The start-up nation is best known for innovative early-stage companies that DLD Tel Aviv Co-Chair Yossi Vardi calls tomato seeds; there is a ton of good stuff packed in those little seeds but they need an experienced gardener to grow properly.
The sale of many such companies to the likes of IBM, Intel, Microsoft, Cisco and Google has helped create Tel Aviv’s vibrant entrepreneurial ecosystem. Their existence has lured the U.S. tech giants to set up in Israel and this in turn has drawn more locals to build companies, sell them and then go out and do it again.
“Israel had been written off as only being capable of producing small exits, security or chip companies — not global Internet brands,” Noam Bardin, Waze’s co-founder and CEO, wrote in a blog post earlier this year.
Bardin noted that at the time of its sale Waze was only the third exit of $1 billion or more from Israel. The mobile navigation service, purchased by Google for $1.1 billion in 2013, was the first Israeli global, consumer Internet brand. It is unlikely to be the last.
“Israelis are moving culturally away from pursuing (smaller) exits to building something big,” says Chemi Peres, managing general partner and co-founder of Israeli VC firm Pitango Venture Partners.
Unicorns Are Rare, Even In Silicon Valley
Companies started no more than 10 years ago which are valued at $1 billion have been coined “unicorns.”
Unicorns are rare, even in Silicon Valley. “In the last decade, the U.S. produced 39 of them; that is 0.07% of start-ups.
The U.S. market is usually considered to be 50x that of Israel so if we normalize markets one would have expected 0.8 unicorns to have been founded in Israel to the U.S.’s 39, so our ‘one unicorn’ exit makes sense,” notes Bardin. “The problem is that after Silicon Valley, Israel is the number two start-up market with over 6,000 startups being founded in the last 10 years, which should have yielded four to five unicorns.”
While no one questions that the sale of Waze was a triumph, the challenge for Israel is now to build independent companies with big revenue streams.
“I believe we are in the beginning of a new era for Israeli start-ups, especially in the consumer tech space,” says Bardin.
And how. In August, four months after Bardin wrote his blog, Mobileye, a Jerusalem-based company that make software to help drivers avoid car accidents, raised $890 million, a record for an Israeli company going public in the U.S.
Informilo polled investors in Israeli companies to ask them which consumer-oriented Internet companies can be considered unicorns or potential unicorns. The names that kept surfacing include eToro, MyHeritage, Outbrain and Taboola. All are global internet companies and have either reached a billion-dollar valuation or, say investors, have the potential to do so.
Consider Wix, which turned down acquisition offers and instead raised capital to go global from Tel Aviv. It went public in 2013. “I think we can grow the premium users category by 90 times the current amount,” says Wix co-founder and CEO Avishai Abrahami. “We are constantly adding more functionality and more territories. We are growing in the U.S. and we see the developing market as a big growth opportunity.”
Not Just Ambition That Is Giving Israeli Start-Ups A Leg Up
Outbrain, a content discovery platform that originated in Israel and has gone on to raise $99 million in venture capital, is following a similar path. It is co-founder and CEO Yaron Galai’s fourth company.
Outbrain makes 180 billion recommendations each month to an audience of 550 million people. “We have enough work for 10 times the number of engineers and product people so I’d like to build the business to fund that,” says Galai.
Rumors that Outbrain will file an initial public offering persist. “It is one of the routes we are obviously considering.”
Taboola, a rival content delivery platform, is currently raising between $80 million and $90 million, which could give it a $1.5 billion valuation, according to press reports, and is also planning an initial public offering.
It is not just ambition that is giving Israeli start-ups a leg up. “The fact that the Internet has become very significant and strong in the last decade has given startups the ability to market, to get audience, close transactions and test their products,” says Pitango Ventures’ Peres. “That efficiency has helped Israeli companies shift to growth and close all the gaps of distance, language and culture.”
Challenges Remain For Israel’s Would-Be Unicorns
That has been the case for eToro, a social investment network that has so far raised $31.9 million in venture capital and today has close to four million registered users. “Today you can get any product to any consumer around the world without leaving your own country,” says eToro CEO and Co-founder Yoni Assia.
“The biggest challenge Israeli companies used to have is distribution,” he says. “The 1.0 companies were focused on building sales forces. When you are selling B2B there is a huge benefit to being acquired because you can sell through the bigger companies’ distribution channels. But now consumer products and even B2B products like SimilarWeb can be distributed completely over the Web. This allows companies to leap ahead and have the potential to grow infinitely.”
Still, challenges remain for Israel’s would-be unicorns. Access to experience is one. To succeed, Israeli companies will need not just capital but investors or mentors who have built unicorns. And most of those are in Silicon Valley.
Even then it is not a slam dunk. So the question the current herd of unicorn wannabees needs to ask is: “how they are going get to $1 billion in revenue rather than a $1 billion market cap,” says Pitango’s Peres.
“I think that these companies can do it but they need to have their mind set on business rather than valuation.”