One of the most talked about topics in Israeli tech over the past year has been the surging valuations of companies. For example, startups raised money at the beginning of the year and again a few months later, but at double the valuation. This phenomenon is now being backed up by analysis conducted by Israeli law firm Shibolet & Co. in cooperation with Fenwick & West LLP. They found that some 93% of Israeli companies that raised money during the first half of 2021 did so at a higher valuation than their previous round, compared to 84% throughout 2020. That figure stood slightly lower for Silicon Valley companies, 89% of which raised at a higher valuation in the first half of the year.
One slightly worrying finding was that most of the investments were made in companies that had raised money previously and that there was a sharp decrease in Series A rounds. Just 13% of the Israeli companies raising funds in the first half of 2021 were conducting a Series A, half of their total share in 2020 and just a third compared to 2019. Series B and C rounds accounted for 58%, similar to their share throughout 2020.
Lior Aviram, head of Shibolet's Hi-Tech and Venture Capital practice and a senior member of the firm's Executive Committee, explained the significance of the figures.
"We are seeing a very extreme picture that showcases an extremely extreme situation, the sort of which we haven't seen in tech for two decades," Aviram told Calcalist. "Over the past year the valuation of public companies has risen dramatically and has taken the valuation of private companies with it. We are seeing companies raise rounds within short periods of time and see their valuations triple over that period. Companies raise money knowing that they will be able to raise more at a higher valuation in a short time. We are in a reality in which companies seem to be growing, but aren't actually being judged on their results, meaning profits rather than just revenue, which is also much smaller than in the past."
Aviram broke down his view of the way valuations are determined. "The VC industry has raised unprecedented amounts and the number of new funds is unfathomable. There is a lot of money around and this positive trend seems set to continue for the foreseeable future," he added. "Valuation is psychological in its essence and is a question of the expectations from companies. It is a result of a power struggle in the market, but the market has been in this situation for a while and I don't expect it to fall soon."