The Bible refers to Israel as a “land flowing with milk and honey”. In the 21st Century, Israel has become one of the world’s top innovation centres flowing with startup companies and ideas of interest to US venture capital (VC) investors. According to research firm PitchBook, startups in Israel have raised nearly $3bn since 2012 and nearly $1bn of that came last year. Although the IT sector is the main recipient of funds from VCs, companies in the healthcare sector, for example, have also attracted attention and have gained US partnerships.
“There is a lot of innovation coming out of Israel,” says Nili Shalev economic minister to North America at Israel’s Ministry of Economy. “There are lots of technologies that are becoming more mature and the companies [are also] becoming more mature.” She stresses that VCs who have been in Israel for some time, and have been able to leverage their understanding of the market to take advantage of today’s growth in innovation, have also helped the growth.
Many in the industry agree that the trends and interest in Israeli companies have a lot to do with maturity of the market. For example, Koby Simana, chief executive of the IVC Research Centre in Israel says investment comes from three directions.
First, VCs are learning to be patient when it comes to investing in Israel and are not jumping into the first investment they see.
Second, whereas five to 10 years ago Israeli companies were simply selling technology, today they are setting up businesses with clients, markets and penetration into multiple markets. “That, of course, will have an effect on the valuation of the company,” he says.
Third, the entrance of corporate investors and foreign VC firms is providing assistance in the growth phases of companies. “In 2014 we saw almost 40 transactions valued between $20m and $1.6bn. Those kinds of investments were very rare in the past but today occur more often.” He says Israel now has about 10 unicorns – private companies valued at more than $1bn.
Some of those companies include Webydo – a code-free cloud platform for web designers – that raised $7bn last year. Some of the non-unicorn companies raising money last year include Gett, a mobile phone taxi-hailing service ($193m), and Altair Semiconductor, a single-mode LTE chip manufacturer ($125m).
One US-based VC fund with investments in Israel is Aleph, whose focus is mostly in Israeli software companies. Michael Eisenberg, a partner there, says three trends are prominent. “Money is looking to invest in innovation and there are very few centres around the world to invest in. One is Silicon Valley, the other is New York but the third is Israel. As more money flows into innovation, it stands to reason that Israel will get some of that money.”
He says there is a general increase in the amount of money going into companies before they go public. This is not specific to Israel but, says Eisenberg, it is turning up in Israel in a more amplified manner. Finally, Israel was thought of as a place where large companies were not created and most of the technology was sold to bigger companies. “In the last three or four years, it has become absolutely evident that you can build big companies and more money flows.”
With volatile markets and investors weary of where to invest their funds, will this type of growth continue?
“Many of the companies are second and third-time entrepreneurs,” notes Shalev. As a result it becomes easier to raise funds as investors gain experience and trust with the people who have proven their abilities, and have strong track records.
But investment is shifting. Whereas US VC funds remain the largest investors in Israeli companies, Chinese funds are making inroads as well. IVC Research forecasts that Chinese investment will grow 54% this year. The value of financing rounds involving Chinese investors came in at $302m last year – triple 2012’s figures. In fact, Alibaba, the world’s largest e-commerce site, said it would put money into Jerusalem Venture Partners’ fund.
Simana says: “The bulk of investment is coming from the US but we are seeing a lot of interest coming from China.” This includes direct investments, or acquisitions and VC investing.
With few innovation centres in the world and VC funds hungry for high-growth-potential startups, Israel appears to being the sweet spot for attracting foreign capital. The Middle East is always volatile politically, so change can be swift for investors. But trends today remain relatively strong.