Maturing Into A Powerful Global Innovation Incubator

During the first six months of 2018, Israeli high-tech deal-making delineated a maturing ecosystem, with a growing layer of start-ups raising more money at later stages from investors placing smarter bets

The number of companies raising between $10M and $20M, so-called “scale-up” rounds, has more than doubled in 2018 compared to 2015 – from 22 rounds in H1 2015 to 53 in H1 2018. There is also tangible growth in the $5M-$10M band, although not as marked as the larger band.

These funding rounds allow companies to grow and expand their operations. It is a sign of a maturing ecosystem with enough strong companies surviving the initial start-up stages, showing enough positive growth to justify such investments. The scale-up growth is just one signal pointing to a maturing ecosystem.

Fewer deals, more money

Overall, the amount of capital raised by Israeli tech companies across all stages has jumped 33% from H1 2015. Significantly, the additional 33% came from fewer deals, with a 17% drop in the number of rounds from the same period in 2015. In other words: fewer deals overall, but more money into companies with an air of durability and dynamism around them.

Start-Up Nation Central

Start-Up Nation Central tracked $2.42B raised in H1 2018 by Israeli high-tech companies in 260 funding rounds, one of the highest first half-years of capital raised since the beginning of 2015, with one of the lowest number of funding rounds.

In addition, across all funding stages, the median size of a funding round for an Israeli tech company has increased dramatically, from $2M in H1 2015 to $5M in H1 2018, a 150% jump. We use median and not average funding sizes since it’s a much more accurate measure: Averages are impacted far more from extreme cases.

Our view is that the Israeli high-tech industry is showing clear signs of both growing (in the amount of money raised by its tech start-ups) and maturing (a growing layer of maturing companies). We’re seeing fewer companies being founded, and more being closed, but at the same time we are seeing an increasing amount of larger companies that are sticking around and growing.

All of this is new in Israeli high-tech, long characterized by a
trajectory of meteoric rise, precipitous fall, or sudden exit for many young start-ups here.

Even in earlier stages there was an increase in the median size of a seed round, from $800K in H1 2015 to $2M in H1 2018, but here there were even fewer funding rounds, a full 40% drop over the past three years.

Downward trend in exits

The corollary to staying private for longer periods is that during H1 2018, only 43 companies exited – the lowest number of exits since H1 2015 – for a total of $672M, continuing a downward trend in the number of exits as well as the dollar amounts exited for.

Part of the criticism of Israeli tech in the past has been that Israeli start-ups tend to sell out too early, and that global companies get all the benefits from it. The data we are seeing shows there is an expanding layer of Israeli technology companies growing their business for longer, staying Israeli for longer, and staying independent for longer. That’s a good thing as they create more value and jobs in Israel.

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There's a lot more capital to deploy now, but investors are much more interested in doing fewer deals at larger amounts – which means funding at later stages. A lot of investors can't be bothered to do the groundwork and interview thousands of early-stage companies; they would much rather see a small number of later-stage companies, and write them bigger checks, which allows them to deploy more capital.

Investors don't have the resources to view thousands of companies and deploy half a million or a million dollars in each one. They'd much rather do a smaller number of investments but give them $10M-$20M each. This is where the industry is moving in places like Silicon Valley, and we see it here in Israel too.

Still, this stage – of a growing number of scale-ups – is a stage we've never really reached before. Typically, the market cycles have been much shorter. This is the longest cycle we've ever had in terms of VC investing of trough to peak – meaning we're still expanding. The 90s tech boom lasted around five years. This cycle, which arguably started after the 2009 financial crisis, far exceeds that of the 90s.

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