The dream of growth companies has been profoundly shaken over the last six months. Market declines are sorely hurting the value of all technology companies; Israeli companies issued on Wall Street, such as Wix, Hippo, Kaltura, Fiverr, and many others, were down by 80%-90% compared to peak levels. Reports of drops in funding, IPO cancellations, layoffs, and reduced deals have all jolted the foundations of the unicorn firms, leaving growth-company entrepreneurs to ponder whether they would not have been better off joining with another international giant or taking the money at an earlier stage; by now, they could have been carefree on a yacht in the Caribbean, without any worry. But now, in every corridor, the talk is about ways to navigate the current crisis.
More than anything, the latest market plunges remind us that value isn't everything and has raised the question of whether this change in attitude – the aspiration to create growth companies, rather than exits or mergers with international giants – is really right for the Israeli ecosystem.
Is little Israel big enough to cultivate more and more substantial growth companies that can continue to grow on their own, in their own right, creating transformational products and leading their fields? Wouldn't it be better to maintain the approach of a fertile ecosystem with a broad range of start-ups and significant exits?
Yes – “exit” is no longer a dirty word. In a smaller economy with structural constraints such as Israel, many companies will likely not survive over the long term. Until a decade ago, start-ups seeking exits were spoken of in a negative light. Critics called it a wham-bam-and-sold economy. They saw the start-ups as wholly focused on exits as a business philosophy, rather than on creating meaningful growth for the company. Yet the drop in value of growth companies in recent months serves as a reminder that it is no simple feat to create another CheckPoint – and it may not be realistic to expect that to happen.
Outcomes of the crisis: larger companies will survive, while smaller ones may reach their funding needs fast
Growth companies have many advantages. In general, it is better to be a predator than prey. Larger companies have a better chance of surviving even the most severe market turmoil; there is no lack of examples of built-to-last companies that succeed in repeatedly reinventing themselves over the years to navigate global shocks and crises. These growth companies have the skills and resources to develop meaningful, even revolutionary, products, and due to their size, they also have a positive impact on the employment market and wages, driving other markets forward.
However, it is important to remember that in an exit scenario, entrepreneurs lower the risk for all stakeholders. The entrepreneurs get their funding faster, and after the exit, they can generate new experiences and opportunities for new ventures. Employees create their own capital faster; most attain financial well-being and may be able to develop ventures of their own. In terms of the economy, the state gains its share immediately, through taxation. Overall, an exit produces less risk than the scenario of growth of an immense business.
Furthermore, many of the international companies that acquire Israeli companies build R&D centers here, which employ more workers and develop more technologies, reinforcing Israel’s standing as the Startup Nation and strengthening its global status.
As a small country with limited resources, Israel's government support is targeted more toward early-stage companies than advanced-stage ones. This approach is better suited to supporting new ideas in the seed and development phase and is less equipped to cope with home-grown giant companies.
For the Startup Nation to continue to thrive, we do need large growth companies to support the market, but we also still need entrepreneurs dreaming of exits rather than Wall Street. We need small companies that are destined to support the ecosystem and eventually be sold or merged with other companies. As the products and technologies made by small companies will be used by larger companies, whether local or international, even ventures that seem to have no chance of long-term survival are essential to the development of the domestic high-tech market. Thus, the entrepreneurs and companies who make the bold decision to pass the baton to those who can take their products to new heights should be accepted by the Israeli economy with understanding and even admiration.
Written by Yaniv Cohen, CPA, Partner, and Head of the Technology cluster at BDO