Israel sees 3-year decline in number of new startups, report shows

Lower number could be sign ecosystem is maturing, Start-Up Nation Central says; number of ‘scale-up’ funding rounds of $10 million-$20 million jumps

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Start-Up Nation Central slide shows decline in number of startups being set up in Israel, and rise in number of firms closing down (Start-Up Nation Central source, based  on  Start-Up  Nation Finder)
Start-Up Nation Central slide shows decline in number of startups being set up in Israel, and rise in number of firms closing down (Start-Up Nation Central source, based on Start-Up Nation Finder)

The number of startups being set up in Israel decreased from 2014 to 2017, and an increasing number of startups have been shuttered yearly in the same time period.

A new report published by Start-Up Nation Central (SNC), a nonprofit organization that tracks Israel’s tech industry, shows that in 2017 some 700 new startups were set up and 408 closed down — a net growth of 292. This compares to 1,001 startups that were set up in 2014, when SNC started collecting the data, with 221 firms closing down that year — a net growth of 780 new firms.

“The data could be interpreted in many ways,” Aviv Alper, head of research at SNC, told reporters on Monday. “We believe it is a sign of the ecosystem becoming more mature.”

Indeed, according to the data, the number of funding rounds in which startups raised $10 to $20 million, so-called “scale-up rounds,” more than doubled in the first half of 2018 compared to the first half of 2015.

There were 53 deals in which “scale-up rounds” were raised, compared to just 22 such deals in the first half of 2015 and 39 deals in the same period last year.

“These so-called ‘scale-up rounds’ allow companies to grow and expand their operations,” the report said. “It is a sign of a maturing ecosystem with enough strong companies that survive the initial startup stages and indicate enough positive growth to justify such investments.”

The smaller number of startups being set up, and the greater amount of funds raised at growth stages, could be an indication that entrepreneurs are sticking with their startups for longer periods of time, shunning the very early exits that used to be typical of Israel’s startup ecosystem, explained Meir Valman, a senior research analyst at SNC.

“This may be a natural development in the cycle of a startup,” he said. “Fewer entrepreneurs are selling off their companies and starting new ones” after their exits.

In the first half of 2018, Israeli tech companies raised a total of $2.42 billion, in 260 funding rounds, marking “one of the highest” first half-years of capital raised since the beginning of 2015, the report said. The amount of capital raised by Israeli tech companies has jumped 33% from the first half of 2015.

In addition, across all funding stages, the report said, the median size of a funding round for an Israeli tech company has increased to $5 million in the first half of 2018 from $2 million in the first half of 2015 — a 150% increase.

The direct result of staying private for longer is that during the first half of this year, just 43 companies held an exit — defined as either an initial public offering of shares or a merger and acquisition. There were 40 M&A and buyout deals, with just three IPOs — all of them on the Nasdaq — in the first half of this year. These 43 deals raised a total of $1.71 billion. This compared to 10 IPOs in the same period a year earlier, and 53 M&A deals, for a total of $4.75 billion.

The three companies that held IPOs in the first half of this year were Sol-Gel, a drug delivery company; Motus GI, a medical firm that aims to improve endoscopy outcomes; and Entrea Bio, a maker of molecule based drugs — all of them in the medical field.

From 2014 until the mid-2018, some 117 multinational firms set up R&D centers in Israel, an average of 23.4 R&D centers a year, the report said.

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