The last few years have been dry ones for initial public offerings by Israeli high-tech companies. In 2018, just eight companies went public, raising only $250 million. The year before that saw 13 companies raising $440 million, according to figures from tech industry tracker IVC.
The dearth of IPOs, however, isn’t a barometer of the health of the Startup Nation. Vast changes in the capital markets over the last decade have shifted the calculations of startup entrepreneurs and investors so that a promising startup no longer has to go public to finance its growth.
“Today we are seeing that Israeli companies, like their American peers, are waiting with patience to go public because there is enough [private capital] available that they can raise money at attractive valuations at an advanced stage [in their development],” explained Boaz Dinte, managing partner of Qumra Capital.
“If in the past a public offering was the way to raise significant amounts of money for companies worth more than $50 million, today there is enough capital to enable them to put off an offering until later.”
Qumra is one of a new generation of venture capital funds that specialize in investing in growth companies, as opposed to earlier-stage startups that are still developing a product or finding their first customers. “Five years ago, there were no growth funds at all.” he said, in reference to Israel. “It’s a global trend,” he added.
One of Qumra’s portfolio companies is JFrog, which makes automated toolsets for developers to manage and distribute software releases. Last October, the company raised $165 million at a company valuation described at the time as “north of $1 billion.”
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“In the past, a company like that would have gone to the Nasdaq, but today it can raise money at a significant valuation in the private market and do an IPO at a later stage,” said Dinte. “We’re building a pipeline of companies that will be able to do much bigger and better IPOs down the line.” Indeed, JFrog is one of seven companies identified by TheMarker as likely IPO candidates. (See story below).
Moshe Lichtman, cofounder and general partner of the Israel Growth Partners fund, said the phenomena of delayed IPOs began in the wake of the global financial crisis and the era of super-low interest rates. “The window of opportunity for public offerings began eight years ago when low interest rates caused more and more money managed by institutional investors to move into the high-tech industry’s private market in pursuit of higher rates of return,” he explained.
The influx of all this capital enabled tech startups to raise money in sums never before possible without turning to the public market and to take on the costs and risks entailed without being bound by disclosure requirements and other regulations that public companies face.
The result is that Israel’s Startup Nation now numbers scores of companies with valuations of hundreds of millions of dollars and even more, which makes them strong candidates for an IPO even as the benchmark for how big a company has to be before it can aspire to issue shares to the public has risen in recent years. Dinte said that the unwritten rule of the stock market today is that a company that wants to go public on the Nasdaq, the world’s leading exchange for technology companies, must have sales of at least $100 million
Natalie Refuah, a partner at the Viola Growth fund, sets the bar even higher — at $200 million. She examined 14 companies that went public on the Nasdaq last year in the software as a services (SaaS) segment and found their average revenues were about $200 million, in addition to employing on average 1,000 people and having raised $300 million in capital on average before going public.
Companies also have to show they have the management skills and sophistication to be a public company, including the ability to adequately forecast sales and other metrics to the investing public and show they are deploying their capital effectively.
“The [company’s] productivity model has to show return on investment for every dollar that goes to sales and marketing. You can’t say: ‘I have a budget for marketing, and this is how many new customers it will generate,’” said Lichtman. “Investors want to know how the sales and marketing budget will double revenue and whether the growth in the marketing budget is higher, the same as or less than the growth in the company’s actual sales.”