fashioned world of agriculture. Although this sector is experiencing a downward trend, we have noticed interest among investors recently. This indicates that this sector is likely to flourish at a later stage.



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