What really happened in Israeli high tech in the first half of the year? We collected and analyzed all the data to give you the full picture
Rinat Korbet, Beni Hakak, Yaneev Avital, and Yaniv Feldman wrote this report.
Every day, we read about new startups, financing rounds, and mergers and exits. The feeling we get is that things were never better in high tech. Is that really true? Is Israeli high tech succeeding where its American counterpart failed? Are we immune for the moment to the slowdown afflicting Silicon Valley?
This report covers the first half of 2016 in the technology, Internet, mobile, software, hardware, and life sciences spheres, referring to companies operating around the world that have an Israel link – in other words, companies that began here and moved to the United States, or which have Israeli founders who chose to register their companies in the United States, but almost all of whom have an active Israeli connection. In addition, all the figures cited in the report refer solely to primary deals; companies sold for the second or third time and companies sold to other companies after their IPO were not included in the report. The numbers appearing in the report are therefore liable to seem lower than those in other reports. Our purpose was to use numbers that reflect the real situation, not to try to distort it so that it would fit what we or other people would want it to show.
In our figures and interpretation of the past six months, we also provide for the first time a forecast of the direction in which Israeli high tech is headed, based on a unique model that includes statistical tools, a macro-data analysis, and technological trends in Israel and in global markets affecting the Israeli ecosystem.
On the way to another record year?
The three main indicators – the number of financing rounds, the total amount raised, and the average amount raised per round – all rose in the first six months of the year, compared with the corresponding period in 2015.
There were 236 financing rounds in January-June 2016, 16.2% more than in the first half of 2015. The average amount raised per financing round rose from $9 million in the first half of 2015 to over $11 million in the first half of 2016, a 22% increase. Since both the number of rounds and the average amount raised went up, so did the total amount raised, reaching $2.68 billion in the first half of the year, a jump of 50 percent compared to the total raised in the first half of 2015.
Wait a minute – are all these figures the result of one or two huge financing rounds?
In May 2016, Israel on-demand company Gett (formerly GetTaxi) announced a colossal $300 million financing round. Via, another Israeli ridesharing startup, raised $100 million several weeks before that, and in early February, cyber startup Skybox raised about $96 million. Even when the $500 million raised by these three companies is deducted from the totals, however, all of the figures for this year are still higher, although not by so much, so there is definitely a trend involved, not merely an abnormal event.
Another question arising from the data is the possibility of a bubble. Is what we are seeing a bubble inflating the financing rounds, which in turn is inflating the valuations of companies in a self-perpetuating spiral, and is that affecting the growth we are observing?
In our opinion, the answer is no. In contrast to the unicorns that have sprouted every day and the wildly exaggerated valuations we have seen in the United States, the market in Israel has been behaving far more moderately. The conversations we have had with investors following the investment, and with the entrepreneurs now raising money, have usually shown that when there are economically viable products or technologies and a business model, there are no great difficulties in obtaining investments.
What can we expect in the second half of 2016?
The market had its ups and downs in the first half of 2016, and fear of crises like those of 2000 and 2008 continue to haunt us. Nevertheless, our assessment is that at least in Israel, there is no cause for concern – for now.
In recent years, the market grew moderately and gradually, without disproportionate valuations, and with many companies raising money after displaying good products and sustainable models. Even if we do see some slackening off in the second half of the year, it will not be drastic. In other words, what we are seeing is a last gasp and slowing of the growth that has characterized the past few years, not the deflating of a bubble.
At the same time, Israel is not an island. It is affected by the global markets, such as the Chinese economy, which has been hit hard and has downshifted after years of outstanding growth. The effect of the growing Chinese market on the West is greater than in the past, and the stock market plunge there at the beginning of the year has gradually made its way into the Western stock exchanges, too. Over the past two years, we have been seeing a leap in the quantity of investments in Israeli startups by Chinese technology companies and venture capital funds, and it cannot be ruled out that the effect of the Chinese recession will also extend to Israel.
The markets in Russia and Brazil are also in crisis, and the economic effect of Brexit is hard to assess right now, although it will probably not be positive. All of this makes people afraid of investing in the stock market; they prefer to invest directly in companies. If this trend persists, we are liable to find ourselves in the middle of a familiar deflating bubble – perhaps in the coming six months, perhaps later.
A jump in early-stage investments
The number of early-stage investments jumped over 15% in the first half of 2016, rising from 125 financing rounds in the first half of 2015 to 144 from January-June 2016. The rise in the amount raised in the early stages soared by no less than 107 percent, from $277 million last year to $574 million this year. Unsurprisingly, the average early-stage financing round also surged, doubling itself from $2 million in 2015 to $4 million in 2016.
Our assessment is that the number of financing rounds in the second half of the year will be about the same as in the first half, but the amount raised will be smaller. The main reason is that the market is currently in a downtrend, and is affected by overall economic changes, such as the decline in the major global markets.
An increasing number of growth stage companies
When we look at the number of financing rounds in the first half of 2015 and the first half of this year, no great change is visible: 71 financing rounds in the first half of last year, versus 74 in the first half of the current year. When we look at the total amount raised in those rounds, however, we see impressive 34.6% growth, from $1.5 billion to $2.04 billion, with a similar rise in the average financing round, from $21 million to $28 million.
We expect the investment rounds of growth companies to undergo a decrease in the amount invested, although less dramatic than the one we will see among companies in the early stages. The principle explanation is that growing companies constitute less of a risk to their investors because most of the Israeli companies in this stage have customers and revenue, and are less sensitive to fluctuations. We therefore believe that they will be less affected in their financing rounds.
Exits: Buying made in Israel
In addition to the numbers, which point to a maturation process among Israeli startups, we are seeing a continuation of the upward trend in the number of mergers and acquisitions – i.e. exits. Our figures show a 25% spurt in the number of exits, from 28 in the first half of 2015 to 35 in the first half of this year. At the same time, we are also seeing the same surge in the value of the deals: from $1.93 billion in the first half of 2015 to $2.41 billion in the first half of 2016.
Another sign of the maturity of startups in Israel is the rising proportion of all-Israeli merger and exit deals, in which both the acquired company and the company acquiring it are Israeli. Nine of the 35 exits in the first half of the year were all-Israeli deals. This is, of course, a positive development, because the monetary capital, human capital, and patents and intellectual property are all staying in Israel.
Disclaimer: To give you a picture of the state of affairs at the midpoint of 2016, we combined publicly available information with information given to us directly by investors and startups. Although the proportion of investors and startups who responded positively to our request for information was extremely high, not all of the investors are always eager to share all the information about their investments. In order to respect their wishes, we are not disclosing specific particulars about investments that were not disclosed to the general public; we are giving the total figures. At the same time, there may be some information gaps, due to information that has not been disclosed to the public, or which was not shared with us.