The coronavirus has laid the world low, but for high-tech companies it’s marked the dawn of a more digitally-rich era than ever. Wall Street has noticed, and the tech-heavy Nasdaq composite index rose 43 percent last year. The average price-to-earnings ratio on the index is a stellar 22 and market valuations of tech companies big and small have grown massively.
Israeli startups aren’t about to let this pass them by. Going public was long a distant second choice for exits, after a mergers and acquisitions deal, but that has changed: About 10 companies are known to be readying for Wall Street debuts at valuations they hope will exceed $1 billion. Industry sources say more are on the way.
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“Without question, the preferred way to complete an exit today is through the stock market,” said Yaron Weizenbluth, a partner in PwC Israel and the head of its high-tech team.
“Last March there was a lot of uncertainty. People were talking about a disaster. I was at meetings where people weren’t talking about an economic crisis but a drop like we hadn’t seen since 1929. Suddenly, we got out of it. There’s more money, there’s a long list of unicorns that can access it,” he said, using the term for a startup valued at $1 billion or more.
In a few cases, companies that had been sitting on plans for initial public offerings, such as Outbrain, IronSource and Kultura, dusted them off. Others that were thinking about an IPO in another couple of years began to think otherwise.
As Weizenbluth explained it, the markets are awash in cash thanks to government stimulus programs while entire industries that have been decimated by the pandemic, such as tourism, are now effectively off-limits to investors. “The big money has moved to technology and we’re seeing that in the IPO market. I think we’ll see even more activity over the next half year,” Weizenbluth said.
According to Stock Analysis, 2020 saw no fewer than 480 share offerings on Wall Street, double the number the year before. The last four months of 2020 alone saw a number of offerings equal to the annual total for each of the previous four years. The two most prominent Israeli companies to go public in recent months are JFrog (software-distribution tools) and Lemonade (online insurance).
To the IPO party, a new guest has arrived in the form of SPACs, or special purpose acquisition companies, shell companies formed and listed on the stock exchange for the purpose of merging with an existing business. SPACs enable companies to go public without undergoing the rigors of an IPO, and they have proved popular with Israelis.
Taboola and Outbrain – content-recommendation companies that tried and failed to merge last year – are taking different routes to a listing. Outbrain plans an IPO while Taboola is in talks with an Israeli-sponsored SPAC called ION Acquisition.
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Payoneer (online payments) and REE (electric vehicles) are also going the SPAC route. IronSource (online advertising), eToro (social investing) and SimilarWeb (web traffic analysis) are also conducting IPOs. OrCam, which develops devices for people who are blind or visually impaired and was founded by Mobileye founders Amnon Shashua and Ziv Aviram, is also reportedly planning an IPO this year.
In recent years, the way for a startup to earn the highest exit valuation was through mergers and acquisitions. Companies that had raised private capital at big valuations feared they would end up going public at lower ones, so few choose that route. The pandemic has changed that.
“The public market has become euphoric and more forgiving. There’s a lot more money chasing after growth investments because there’s no other place to invest and interest rates are at zero,” said Amit Karp, a partner in the U.S. fund Bessemer Venture Partners. “They’re trading at multiples no one could have imagined.”
He cites as examples Snowflake, CrowdStrike and Tesla, which are trading at a P/E of 138, 55 and 22, respectively, based on their forecast 2021 revenues.
“Even sectors that historically were considered less attractive, like educational tech, can issue shares now because there’s enough appetite in the public market. That’s what the market is today: I concluded a long time ago that anyone who thinks the market is stupid is making a mistake,” Karp said.
The top four Israeli companies planning to go public are looking at valuations ranging from $2 billion for SimilarWeb to $5 billion, for IronSource. In between, Payoneer is eyeing a valuation of up to $3 billion and Taboola of up to $2.5 billion.
“Companies designated stars are getting crazy multiples on the assumption that winners will take all,” Karp said. “Investors are willing to take more chances. They think the new companies of the new era will eat the lunch not only of the companies of the old era but of the tech dinosaurs, too.
“It’s reasonable to assume that there will be a market correction, but no one knows if that will be in another year, two years or five years,” Karp added.
Harel Beit-On, a partner in the Viola Growth fund, said the market was, in fact,more selective that it appeared to be. “It’s not really a tide lifting all the boats. Even in the world of technology, there are big differences in valuations,” he said.
For example, with enterprise SaaS (software as a service) companies, multiples are 10-20 times the revenue, while with e-commerce companies the multiplies are between 1 and 4, he said. But, he stressed, there is a fundamental basis for the high valuations.
“Without a doubt, we’re in the midst of a multiyear transition of digitization and a technology revolution that will affect every aspect of life,” Beit-On said. “Technology is critical to every industry, all business activity and every part of our lives – and it’s here to stay.” There are nontech factors in play as well, he said. “I’m not a prophet, but I don’t believe interest rates are going to rise and I don’t believe in the horror scenarios of bug budget-cutting in the years ahead to pay for today’s government deficits,” Beit-On said.
If so, demand for equities with a growth story will remain strong. “I don’t think the market will turn low. There’s so much in the world looking for a place to invest,” he explained. “Four or five years ago, technology investments were marginal, but today everyone wants a piece of the action. It’s created an imbalance between supply and demand, so share prices are soaring.”