Israeli Startup Valuations at Their Highest Since 2008

But local companies have avoided the excesses of Silicon Valley and are less vulnerable to a market correction.

Israeli high-tech workers. Rare is the Ethiopian-Israeli among them.
Alon Ron

Around the high-tech world the atmosphere has grown chilly in recent months, reflected in a drop in fundraising by U.S. startups and the increasing number of companies raising money at lower valuations than in previous rounds.

But in Israel, the industry remains unaffected so far – the latest evidence came in a survey Sunday by the law firm Shibolet & Co. The poll found that 2015 was the strongest year for Startup Nation since the first half of 2008, considering the percentage of startups raising money at higher valuations than in previous rounds.

The ratio of so-called up rounds to down rounds is a barometer of the industry’s strength. Shibolet found that in 2015, 84% of startups raising money did so in an up round.

The companies in the other 16% were split evenly between firms that raised money at the same valuation as in their previous round and companies that suffered down rounds.

The rate was better than in the United States for the fourth quarter, when 82% of startups had up rounds, 12% had down rounds and the rest were flat, according to a survey by the U.S. law firm Fenwick & West.

The global stock market slump for high-tech companies threatens the tech industry in the United States as well as in Israel, but Lior Aviram, who heads Shibolet’s high-tech practice, said the U.S. industry was much more vulnerable to the downturn.

“The valuations in Silicon Valley have been outrageous to the point that even investors know they’ve been unfounded,” he said. “They’re at a much more sensitive stage than we are.”

Referring to companies like Uber and Airbnb that have raised capital at valuations in the tens of billions of dollars, he said: “It’s not just the unicorns, it’s that their influence is felt further down, including the valuations of startups that are just raising their first rounds. The atmosphere reminds me in many ways of 2000. You can expect a correction.”

Aviram estimates that valuations for Israel startups are about 30% to 40% below that for their Silicon Valley peers, and that this gap has widened from 25% a year ago. The widening gap is making Israeli companies more attractive to American and Chinese investors, he said.

“The situation in Israel is much more moderate, so there isn’t likely to be a big change [when the market turns down]. One of the reasons we’re seeing foreign funds coming to Israel now is the valuations in Silicon Valley. In Israel they’re much more logical,” Aviram said.

Another positive indicator for Startup Nation is the high proportion of startups raising capital for the first time – 44% in 2015 versus 23% for U.S. companies, according to the Shibolet and Fenwick & West surveys. Shibolet said the 44% figure was an indication of the momentum in the Israeli industry.

Moreover, there was an increase last year in the percentage of startups conducting “significant” rounds of $20 million or more, according to a survey by Israel Venture Capital Research, which counted 63 fundraising rounds in that category.

On the other hand, Shibolet found that fewer companies were raising late rounds, their fourth, fifth or later. In 2015, late rounds accounted for only 16% of fundraising, down from 27% in 2014 and 20% in 2013.