Flush with ample funds, Israeli technology firms delay exits
Whenever potential buyers have approached Tel Avivbased Fiverr, the technology firm has said no; like a growing number of Israeli start-ups, it has enough backing from private investors to stay independent for longer.
Traditionally, many of Israel’s numerous tech companies have sold out at an early stage to global giants, including Cisco, IBM and Microsoft. Only a few, such as cybersecurity leader Check Point Software, have reached a significant size.
But now start-ups are using a sharp rise in private investment to pursue growth, often aiming for eventual stock-market flotations. With founders looking longer term rather than trying to make quick money, acquisitions of Israeli technology firms fell in 2016 to their lowest level in six years.
Fiverr, backed by large venture-capital funds, including California-based Accel and Bessemer, is among those hoping to follow the Check Point model.
Its online marketplace allows freelancers to offer services such as logo design, cartoons, translations and psychic readings. Asking prices range from $5 to $10,000.
A consumer-oriented company focused on the US market, Fiverr raised $60 million in November 2015, bringing its total funding to date to $110m.
“Fiverr should be a multibillion-dollar business. This is why we aren’t looking to be acquired,” chief executive Micha Kaufman told Reuters. “Eventually a company like ours will go public.”
Fiverr declined to disclose the company’s current valuation or name the would-be buyers that have approached it in the past couple of years.
Israel’s hi-tech industry is well established, using skills of workers trained in the military and intelligence sectors. Tax breaks and government funding have encouraged start-ups and also drawn in entrepreneurs from abroad.
But acquisitions of Israeli hi-tech companies more than halved last year to $3.5 billion, according to Price water house Coopers.
Stock-market listings in the sector are also dwindling as investors increasingly prefer bigger tech companies. After eight initial public offerings valued at $3.4b. in 2015, only two IPOs totaling $44m. took place in 2016 – one in London and the other in Tel Aviv.
Instead, private investment is rising. In the first nine months of 2016 Israeli start-ups raised $4b., up 27% from a year earlier, according to the Israel Venture Capital Research Center (IVC), which has forecast a record year in 2016.
Investment in more established latestage companies surged 47% to $1.6b. in the first nine months, IVC said.
The Aleph VC fund said four of its 12 companies have declined offers from would-be buyers in the hundreds of millions of dollars.
“I’m seeing for first time that many founders are saying no to M&A. It’s a good thing,” Aleph partner Eden Shochat said. “These bigger companies create pockets of knowledge... which is required to build an industry.”
Aleph was structured to allow 12 years for investors to cash in, instead of the seven years typical for the venture-capital sector, he said.
Accel, which has just opened an Israeli office, said it can invest $50m. in a growth-stage company and has raised a fifth fund of $500m. to invest in Israel and Europe.
“The fact that money is available has clearly impacted the level of exits,” Accel partner Philippe Botteri said.
Adam Fisher, a partner who manages Bessemer’s Israel office, expects this trend of holding out to continue as long as growth funding, especially from new sources such as China, is abundant.
LESS EFFICIENT
Fisher believes the availability of growth capital also has disadvantages. The risk is that generously funded companies may be less efficient than those running on a shoestring.
Moreover, rejecting an offer to hold out for more money limits the number of potential buyers, while an IPO may also not be possible if stock-market investors consider a firm has yet to grow big enough for a flotation.
Gone are the days of the tech boom in the late 1990s when relatively small firms listed on the US Nasdaq market.
“Start-ups often need growth financing to reach the current IPO threshold of $100m. revenue run rate, but by no
‘I’m seeing for first time that many founders are saying no to M&A. It’s a good thing’
means does that imply that growth financing will create an IPO candidate,” Fisher said.
Despite the country’s reputation as a center for innovation, many global buyers prefer the more established markets of the United States and Europe. Rubi Suliman, the hi-tech leader for PwC Israel, said there are still not enough buyers who are familiar and comfortable enough with Israeli hi-tech to drive a wave of deals.
“When potential buyers are relatively scarce, deal prices are expected to go down,” he said.
Taking the IPO route could also prove difficult for Israeli firms in certain business areas. Some of the largest private companies in revenue terms are in the online advertising sector, which public markets have turned against.
The valuation of Israeli adtech firm Matomy, for example, has nearly halved since it went public in London in 2014.
With Facebook and Google owning much of the distribution and profit from selling ads directly to the advertiser, the pie for adtech firms is much smaller, said Nir Blumberger, Accel’s Israel-based venture partner and a former corporate-development executive at Facebook.
Amounts made by investors exiting adtech firms through sales or IPOs fell to $238m. in 2016 from about $600m. in 2015, according to IVC and the Meitar law firm.
In cybersecurity technology, the need for firms’ services is growing, but a proliferation of start-ups means competition is stiff. Cyber start-ups raised more funds last year than in 2015, but exits nearly halved to $660m., IVC data shows.
“I still foresee this will be a big area for M&A and IPOs in the future, but it will take a while to be built into a revenue stream,” Shochat said.
A third group is automotive tech, boosted by the success of Mobileye, which makes driver warning systems aimed at preventing accidents. Investment in start-ups nearly doubled in 2016 to $680m., though exits brought in only $190m.
Investors caution that companies in this sector require a lot of money over a very long period.