Just hours apart last week, two Israeli e-commerce startups were sold to foreign buyers for a combined $250 million. A day later, a third announced it had raised $50 million.
In the biggest of the deals, Tapingo, which enables students on 150 U.S. campuses to order meals, was acquired by the U.S. company Grubhub. Upstream Commerce was bought for a reported $50 million by Indian online retailer Flipkart to help it deliver real-time pricing and product analytics to their sellers. Forter, an Israeli-American startup whose products protect online retailers from fraud in real-time, secured $50 million in new funding.
Why are foreign companies and investors so interested in Israel retail tech?
The answer, in a word, is Amazon. The U.S. company has built a seemingly unconquerable global retail empire by using technology that gives it insights into shoppers’ wants and needs and delivers their orders in increasingly less time.
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For Amazon’s rivals to stand a chance of keeping or increasing their market share, they have to match it with technology that is at least as good. That’s why Flipkart, which was acquired by the U.S. retailing giant Walmart in August, wanted Upstream Commerce and says it is on the hunt for more Israeli startups.
“Israel isn’t the savior of the retail world, but there’s quite a bit of interesting activity here,” explained Daniel Cohen, a general partner at Viola Ventures.
Flipkart is in a pitched battle with Amazon for the hearts of Indian consumers and is counting on Upstream Commerce to deliver real-time pricing and product analytics to its third-party sellers. The Upstream Commerce team will continue to work out of Israel and form one of the company’s global centers for data science research.
Retailers have no choice but to confront Amazon. Online shopping grew by nearly 25% last year to $2.3 trillion, or nearly a 10th of all shopping. eMarketer, a research house, predicts that by 2020 e-commerce will reach no less than $4 trillion.
Many companies lack the financial resources to go head-to-head with Amazon on technological innovation, and those that often don’t have the time or the luxury to develop it in-house. Israeli startups are a tempting shortcut to provide them with everything from shipping and packaging technology to automated pricing and drone delivery systems.
The strength of Israeli technology is demonstrated by the fact that not only Amazon, but China’s Alibaba and eBay all have research and development centers in Israel. So when other companies buy and invest in Israeli companies, it’s also about getting control of Israeli human capital; by acquiring Upstream Commerce, for example, Flipkar acquired an Israeli R&D center.
And when Alibaba paid $15 million for Israeli company Visualead 10 months ago, it not only acquired the startup’s computer vision technology but also took on its core engineering team to create a DAMO (“discovery, adventure, momentum and outlook”) office in Tel Aviv.
Last year, Israel’s Flytrex partnered with AHA, Iceland’s largest instant delivery platform, to have drones pick up orders from restaurants and stores on one side of Reykjavik and fly them to a drop-off point in the suburb of Grafarvogur. Flytrex develops autonomous, drone-based delivery systems.
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Another innovator is CommonSense Robotics, whose technology is designed to help online grocers speed up fulfillment and delivery. Earlier this year it raised $20 million The CommonSense’s system utilizes robots to shelve products and bring them to human packers. The robots work in dedicated warehouses or microfulfilment centers small enough to be located in urban areas close to customers.
According to Startup Nation Central, a nonprofit that promotes and surveys Israel’s high-tech industry, Israel currently has 419 startups specializing in retail tech. Nine have been acquired this year for a combined $392 million, while 20 others have raised $230 million.
“The world of e-commerce innovation is divided into two areas — startups that provide solutions for players trying to compete with the big ones, and those that build a shop from scratch. For example, the acquisition of Upstream enables a large retail player like Wal-Mart to become significant and add technologies that make it competitive,” said Cohen.
Viola, along with Qumra Capital and Jerusalem Venture Partners, is one of the leading funds investing in e-commerce technology. Viola has also invested in e-commerce companies themselves, such as GlassesUSA, which delivers prescription eyewear to the buyer within 48 hours, and Brayola, which sells lingerie online.
Israel is also home to The Shelf, an incubator for online retail technologies.
“We built a platform that provides services for big retailers, who pay us to help them link up with the right startups for them in Israel,” said Managing Partner Ilan Leiferman. “We began two years ago to create an Israeli ecosystem, Then the hype was around fintech and cybersecurity. Ecommerce wasn’t on the funds’ agenda. But Amazon, Alibaba and eBay began to build Israel R&D centers and things began to change.”
Ironically, the Israeli shopper rarely benefits from all this tech. “We’re a small market, and the big players aren’t here, and the logistics infrastructure is also not available,” Cohen said. “There are things that work well, like supermarket delivery, but there’s still a lot of work to do.”