Israel is now home to some 100 unicorns – not mythical beasts, but high-tech companies that are valued at over $1 billion.
The trend is a global one. As The Economist put it, “The world’s unicorn herd is multiplying at a clip that is more rabbit-like.” Still, the Israeli figure is impressive. Following massive fundraising rounds in recent years, particularly last year, there is a feeling of an exceptional period of growth throughout the industry.
A new report published by Deloitte Catalyst Israel looks at unicorns – privately owned companies that reach a valuation of $1 billion – as well as companies that were issued on the stock market and reached a value of $1 billion before or after their initial public offering. “We decided to include them in the report, because we didn’t want to ignore this very significant group of companies,” says Yair Laron, co-leader and head of startup services at Deloitte Catalyst.
Covering data from 2011 to the end of the third quarter of 2021, the numbers speak for themselves. In 2017, only three Israeli companies joined the “billion dollar club,” one of them through an IPO. In 2020, another 20 companies joined the club, three of which held IPOs. In just the first three quarters of 2021, 35 new companies were added to the list, six of them through IPOs.
The report mentions a total of 94 companies. Since the end of the third quarter, at least nine more Israeli unicorns have been announced, bringing the total above 100 companies.
But the feeling of local pride comes with a warning light. It’s no coincidence that these inflated valuations are happening all over the world. It stems from investor conduct in a zero interest environment and unprecedented liquidity in the markets. In other words, far more money has been seeking investment opportunities in the last year and a half or so, kicking off aggressive rounds of fundraising in startups over increasingly brief periods of time.
Is this a bubble in the making? It’s a common question in the industry – but even if the answer is yes, there seems to be little interest in stopping the trend.
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“There’s a lot of talk about a bubble in the market,” says Laron. “But whether or not the evaluations are justified, there’s a unique situation where we have 100 companies, all of which have raised at least $100 million. That means that the companies in Israel are financially strong and well-financed. In the event that the bubble bursts soon, many of them will be able to deal with it, survive the next year or two, and continue to grow and progress.”
“There’s no doubt that we’re seeing very high valuations, and that the multipliers on the revenues are higher than we’re used to. On the other hand, these are sophisticated investors for the most part – when we’re talking about private rounds of funding – who take into account many parameters and don’t look only at revenues. The most significant parameter that investors are stressing is companies’ growth and ability to increase market share.”
A war over workers
According to the report, the capital raised by the members of the “billion dollar club” has also increased sharply. From about $2 billion in 2018, it rose to around $6 billion in 2019 and 2020. In the first three quarters of 2021, it spiked to more than $16 billion.
Further, startups are reaching a value of $1 billion far more quickly. Between 2011 and 2018, companies required 11 to 19 years to reach such a figure. “Today, investors don’t only examine whether a company can reach a value of $1 billion – as far as they’re concerned, it’s almost a must – but also how fast it can do so,” says Tal Chen, a co-leader and head of services for international corporations at Deloitte Catalyst.
“The quickening pace has an immediate effect on investors’ expectations. They want to see companies growing faster and reaching $1 billion within five years. They’re willing to risk more and finance more aggressive growth, and then we see enormous fundraising rounds. After receiving the money, the startups have to demonstrate growth and recruit massive numbers of workers, creating a vicious cycle,” adds Chen.
Deloitte Catalyst examined what types of transactions brought companies into the “billion dollar club.” Since the companies become unicorns at much earlier stages, the most salient figure is the sharp increase in funding rounds that help companies reach a value of $1 billion – 28 fundraising rounds from the beginning of 2019 to the end of the third quarter, compared to only two fundraising rounds between 2011 and 2018.
Laron says we will soon see Israel’s first decacorn – a private company worth $10 billion. “It’s going to happen really soon,” he says, pointing to an Israeli-British company for securing apps, Snyk, and a company that deals with analysis of sales interactions, Gong.
Does the rise of the unicorns come with significant consequences?
“The most significant thing is the battle over workers,” says Laron. “It’s not only a local battle. The market for high-tech talent is very competitive in the United States and has become increasingly competitive in Eastern European countries as well.”
Chen and Laron say that entrepreneurs have more power than ever, and there’s tough competition among investors for good companies. However, Chen adds, “currently, a startup that can’t create a serious plan to enter the unicorn club within 10 years will find it very difficult to obtain financing from a certain type of investors. Entrepreneurs who can demonstrate a clear plan in the short term can choose their investors. On the other hand, entrepreneurs who are unable to demonstrate such a plan may find things even more difficult than in the past.”
The report also examines the various fields of activity of the Israeli unicorns, and points to relative variety, with a very prominent presence in two main fields – cyber and fintech, with 20 and 19 companies worth over $1 billion, respectively.