Israel's ecosystem, which was once a small-scale model of Silicon Valley, has matured in its own right, quickly nipping at the heels of the Bay Area whilst exhibiting its own idiosyncrasies and flavours.
2021 has been a year of growth and change for investors. Venture investors manage only 2% of institutional assets globally, but in 2021, the asset class invested ~$580 billion, nearly 50% more than was invested in 2020. This influx of capital meant that even new sectors were funded to scale this past year. This growth was interspersed through almost every element of the Israeli high-tech ecosystem.
The Inflationary Seeds Have Blossomed
As abundant capital seeks returns in an inflationary environment with near-zero interest-rate policies, valuations have been pushed further as the discounted potential value of a start-up decouples from traditionally accepted norms, clearly evidenced by global, early-stage median valuations rising to $53 million, a substantial jump from 2020s $30.5 million.
In Israel, deals increased, and valuations followed, and not far behind, increasing amounts of dry powder. In this milieu, Israeli venture funds competed over the best entrepreneurs, side-by-side with local as well as international funds. Looking into the future, venture funds realized that companies are debuting on global exchanges as a vehicle for raising capital while continuing to focus on scaling to further heights. Fund models are supporting this shift by allowing the fund, upon maturity, to transition from VC to hedge-fund, as evidenced and demonstrated by Sequoia.
Companies that were once early-stage start-ups have reached a level in which corporate-strategy offices are playing an ever-larger role, with M&A’s skyrocketing to $9.5 billion in total value created. More interestingly, 30% of 86 M&A transactions that occurred this year were “blue and white”—where both buyer and seller were Israeli.
Another outcome of Israel's "tech boom" is the talent crunch. The ever-growing need for more talented employees and the competitive employment landscape has challenged founders to retain talent and fill open positions. Ultimately, forcing a need to raise additional capital to meet salary expectations and rework options models to attract the best. Furthermore, newly minted start-up millionaires began roaming the streets of Tel Aviv (now the most expensive city in the world) due to the 57 public listings of Israeli companies this year. If you’re an employee, it’s a job-seekers market. If you’re a start-up, it’s a entrepreneurs’ market, and if you’re a venture fund, you must be able to act in a market where valuations are high, but the potential is higher. The Decacorn is the new Unicorn.
With so much capital floating around, prominent investors seized an opportunity to raise a SPAC. SPAC sponsors, operating under a two-year time constraint to find a target, and Israeli founders, looking to deliver shareholder value, saw in each other a match made in heaven.
Trials, tribulations, and novel solutions
This past year, some sectors took on new independence and global recognition. Foodtech, a prime example of a sector that was once a niche, is now its own vertical currently enjoying profound tailwinds. The current makeup of the food industry, unsustainable from both a health and environmental perspective for tomorrow’s population, has a large enough Total Addressable Market to offset any near-term, supply-chain pressures where everything from ingredients to shipping costs saw price inflation this year. Israeli-venture investors recognized this secular growth and plowed ~$480 million into the foodtech and agrotech space in just the first three quarters of 2021.
The abounding problems in the world are not merely reflected in the way society eats or produces food, such hindrances extend to humanity’s approach to climate change. The world’s consumption of non-renewable resources backdropped by inopportune unit economic costs of current renewable solutions fails to push forward solutions to this issue. Whilst Western governments have begun to fill the gap of demand, the private sector holds a responsibility to effectuate a proper supply, and companies are playing their part to bring renewable, green hydrogen to the market at a fraction of the cost.
Digital health also garnered a more zealous focus in 2021 as the world dealt with the backlash of COVID-19 and technology became key in how we manage our health.
The digital-asset market has also transformed, as we are now seeing real use-cases and applications being brought to market and taking crypto mainstream. As blockchain technology matures towards becoming infinitely more scalable, and traditional companies diversify to crypto, we expect this trend to grow exponentially. From DeFi (decentralized finance) to the Metaverse, the dynamics have changed, and with it, the potential for digital assets to remake how many sectors execute business, art is owned, and games are played.
Lastly, as in all industries, there is a mismatch between women in leadership roles and the number of women working in the ecosystem. In 2021, we have seen improvement in this as well with more women and minorities in leadership roles in the tech ecosystem.
Where we’re going, we don’t need roads
Though there are macro challenges, Israel’s unceasing introduction of technological solutions to both well-trodden global problems and niche markets leaves us excited for the ensuing year as the world continues to witness what blue and white human innovation will bring in the way of technology.
Written by Mor Assia and Shelly Hod Moyal, iAngels founding partners