In what some may see as a portent of a high-tech bubble here, the valuation of 80% of startups that raised venture capital last year increased compared to their previous financing rounds, according to a survey by the Shiboleth law firm.
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Such increases have not been seen since 2008, when the global economic crisis erupted. They indicate more positive sentiment here than in California’s Silicon Valley, where the comparable figure was 69%. Most of the Israeli companies that declined in value were more mature firms, and the decline was therefore explained as a result of their being longtime fixtures in the field that in many cases had not missed out on the right time at which to raise capital.
For his part, Shiboleth partner Lior Aviram said he doesn’t think the startup sector here is in a bubble of unsustainable prices. “We are seeing a flow of foreign investors who come to invest in Israel mainly because it’s cheap here,” he claimed. “Investors are taking fewer defensive measures,” he added, citing steps such as reserving their right to redeem their shares in the event that the company is acquired. “Currently we’re seeing the lowest rate of such requests since 2007.”
According to the study, 2013 was a year of unprecedented optimism, which was reflected in the investments that the Israeli high-tech companies attracted.
“Nearly all of the parameters that we surveyed showed improvement in the high-tech companies’ favor,” the study’s authors stated, “which is evidence of a strong and healthy industry.” The study also cited the significant numbers of major recent acquisitions of Israeli high-tech firms as further evidence of the positive state of the industry here.
The Shiboleth survey is the latest in a number of indicators that suggest that 2013 was a record year for the Israeli high-tech sector when it comes to investment in Israeli startups and acquisitions of young Israeli tech firms. That momentum is also being carried over into 2014. For example, last week, Viber, which provides Internet-based voice and message service to mobile phone users, was snapped up by a Japanese tech giant for $900 million. Viber is not formally headquartered in Israel, but it has a research and development center here and is headed by an Israeli. And this week, Google purchased Slick Login, a Tel Aviv-based startup that developed voice-based password technology and was formally founded just two months ago.
In 2013, foreign companies spent $6.45 billion buying Israeli firms, up 20% from 2012, accounting firm PwC Israel Kesselman & Kesselman reported. Most of that sum was for a small number of mega-exits in high-tech, including Google’s acquisition of Waze, the navigation application company, for about $1 billion. Last year 622 Israeli high-tech firms raised a cumulative sum of $2.3 billion, the largest amount since 2000, when Israeli high-technology firms attracted $3.1 billion, according to the business data company IVC Online.
When analyzed based on the stage at which investment in the company was made, the Shiboleth survey shows that most of the money in 2013 was being provided at an early stage. Fully 37% involved companies in the first financing round while another 30% were firms in their second round. “Such a rate will support the creation of larger numbers of high-tech companies,” the report stated, “after the natural selection of the stages to come.”
The study’s authors noted however that later stage financing rounds, from the fifth round and up, also increased and constituted 13% of the total last year compared to 5% in 2012. “That finding shows that the high-tech sector is sprouting good companies that mature and continue to receive funding in the later stages and are not closed during the intermediate stages,” the study said.
The survey, which was carried out in cooperation with Fenwick & West, a Silicon Valley law firm, analyzed deals involving more than $500,000. Shiboleth, which is engaged in work in the international business and high-tech sectors, has an affiliated office in New York.
Compared to their counterparts in Silicon Valley, young high-tech firms represent a larger proportion of companies engaged in new financing rounds. Among Israeli firms, 27% were in their first round compared to 24% of their Silicon Valley counterparts.
Israel’s high-tech sector is demonstrating vitality, the study said, and new companies are attracting more funding. Compared to 2012, the same proportion of companies are being funded at their early stages, but the amounts involved increased in 2013, the authors noted, and companies continue to raise more and more capital. “That indicates that investors are taking risks and are optimistic with respect to the companies’ and the industries’ future.”