Founders shun quick sale and IPOs in bid to grow their startup, data shows

A significant increase in funding for later stage startups is the biggest trend of 2019, a new report by Start-Up Nation Central shows. This has allowed a large number of Israeli tech firms to keep growing and expand, without the need to raise money on the public markets or seek buyers.

Later stage funding in 2019 rose some 50 percent to $5.24 billion year-to-date from $3.45 billion in 2018, the report by Meir Valman, a senior research analyst at the non-profit organization that tracks the local tech industry shows. In 2015, growth stage companies raised $2.4 billion, with the figure remaining stagnant around the $3 billion figure, in the years between 2016-2018.

Early stage startups raised $1.48 billion in 2019 year to date, compared to $1.73 billion a year earlier and $1 billion in 2015, the data compiled from SNC’s database showed.

In 2019, there were 15 rounds of fundraising of $100 million or higher, compared with four in 2018.

Of these 15 rounds, six were for fintech companies, including the year’s two largest rounds for insurance companies Lemonade and Next Insurance. Three investments went into industrial technologies Vayyar, Innoviz, and Fabric, and two each for mobile and telecoms, safety and security and software applications, the report said.

Investors in these mega rounds were diverse but dominated by foreign VCs, with General Catalyst participating in three of these rounds, followed by Softbank, Bessemer Partners, Insight Partners and HarbourVest with two each. Israeli investors ClalTech, Vintage Investment Partners and Ion Crossover Partners also invested in two each, the report said.

The dominance of foreign investors in these rounds is a global trend. There have been 442 VC rounds globally of $100 million and over in 2019, the highest number ever, according to Pitchbook.

The deal-size of later stage rounds in Israel has also increased, the SNC report said. The median round size at later stages increased over 40% to $26 million in 2019, from $18.25 million in 2018. C Rounds and later saw the greatest increase, rising 56% to $39 million from a median of $25 million in 2018.

A Series A funding round is made once a business can show it has developed a user base, has a steady flow of revenue or some other key indicator. A Series B funding round takes place when startups want to move to the next level, past development stage to expanding its market reach. The funding in this round is generally used to grow the firm so they can meet demand for their product. Series C round and others can happen when the company is already quite successful, and is looking for funding to help develop new products or expand into new markets or also snap up other companies.

One of the main implications of the data from the SNC report is that “even startups based in Israel can raise substantial C rounds and beyond, and are not forced to sell, or move locations after their B round or earlier as frequently occurred in the past,” SNC said in a statement.

This partially explains why the total the value of startup exits — defined as an initial public offering of shares or a sale of the company — has declined despite the continued boom in the sector, SNC said.

In 2019, exits totaled $4.73 billion, down from the $7.3 billion in the peak year of 2017, the data compiled over a period of five years showed.

There were just 80 acquisitions of Israeli startups in 2019, for a total value of $4.3 billion from a peak of $7 billion in 2017, as companies opt to raise more capital, grow and stay private rather than look to be bought, the report said.

Initial Public Offering of shares declined year to date to $414 million in 2019, in 10 public share offerings, compared with 12 IPOS in 2018 when startups raised $292 million both in the Israeli markets and abroad. In 2015, startups raised a toal of $658 million in IPOs in Israel and abroad, a peak year, according to SNC data compiled for the last five years.