At first glance when you compare venture-backed companies in Israel — both in terms of raising money and exits — with their counterparts in countries like the UK or Germany it doesn’t look that great. Over the five years to 2013, companies in the UK and Germany raised a lot more money and did a lot more deals.
But then you have to stop and consider the three countries. According to the United Nations, Germany is the fourth-largest economy in the world (after the U.S., China, and Japan), the UK is sixth (surpassed by France), and Israel is 42nd. Its population is a tenth that of Germany — there are more people living in Lower Saxony than in all of Israel.
“You can’t really compare 70 million people in the United Kingdom to just eight million people here in Israel,” says Koby Simana, CEO of the Tel-Aviv based IVC Research Center Ltd., a leading source of information on Israel’s hightech industry. If instead of measuring absolute figures, you look at per-capita activity then Israel’s strength as a tech super-power is evident.
Using data from Dow Jones VentureSource over the last five years (20092013) Israel raised $254 per capita in venture deals for its tech industry: that is three times as much as the UK. It dwarfs Germany — which raised just $42 per capita, barely a sixth of the amount.
Not only do Israeli companies raise substantially more per capita, they also typically raise larger amounts than equivalent companies in Europe and even the U.S. (with the exception of later-stage deals). Seed, first and second-round deals are all larger in Israel. As a substantial part of an early-stage company’s expenditure is on staff, then Israeli companies are likely to be better staffed and so better able to grow faster than their counterparts in Europe. That higher earning potential is reflected in exits.
Israel’s Position Even Stronger On Exits
Flipping to the exit side, Israel’s position is arguably even stronger. Using data assembled from IVC Research Center on Israel and from Go4Venture Advisers and Ernst & Young on M&A deals and IPOs respectively in Germany and the UK, taking exits of tech companies backed by venture funds, then per capita Israeli companies raised nearly 3.5x as much as their UK equivalents, and eight times as much as their German counterparts. Given that Israeli companies only raised six times as much per capita compared with German companies, the exit multiple for investors is higher, making the Israeli investments more attractive.
This, says Simana, should come as no surprise. “Valuations of Israeli technology companies are getting higher. More and more mature Israeli companies are raising substantial amounts of capital than ever before. We see more of the so-called ‘unicorns’ here in Israel. Companies are trying to raise capital with valuations of more than $1 billion.” While historically some have accused Israel of selling companies too soon, times are changing, says Simana. “Both investors and entrepreneurs are trying to go beyond what we have done so far,” he says. Instead of developing cutting-edge technology and then doing an M&A deal with a foreign company they are now building standalone growth businesses (see the story on Israel’s Unicorns on pages 10 and 11). Examples include companies such as Outbrain, eToro, Wix, Taboola and MyHeritage.
And while Israel has always looked to the U.S. for both M&A deals and in particular IPOs, says Simana, “I think that the dominance of the U.S. market is declining.” He pointed to the recent float of the digital advertising group Matomy Media on the High Growth Segment of the London Stock Exchange — Matomy raised £41 million with a valuation of £203 million. “I know other companies are looking at Europe. They can see that it’s a closer market.”
That said, Israel is still second only to China in the number of companies listed on NASDAQ and spokespersons for the U.S. exchange have already said they expect 2014 to be a stronger year for Israeli IPOs than last year.