Startup Nation Out, Big Tech Nation In

This might sound strange, but Israelis are growing horns more than ever before;unicorn horns, that is (why, what did you think I was talking about?). World, pay attention: more than 35 companies in Israel reached unicorn status over the last year or raised private capital at a valuation of over $1 billion.

Some of the newest Unicorn Club members are only one year old. Only a few years ago,  valuations of $1 billion or more were reserved for the most established, large companies. In the era of Covid, with new problems to solve, and the need to adjust to a new normal, many Israeli companies ceased the day and made a fortune providing innovative solutions.  

Even before Corona, the US stock market was at low tide; meanwhile this has turned out to be the longest period of this kind in its history. Consequently, the private money market has been flooded with more and more new entrants. Private investment and venture capital doubled to more than $3 trillion by 2020. Together with hedge funds and real estate investment funds, these sums have already reached $10 trillion. There was so much money in the private market that capital raised soared to a peak of $2 trillion in early 2020.

At that time, dozens of unicorns were born in Israel, which was a fantastic phenomenon, but then Covid hit. After a short while of paralysis, the stock market began to recover, and the private investors were back . Israeli companies stood by, waiting to pick the fruits.

In 2021, Israeli startups raised over $25 billion, (which is 2.5X of last year’s amounts and about 25X what it was 15 years ago). In recent years, Israel has experienced a major scale-up, with an exponential increase in financing and unicorns. Some attribute this to world-class talents trained in the top R&D units of the IDF as well as its unique intellectual property; Israel is notably a domain expert in the fields of cyber security, AI, computer vision, adtech, semiconductors and sensors, among others. Some credit the formation and density of startups: there are 6000-9000 active startups and around 1000 new companies are formed every year. 

Masters of Their Domain

While the newly minted unicorns in Israel are based in diverse industry segments, the strong domains are enterprise software, cyber security, fintech and insurtech.

In the past year, several companies in new business segments reached unicorn status. These segments include semiconductors (Wiliot, Valens, Innoviz, Hailo and Next Silicon); digital healthcare ( K Health, Immunai) and the industrial sector (Augury and Fabric).

Yahal Zilka, serial entrepreneur, cofounder and managing partner at 10D, is a long time veteran of the VC industry. He has led multiple well-performing global funds and has been an early investor in numerous unicorns, including: Waze, DriveNets, Fundbox, Valens ( NYSE: VLN), Appsflyer, and Innoviz (Nasdaq:INVZ). The companies have one thing in common besides their over a billion dollars value: they’re all Israeli. “Israeli companies,” says Zillka as he attempts to explain the secret sauce of the Israeli unicorns, “are by and large focused on deep technology, out of the box unique offerings and the ability to develop solutions that are scalable.”

From Tech Focused to Full Scale Solutions

Historically, Israeli entrepreneurs focused on products which provided a component or subsystem. Nevertheless, they were not directly selling to customers. “Over the past few years,” Zilka says, “with greater availability of capital, the focus has shifted to providing a full solution and offering while directly serving the customer. Israeli entrepreneurs, founders and management teams are keen to develop and provide multiple solutions, thus advancing in the the value chain. Therefore valuations are also impacted upward. This is demonstrated by companies such as Waze and Solaredge.”  

Despite the dynamic startup industry, Israeli companies have had to cope with a “geographic glass ceiling;” they were excluded from the main global markets. “Due to this handicap,” Zilka suggests, “remote skills were adopted and developed and eventually brought to the forefront by the pandemic, which succeeded in ‘flattening the world.’ This long-term competitive advantage for the Israeli tech ecosystem was created, eliminating the distance component. These are challenges Israelis have been working to overcome for years. They have  had ample time to hone their remote skills in sales, onboarding, implementation, customer success and more.”

No Exit

Jewish mothers used to wish their kids would grow up to become doctors or lawyers. In the past 30 years, with the rapidly growing startup nation, this traditional hope was replaced with the desire for a startup “exit”. In 2022, this shifted once again. “In the past,” Zilka says, “most Israeli startups were acquired by leading technology corporations for hundreds of millions of dollars, mainly due to the obstacle of building large scale companies outside of Israel and the availability and scarcity of growth capital. In the past twenty-four months this has changed dramatically. With this new growth of capital, both entrepreneurs and investors believe they will build very strong companies that will be leaders in their field.” 

SPAC/PIPE, a new financial vehicle that appeared in  2020 provides new financing opportunities for younger companies that are recognized leaders but only have ”bookings” to show,  rather than revenue track records. “In addition, there has been a major shift to IPOs as these startups choose to stay independent and build full scale businesses, reaching valuations in the billions,” insists Zilka as he lays out the very good reasons companies are no longer in a rush to exit. “In 2021 alone, several companies have achieved valuations of over $10 billion; this is a feat that was previously achieved only once every 5-10 years.”

Biotech startup Immunai earned its unicorn status with a $215 million Series B investment round. The Israeli company has developed a technological platform that maps the entire immune system for better detection, diagnosis, and treatment of disease. It was founded in 2018 by Noam Solomon (CEO) and Luis Voloch (CTO); the company has raised $295M in funding to-date.

CEO Noam Solomon says that only a year ago, the company had to invest resources to attract the attention of big pharma companies. “Now we get requests from C-level executives that already know the company and want to partner, which clearly help us grow faster.”

The pandemic greatly accelerated their unicorn status: “Our mission is to fully map and unlock the secrets of the human immune system and develop better medicines. Covid19 had a huge impact on the world and on all of us, and it demonstrated how critically important understanding the human immune system is. Our unique value proposition became more attractive to investors and partners and ignited our growth.” He credits much of the company’s success to the Israeli culture: “There is something about the direct and straightforward nature of Israelis, who feel more comfortable sharing their disagreement without apologizing, that when coupled with a strong “team above I” mentality, can create a whole much larger than the sum of its parts.”

Tipalti, a leading global payables solution, announced it has raised $270 million in series F funding at a valuation of $8.3 billion, bringing total funding raised to date to just over $550 million and placing it among the most valuable private fintech companies in the world. Thousands of global companies, from  Amazon Twitch, GoDaddy, Roku, to WordPress.com, and ZipRecruiter etc., use Tipalti to reduce operational workload by 80%.

CEO Chen Amit admits that the company’s unicorn status has impacted employees, hiring, and the ecosystem as well as the customers. Covid played a huge role in the company’s growth: “With remote work, there is the need to digitize finance processes that were previously manual.” He defines the growing unicorn phenomena as part of the industry’s maturity. “The recent shift by which Israeli entrepreneurs are no longer seeking an “exit” at a moderate valuation is a sign of the mature approach. I believe that considering Israel’s small population, it was overrepresented in the tech economy, and now it is overrepresented in the unicorn community.” Chen goes even further and says that the term “unicorn” is obsolete.  “It’s no longer such a unique and fantastic being. There are too many unicorns around for this term to be relevant. I wish that there was a different term for $1B companies, and perhaps the real unicorns today are companies valued at $50B or $100B which is really rare for private companies.”

Believe You Will Find a Solution to Any Given Problem

Melio, a leading B2B payments platform for small businesses whose mission is to “Keep Small Business in Business” has raised over $500 million to date, with its latest funding round in September bringing the company’s value to $4 billion. Matan Bar, CEO, says that just two years ago, pre-Covid, the company had 30 employees. Today it has almost 500. “The strong culture we built made this expansion possible; however, there is also a growing trend by which people are interested in transitioning from large corporations to “pre-IPO” startups like us. Covid created the ideal opportunity,” he admits. “We were in the right place at the right time and are now the fastest-growing B2B payments company in the U.S. There are $14 trillion in funds in the U.S. that are transferred in checks between businesses. But during the pandemic, businesses that were used to paying their suppliers in checks suddenly found that they had to transition to digital payments. Also, many small businesses faced more frequent and severe cash flow challenges due to global financial volatility. We grew our team quickly to make sure we provided the right level of support during a time they needed us the most.” He credits much of their success to Melio’s Israeli roots: “Creativity is usually sparked when there are obstacles to overcome and Israel has faced many obstacles since it was established.” 

Orca Security, the cloud security innovation leader, is valued at $1.8 Billion. Today, the company provides instant-on security and compliance for Amazon Web Services (AWS), Google Cloud and Microsoft Azure, and many more. CEO Avi Shua says that in 2021 alone, Orca Security achieved more than 800 percent year-over-year growth, expanded rapidly around the globe, gained notable customers across industries, went from dozens to hundreds of employees, and opened a London office as well as a U.S. headquarters in Portland, Oregon. Like many of the other new Israeli unicorns, the company noted a huge increase in demand when Covid struck, and that demand is only growing. “I spent a decade in Unit 8200 of the Israel Defense Forces (IDF), and another decade at Check Point Software as its chief technologist. The most important cyber security defense lesson I learned in the IDF was that security basics are always more important than shiny new security “toys” because attackers will use the simplest means possible to breach your defenses. There’s a popular Unit 8200 mantra,” he shares, “that also rings true for entrepreneurs: ‘Believe you’ll find a solution to any given problem. Never assume that existing approaches are the only possible solutions.’ So, we invented an entirely new approach to cloud security that doesn’t rely on installing and maintaining agents or network scanning tools. Those legacy approaches didn’t provide complete coverage back then and they certainly don’t work for the cloud.”

A Unicorn Bubble?

Zilka admits there is clearly a concern with some of the valuations, as they represent 50-300X over next year revenues. Though revenues are strong,  expenses are also mushrooming. “Nevertheless, the majority of these companies have clear Product Market Fit, strong pull from customers, unique offerings, meaningful revenues, strong growth rates, as well as strong leadership and management teams.”  

As for the driving force behind the major growth, Zilka credits the Israeli entrepreneurs who have the experience and desire to swing for the fences. “Whether it’s the large pool of second-time entrepreneurs, the graduates of the elite military units taking their knowledge of building large scale complicated software solutions to the private sector or the seasoned technologists who put in the time at leading multinational corporations, the breadth and depth of this talent pool is putting the Israeli ecosystem ahead of the pack.”