The Stage is Set: Israeli Startups Can Break Through to the Next Level

In recent years, when Israel’s technology industry is mentioned, the discussion quickly turns to the tendency of local startups to sell early. Today, more so than ever before, Israeli companies can avoid an early exit and grow.

Combined, existing market needs, the growing number of funding sources, fewer options for early exits, and the availability of local talent, can take Israel’s startup hub to the next level. The number of homegrown startups with a potential to become medium and even large companies is the highest since the Israeli venture capital industry has taken root in the early 1990’s.

In fact, if Nasdaq-traded, Israel-based security information company Check Point Software Technologies Ltd. is not taken into account, the overall valuation of Israel’s biggest 50 privately owned startups now tops the overall value of the 50 biggest Israeli technology companies traded on U.S. exchanges.

While public companies still take up the top spots in the list of Israeli technology companies with the highest valuation, private companies now take up several places on the top ten list. When it comes to companies with a valuation of over $200 million, there are many more private Israeli technology companies than public ones.

The uptake: Israel can now be a place where startups work alongside companies of varying sizes, and alongside multinationals that have set shop in Israel seeking to benefit from local talent. For a market known for long years as a breeding ground for startups that get snatched up quickly by bigger multinational buyers or die off, that is a considerable change.

This dramatic development was driven by a no-less dramatic change in the urgency of the digitization processes taking place at global companies which led to a wind change in the way executives at organizations think about strategy and technology. Once considered to be in a supportive role, technology is now a core part of the way companies do business.

These changes require technology entrepreneurs to think about the business needs of clients. The customer’s IT manager is no longer the organizational go-to person for an inspiring technology company; instead, these companies now work with business development executives, CEOs, and board members.

Some Israeli entrepreneurs today have a thorough understanding of market verticals including the automotive industry, banks, insurance and the hospitality industry. By thoroughly understanding their target industries they can tailor their product to the needs of the end user, and become market leaders.

Calcalist’s list of Israel’s Top 50 Startups includes advertising technology startups, alongside autotech companies and fintech companies.

Softbank’s Vision Fund and other mega-funds have changed the way equity funding works. The funds poured into the creation of technology-enabled services create opportunities that never before existed, and execution ability and business vision take up a much bigger role in the eyes of investors.

While late-stage venture capitalists are now willing to shoulder sustained losses to enable companies to grow and attain market leadership positions, public markets have not yet adapted to this new reality. Continuing to benchmark companies according to P/E ratios, the public markets have become less relevant for technology companies looking for the cash they need for growth. Once seen as an investment that would take five to seven years to vest, startups today can continue to grow for double that time before going public.

In terms of merger and acquisition deals, 2017 was a disappointing year for Israeli tech. Three cybersecurity startups that sold early on in their life-cycle made up the bulk of the overall sum of acquisitions of local companies plucked by bigger corporations. Only one of those companies reached annual sales of over $100 million. At the same time, Ernst & Young estimates there are over 200 Israeli venture capital-backed companies with a valuation higher than $100 million, ensuring the strength of the industry for years to come.

The changes described bring with them a new set of challenges for Israeli companies now making their first steps.The most noticeable challenge is finding the managers that can attain and sustain fast-growth. When it comes to business development, sales, and talent management, the Israeli market still has much to learn, but demand for such managers is immediate and urgent nonetheless.

Given current market conditions, Israeli tech can now go on to the next level, bringing forth bigger companies and much higher valuations. Such companies, in turn, can open up tech positions to many more Israelis—not just for engineers but also for business development executives and marketing professionals. Local companies that have set up proficient marketing and sales departments would be a future source of talent and know-how for future companies to come.

Israel’s technology industry has come to a stage where it can stop benchmarking itself according to exits and acquisition deals. For the next decade, revenue growth, and employee numbers should be seen as no less important factors for the success of companies.

Oren Bar-On is a senior partner at Ernst&Young Israel.