Israeli tech surges with investors jumping in as COVID spurs digitalization

Israel’s tech scene is on fire.

Companies are raising record amounts of money from investors at unprecedentedly high valuations and shares of publicly traded firms have seen a surge in value on the public markets.

This is helping Israel to speed up its shift from a Start-Up Nation, with a plethora of fast-moving small tech firms that get sold quickly, to a “Scale-Up Nation” in which entrepreneurs hold on to their companies and seek to grow them into large and hopefully profitable ones. This tech boom is also creating newly minted tech millionaires.

The boom is in line with what is happening to the tech industry worldwide, where the coronavirus pandemic has accelerated digitalization of work and play. As businesses, schools, shopping and food services increasingly went online amid COVID-imposed lockdowns, the world turned to technology for assistance. The virus has underlined the key role of innovation with a message that is loud and clear: businesses that don’t go digital and innovate cannot survive. This push has fired up the industry.

Even while tech shares have been getting battered on Wall Street as the specter of inflation looms, experts believe that in the long run the overall picture for tech firms is positive.

On Tuesday, Valens, a maker of high-speed chips for the audio-video and automotive markets, said it will merge with special purpose acquisition company PTK Acquisition Corp. in a transaction that values the Israeli firm at $1.16 billion. On that same day, Forter, an e-commerce fraud prevention startup founded in 2013, said it raised $300 million from investors at a $3 billion valuation.

Earlier this month, as deadly conflict flared between Israel and the Hamas terror group in the Gaza Strip, Global-e Online Ltd, an Israel-based provider of an e-commerce platform, held its share debut on Nasdaq at a $3.55 billion valuation.  Fintech firm Nayax started trading on the Tel Aviv Stock Exchange after an initial public offering that valued the firm at $930 million, making it the largest in the history of TASE’s high tech sector’s IPOs, in terms of both the company value and the amount raised. Meanwhile, digital analytics firm SimilarWeb held an intitial public offering of shares in New York IPO at a valuation of $1.6 billion.

Also this month, Walmart announced it would buy Israeli startup Zeekit, a maker of an app that allows users to virtually try on clothes when they shop online, for an undisclosed amount, and Cisco Systems Inc., a US maker of networking software and hardware, said it would acquire Israel’s Sedona Systems, a maker of communication technologies, for a reported $100 million.

Blackstone’s incoming Senior Managing Director and head of its Israel operations Yifat Oron (Yoram Reshef)

“Everybody understands that the need for technological innovation is much larger now,” post-COVID, said Yifat Oron, the newly appointed head of Israel operations for Blackstone, a New York City-based investment giant that manages $649 billion in assets, last month. “Everyone around the world is doubling down on tech. Companies that are not working on accelerating technology adoption are at risk of becoming irrelevant.”

Blackstone said last month it was setting up an office in Tel Aviv to tap into the nation’s growing tech firms, which are now “ripe enough” to be recipients of the New York firm’s large investments.

Let’s look at the numbers

Private tech firms globally and in Israel have raised records amount of money from investors. In the first quarter of 2021, global venture investments hit an all-time high, surging to $125 billion in a “whopping” 94 percent increase year over year, according to data compiled by Crunchbase. Valuations of VC-backed companies in the US were at or near record highs in the first quarter of the year, according to a May 24 report by data firm Pitchbook. The venture capital market was buoyed by strong initial public offering exits, the participation of money-rich nontraditional investors, and the prospect for a broader economic recovery on the horizon.

In parallel to the investment boom, new unicorn companies — privately held firms valued at $1 billion or more — flourished in the first quarter, creating worldwide “an average of close to two new unicorns per working day, well above all previous quarter counts,” the data firm said. In the first quarter of this year, a total of 112 companies joined the Crunchbase unicorn club, whereas for the whole of 2020, a total of 159 companies, or roughly one per two working days, became unicorns.

There are between 662 and 820 global unicorns, according to data compiled by Crunchbase and New York data firm CB Insights.

Illustrative image of a unicorn (Ellerslie77; iStock by Getty Images)

Stock shares of innovation firms have also been on a roll. Four of the world’s largest tech giants — Apple, Alphabet’s Google, Microsoft and Facebook — reported strong results in April as a result of the technology rush.

In Israel, tech firms raised a record $5.374 billion in the first quarter of the year, double the amount raised in the first quarter a year earlier and 89% higher than the funds raised in the fourth quarter of 2020. In the first quarter of this year, 20 tech deals out of a total of 172 exceeded $100 million each. These 20 deals raised almost $3 billion in the first quarter of the year, according to data compiled by IVC Research Center, which tracks the industry.

In the full year 2020, tech firms raised a total of some $10 billion.

There are also Israeli or Israel-founded publicly traded companies whose shares are trading at multi-billion-dollar valuations on the Nasdaq: NovoCure, which treats tumors using electric fields to target cancer cells, has a valuation of over $19 billion, up from $6.7 billion in March 2020. Wix, the do-it-yourself website creator, has surged to some $14 billion from $5.2 billion in March 2020; the company said on May 12 that it expects $14 billion in revenue in the next decade, as it posted higher-than-expected first quarter revenue. Cybersecurity firm Check Point Software Technologies has a valuation of some $16 billion, up from $14.5 billion in March last year.

These companies are being joined by others that are jumping onto the bandwagon  via SPAC mergers, which have opened a new avenue for tech firms to go public. The shares of Innoviz Technologies, a maker of self-driving cars, rallied in their debut on the Nasdaq in April after the company completed a merger deal with the Collective Growth Corporation SPAC at a valuation of $1.4 billion. And IronSource, a 10-year old firm, said in March that it plans to raise $2.3 billion through a merger with SPAC Thoma Bravo Advantage at a whopping implied approximate valuation of $11.1 billion. Many more SPAC mergers at multi-billion-dollar valuations are on the way.

The ironSource management team in March 2021. (Courtesy)

There are 65 Israeli-founded unicorns headquartered either in Israel or abroad, according to data compiled by industry tracker Tech Aviv. They have a combined value of some $168 billion and have jointly raised $47 billion, according to the data. Fifteen new unicorns have been formed since the start of this year, the last one, Honeybook, on May 4, compared to 20 for the whole of 2020. The numbers indicate that Israel is generating on average something close to an astounding one unicorn a week.

“The numbers are wild,” said Aaron Kaplowitz, president of the United States – Israel Business Alliance (USIBA), referring to the 22 Israeli-founded unicorns in California, as of the end of April. His words are a good description of the wider picture as well.

Is it a bubble?

Is a tech bubble forming, similar to the dot-com bubble that burst at the start of this millennium? Is everything going to come crashing down as fast as it built up?

An illustrative image of bubbles or tech bubbles (Chartchai Sansaneeyashewin; iStock by Getty Images)

At a recent online press conference Jonathan Medved, the CEO and founder of Jerusalem-based VC firm OurCrowd, forecast that based on the strong first quarter, Israeli startups are on track to raise a record $20 billion from investors this year, double the amount raised last year.

“This tech economy that we are part of is unbelievable,” he said in a phone interview. The worldwide valuation environment today is “very robust,” he said, and the strong revenue growth forecast for these tech firms gives the valuations “some real justification.”

‘Unstoppable changes’

That doesn’t mean valuations will continue to stay high, he warned. “There are going to be corrections, and serious ones, in the future,” he said.

The specter of a rise in interest rates as inflation rises is already dampening the jubilation of stock markets, bringing valuations lower. US Treasury Secretary Janet Yellen said earlier this month that rates may have to rise somewhat to keep the US economy from overheating. Soaring commodity prices have sent the cost of raw materials, like copper and iron, to record highs, spurring speculation of higher inflation.

Technology stocks have pushed Wall Street’s main indices lower recently, as signs of inflation in the economy caused jitters among investors who worried about higher interest rates. Shares of website creator Wix have declined some 30% since their peak in February 2021; Fiverr, a firm that connects businesses with freelancers offering digital services, has seen its shares plunge 41% from a February 2021 peak; and Lemonade, an Israel-founded insurance tech firm, has seen shares topple some 51% from a February 2021 peak.

Ilan Paz, Barclays Israel Country Manager (Yossi Zeliger)

“Historically inflation means an increase in interest rates and an increase in interest rates means some contraction in valuation multiples,” said Barclays Israel country manager Ilan Paz in a phone interview. “So do I see more downside than upside to today’s technology companies valuations? I do.”

Paz said he believes there will be some kind of correction, because valuations are currently “pretty stretched.”

“If the average software company, three, four or five years ago was trading at a multiple somewhere between three and five times its revenue, today it is trading at somewhere between eight and 10 times its revenue – that is double,” Paz said. “So where valuations are right now, there is more downside than upside and the average is probably lower than where multiples are right now.”

Even so, he said, for the long term tech is positively poised for an upward trend. “What the world will witness will be a correction, and not a turnaround,” he said, because the coronavirus pandemic has accelerated a shift to tech. “What this pandemic did is it accelerated the changes that we thought would take five years into five months,” Paz said. So, yes, he said: “Tech is on fire.”

The ‘zigs and the zags’

If you look at long-term trends, OurCrowd’s Medved said in the phone interview earlier this month, “when you get rid of the zigs and the zags,” the tech path is heading one way: upward.

“One can be optimistic, not just here in Israel but in general about technology, because the changes are so profound and unstoppable,” he said. “But along the way to the positive long term tech future there will be major setbacks and dramatic temporary drops in stock prices and private investment valuations. This is natural. Success in technology investing… requires strong nerves and strength of conviction.”

OurCrowd CEO Jon Medved (Courtesy)

Fields like telemedicine, genomics and personalized medicine, food technologies, alternative proteins and cybersecurity are all poised for further growth, Medved predicted.

At the start of the pandemic, when the global stock markets plummeted, OurCrowd held meetings with the startups in its portfolio and recommended that they slow down, cut costs and furlough workers.

“We were really worried, because I had been through the downturns of 1987, 2000, 2007, and I was ready for nuclear winter,” Medved said. ” And we were right — for about a month.” Because what happened in fact was that the pandemic actually presented tech firms with an “opportunity to grow, and to grab market share,” he said.

As governments injected money into their economies to keep them afloat and amid record low and negative interest rates, investors piled their funds into tech stocks for lack of better alternatives.

“Valuations are high because there is a lot of money around and there is nothing to do with this money,” said entrepreneur Eyal Waldman, who sold the company he founded, Mellanox Technologies Ltd., to US gaming and computer graphics giant Nvidia for a whopping $7 billion in 2019.

Eyal Waldman, left, founder and CEO of Mellanox, and Jensen Huang, the founder and CEO of Nvidia Corp., at a press conference in Yokne’am, Israel, on March 25, 2019 (Shoshanna Solomon/Times of Israel)

Had he sold the company to Nvidia today, he’d have gotten a much higher valuation, Waldman said, not only because in general valuations are higher, but also because Mellanox, as part of Nvidia, has seen a boost in sales following the pandemic.

According to Tech Aviv data, Israel also has 27 so-called charging ponies – companies with valuations over $500 million and growing.

There is a lot of money looking for investment and there is “a lot of demand for technology,” said Raanan Lerner, a partner at Meitar, one of Israel’s largest law firms, which works with Israeli tech companies.

Raanan Lerner, partner at Meitar law firm (Tomer Jackobson)

“VC firms, corporations and other investors are all pouring money into tech,” Lerner said. “Startups are getting offers from multiple parties at that same time. And when that happens, prices will go up. And this is pushing valuations higher.”

“Is there a bubble? I am not sure,” he said. “How we measure and value companies today may have changed from how we measured them 20 years ago. Today a startup without revenues can raise millions of dollars… whereas before, the sums were much lower. And the industry has gotten used to that. Valuations have risen at all stages of the firms – pre-seed, seed, at exit stage and at unicorn stage. I can’t say companies are expensive. They may rise even further. It is a very good time for tech firms.”

All of this money is enabling entrepreneurs to hold on to their firms for longer – growing the company and employing more workers not just in R&D but in a variety of other jobs such as in-house lawyers, marketing and public relations professionals, and content and technical writers.

And all of this money is creating tech millionaires.

Financial website Calcalist reported that one of IronSource’s founders, Itay Milrad, who is expected to get shares worth $648 million and $114 million in cash from the SPAC deal merger with Thoma Bravo, acquired a penthouse for NIS 40 million in Tel Aviv. The co-founders of Israeli ag-tech firm Prospera, which entered an acquisition deal with US maker of irrigation and infrastructure equipment Valmont Industries Inc, will be receiving some $100-$120 million for their 35% stake in the firm, according to Calcalist.

Employees at these highly valued tech firms, who are generally given equity options, “are now newly minted millionaires,” said Meitar’s Lerner. “We don’t have the statistics but the big money in tech is not made from the high salaries but from the equity incentives offered. The higher the firms are valued the more millionaires Israel has.”

According to Globes, a financial website, and based on data provided by an unnamed accounting firm, tens of thousands of tech employees in Israel have become millionaires in the past year due to the options they received.

Flush with money and with millionaire employees, will Israeli entrepreneurs and their firms be able to deliver real value to investors? Do they have the skills necessary to navigate and manage these newly formed multi-billion-dollar companies?

Yes, say the experts.

“More so than before,” said OurCrowd’s Medved. That is because by now many of the startups are set up by entrepreneurs with experience, who have successfully sold their previous business or learned lessons from a failed startup.

Microsoft’s New Campus in Herzliya (Photo: Gal Zonenstein)

In addition, the 500 multinationals, including Intel Corp., Google, Facebook and Microsoft, operating in the nation’s tech ecosystem via R&D centers, accelerators and incubators have mentored, trained and molded dozens of new local entrepreneurs with the skills they need to succeed, said Medved. These entrepreneurs, he said, “have no fear and they are very, very bold.”

Executives and middle management are far more mature and have greater aspirations than in the past, said Eden Shochat, co-founder of the Aleph venture capital firm. They also don’t shy away from hiring foreign talent in areas where they have less expertise, he said, and US-based executives are more open to the idea of working for an Israeli company.

What is key to success, said Medved, is the ability of these entrepreneurs to deliver value by working hard and building relationships with clients, markets and investors.

“We have to build companies that last and scale,” he said. Whether the massive valuations garnered are justified will be quickly determined by the markets, at the end of the day.

“We just must keep on working hard and realize… that this success long term is going to be based on… continued relationship-building rather than just transactional expertise. I really think that long term we have to realize that this is about relationships with companies, with investors, relationships with countries.”