Last Wednesday, was a magical day for the Israeli tech ecosystem, with startups bringing in over $1 billion ($1.057B to be exact) in funding, in one day. The unusual day follows the month of March, when Israeli startups as a whole collected more than $2.7 billion in funding.
Leading the train is Trax, an Israeli-Singaporian startup that reeled in an astronomical sum of $640 million. This a rare funding round for the Israeli startup ecosystem, with the only other Israeli startup raising more than Trax was WeWork, bringing in $4.4 billion in 2017. Another Israeli company that announced a massive funding round was Redis Labs, which raised $310 million and doubled its valuation. Additionally, Israeli startups Blue Dot and WhiteSource secured $32 million and $75 million, respectively.
“If the market holds, we’ll break new records”
Yahal Zilka, formerly of Magma VC and currently Partner at 10D, can’t recall a capital rich era like this one: “I can’t remember a time with so much venture capital activity, and I’m celebrating 30 years in Israeli high-tech,” said Zilka, who estimates that the fundraising madness we’ve seen lately is not going to die down, and we should expect more massive rounds. Nonetheless, Zilka does add that he doesn’t foresee any other days like Wednesday anytime soon. “As an ecosystem, Israeli high-tech is in a different place from two years ago. We went through a significant transition, from an innovation based ecosystem to building major corporations. I estimate that the trend will continue and take us new peaks,” stated Zilka.
But maybe the March madness and Wednesday’s over billion dollar day were the peak, and from here it goes downhill? “Unfortunately, I’m no fortune teller. I estimate that interest rates will remain low and alternative investment channels are few. In 2020, we saw $10 billion invested in Israeli tech companies, and this year, Q1 has already covered 50% of that total. By the way, I personally am aware of few deals still brewing, and if the market holds, we’ll be setting some new records.”
Israel has generated more Unicorns than Europe over the past year and a half
According to Zilka, a key reason behind all the capital flowing into Israeli startups – during a year of global crisis not seen in a century – is the fact that interest rates are low, leading investments towards scale companies. But, doesn’t this seem more like inflation, a company valuation bubble, with new Unicorns popping up everyday? “Over the past year and a half, Israeli Unicorn companies make up around 15%-16% of the total global Unicorn club. Just to compare, the entire continent of Europe has produced less Unicorns than Israel over that time. We’re experiencing an increase in investment volume as a result of developing quality companies, not just in their product or tech, but on the business side, showing substantial growth in sales.”
However, he did note that the massive amounts of capital flowing through the Israeli ecosystem does give off a bubble vibe. “Different from the Dot-com bubble, the companies raising massive rounds today are already doing real business. Maybe the valuations are bit off for some of these Unicorns, but there are companies here with massive operations, and growing fast. So, the incredible growth pace covers up a bit for those “heavy” valuations,” Zilka explained.
And what happens to the early-stage startups, watching the capital fall only on growth companies? Zilka agrees that there is a problem here: “We definitely noticed the trend where the big money is going to a relatively small percentage of companies in the ecosystem. We see the disparity out there. About 70%-80% of the companies are going through dry times, while massive amounts of financing are hovering over a small group of companies.”
What about the future? What kind of trends do we see down the road?
“I believe that the SPAC and open-check mergers trend will grow, although with increased regulation. As long as the public market is open, we’ll probably see more and more of them. The whole private equity sector focusing on tech companies will further help advance the industry, and thus help take Israeli companies to a new phase.”
“We’re in a bubble and we don’t know when and how it will pop”
Unlike Zilka, Aya Peterburg, co-founder at S Capital, is not quite sure of an upcoming peak. “It’s hard to know if the peak is behind us or not, no one can predict the future. Last year, we celebrated many milestones, each time reaching new heights.” Peterburg restates that in our current venture capital reality things can change at any moment – and maybe we finally hit the wall. According to Peterburg, she sees capital-availability as a key accelerator behind days like Wednesday: “There’s a lot of money available, and capital managers have to invest and put that money to work. And this coincides with the Israeli entrepreneur being more business oriented than in the past, aiming to disrupt markets, scale companies, and keep their toes out of the M&A pool.”
Peterburg takes a stronger stance than Zilka, on the whole investment inflation and bubble talk, noting that “We’re in a bubble and we don’t know when and how it will pop.” Peterburg points out another interesting fact about the chance that investment in early-stage startups would be damaging, with most of the growth startups scoring the load of capital: The fact that capital that does reach early-stage startups usually lands in the hands of serial entrepreneurs, further blocking the young entrepreneur’s path to funding. “It seems a lot of resources are allocated to growth stage companies or serial entrepreneurs. That’s why we at S Capital focus our resources towards young entrepreneurs starting up.”
“When the noise and stardust settle,” sums up Peterburg, “the companies will have to return to the basics, and establish a foothold based on their own merit, sales numbers, and ability to operate financially savvy. We can’t set capital funding as the goal for companies, but rather target developing the right product and providing true value for customers.”
“There has never been a better time to be an entrepreneur”
Much like Zilka, co-founder and Partner at Glilot Capital, Kobi Samboursky also thinks the Israeli startup success is more than a fluke, but a trend: “It’s not an accident. Over the last year, startups have been significantly accelerated. A few months into the pandemic crisis it became clear to most investors that scale-up companies hold the most potential, especially if those companies operate in a COVID-accelerated industry, like cloud infrastructure and cyber. Today, it’s obvious that the market itself has graduated to a new level, leading the funding rounds to new highs.”
Hold the breaks though. Like Peterburg, he also carefully tiptoes around the future, and if Wednesday’s records could be topped: “I believe the trend we’re seeing will be with us for many years to come. There’s no doubt that there will be dips, but long-term vision is clear, and I think overall, scale-up companies will definitely benefit from it. Bottom line, this may have been the peak but either in the near future or further down the road, I have no doubt that we’ll see new records broken.”
According to Samboursky, the accessible capital shows investors understand that Israeli startups, together with the power of Israeli industry, are an ideal location to find the highest return on investment: “Currently, we have an incredible generation of entrepreneurs being supported by the highest quality of infrastructure (i.e. VC funds, advisors, accelerators, etc.). For the first time in history, Israeli high-tech has created a truly supporting environment for building market leaders. There are no questions that we’re experiencing elements of a bubble, and there will be companies (maybe even many) that at the end of the day won’t have what takes, but in my opinion, this period will cemented in history as a highlight, leading to many more years of major scale-up companies,” he added.
“I thought that one of the most interesting trends during this past year,” said Samboursky, “was creating a distinct difference between ‘leading’ companies and those who are not throughout the first couple of years in existence. Unlike the chaos of the past, companies built right from day one will have real potential to grow quickly during their first years.”
Samboursky doesn’t agree that early-stage startups suffered from how the pie was shared last year: “Over the last year, Glilot Capital wrote six Seed checks, and the year isn’t over yet. Of course, we’re not the only ones. I believe there is enough capital for strong companies no matter their stage. For all the potential entrepreneurs out there I say to them, there has never been a better time to be an entrepreneur.”