Surge of Tech Exits Point to Startup Nation’s New Maturity

Companies are worth more and a wider range of buyers boost exits to $5 billion in first half.

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

Israeli high-tech is breaking record yet again: Since the start of the year 48 startup companies have been bought in mergers and acquisitions deals for a combined $4.98 billion, an amount that already exceeds the full-year 2014 total, according to an IVC Research Center report this week.

It’s too early to tell whether 2015 will be a record year for high-tech exits, but clearly the industry is on a roll. Moreover, behind the headlines are figures that show the industry is maturing from one that grows startups to be swallowed up by big multinationals:

Of the 10 biggest deals in the first half of the year, many were companies that weren’t being bought and sold for the second or even third time. They’re no longer startups, but veteran companies.

Another important new development for Startup Nation is the entrance of new players into the industry, both in terms of size and home country. Israeli companies are emerging as buyers, not just startups being sold.

Here are four trends:

The first reflects the growing maturity of the industry. The single biggest deal in first-half 2015 was the sale of Fundtech for $1.25 billion by the private equity fund GTCR to the Canadian fintech company D + H. The Fundtech sales alone accounted for a quarter of the deals in dollar terms in the first half, but it was a typical exit.

Fundtech had been a publicly traded company and has changed hands several times. In the three years it was controlled by GTCR, the company, which is still managed by an Israeli, Reuven Ben-Menachem and is based in Herzilya, tripled in value.

The second-biggest transaction, like Fundtech, marked a change in ownership, not simply an exit. Borderfree, which had gone public a year ago only to see its market capitalization drop 60%, was bought by Pitney Bowes. Two other sales were the sale of certain Comverse billing-technology businesses to Amdocs, an Israeli company.

The long history of these companies shows Startup Nation is evolving into a wider range of businesses. “An initial public offering is no longer necessarily an exit but simply a stage in the evolution of a company,” says Dan Shamgar, a partner in the law firm Meitar Liquornik Geva Leshem Tal, which co-sponsored the report with IVC.

The second big development is the growing size of Israeli tech companies. In the first half the average exit was $98 million, a 51% increase from 2014. For companies backed by venture capital fund, the average was $84 million, a 15% increase, but for more mature companies with VC investors the rise was especially dramatic, to an average of $108 million, an 80% increase over last year.

The third important development is the new investors piling into the Israeli tech scene. They include technology multinationals not present in Israel to date, companies controlled by global private equity funds and companies outside the United States and Europe, particularly from India.

“We’re seeing a wider range if buyers instead of the usual suspects – not just the IBMs, Ciscos and Googles of the world but new kinds of buyers interested in Israeli companies,” said Aluf Sahar, a partner in the Meitar law firm.

Amazon became the last of the big four, which include Google, Facebook and Apple, to make a foray into Israeli tech when it bought Annapurna Labs last January for $360 million. Like the others, Amazon is turning its Israeli acquisition into a research and development center and is hiring 100 staff.

Other companies to debut in Israel this year were BlackBerry, which bought the security start-up WatchDox for $150 million, and the network storage maker Dropbox, which bought Israel’s CloudOn, setting up its first Israel R&D center in its wake. Dropbox is the example of a unicorn company – a startup with a valuation of more than $1 billion – buying into Israel as part of a global expansion drive.

Meanwhile, two Indian companies have acquired Israeli startups – Infosys, which bought the software maker Panaya for $230 million and Tech-Mahindra, which teamed up with Comverse in April and took over its digital services business unit.

As Israeli startups grow and mature they are looking for bigger and bigger investment rounds in the tens of millions of dollars, in the case of Taboola more than $100 million to finance their growth plans.

One way these companies are growing is by making acquisitions instead of being acquired. In many cases the M&A deals they do are close to home, involving other Israeli companies, with smaller Israeli startups combining with bigger ones.

“In a lot of deals, Israeli companies prefer to hook up with a bigger company by taking shares of the buyer [instead of cash], in order to be a part of the buyer’s growth story and success,” said Shamgar. “It’s not equity-hire [buying a company for its personnel] but companies worth tens of millions of dollars. They are companies that have reached a certain stage of growth and realize they need to link up with a bigger company.”

Eleven of the acquisitions in the first half were done by Israeli companies, 23% of the total.