Than ever before

Israeli start-ups are now turning to crowdfunding platforms to get their feet off the ground, a departure from the traditional route of asking for larger sums of money from fewer investors.

From 2012 to 2017, nine equity crowdfunding platforms – two of them foreign – invested in some 145 Israeli hi-tech companies, the Israel-based IVC Research Center said in its first report on crowdfunding. Some 17 of those companies have made an exit, which is when the founder sells his or her stake, usually for gain.

In the first half of 2017, these platforms invested some $173 million in Israeli start-ups, some 73% of the 2016 total. Crowdfunding is when many more people invest comparably smaller amounts and in return, they receive a small share or equity of the start-up’s future earnings.

“They are most vital, specifically in Israel’s hi-tech industry, for the activity of very young start-ups and start-ups that are just in the beginning of the way,” OurCrowd CEO Jonathan Medved told The Jerusalem Post.

OurCrowd is the dominant crowdfunding platform in Israel, and it has accredited some 20,000 investors who seek to scout out start-ups.

The practice of crowdfunding fills a key void as more established companies can attain funding from venture capitalists and angel investors, who prefer later-stage start-ups that are already producing revenue and can provide a return on investment. That leaves fledgling start-ups out in the cold.

“They give a chance to these new companies,” Medved said, estimating that only 5% of Israeli start-ups are resorting to crowdfunding. The reason is that the majority of companies are rejected by crowdfunding investors; some 200 companies apply monthly while only a half-dozen companies are approved by the platforms.

Crowdfunding began to take off in 2012 after US legislation labeled the Jumpstart Our Business Startups Act, regulating the practice for the first-time, which eases securities regulations.

Crowdfunded companies raise some $4.1m. in a financing round on average, and the average crowdfunding platform investment was $900,000. While it is in no way cheap – start-up crowdfunding relies on affluent funders — the investments range in the tens of thousands of dollars and do not include multi-million dollar checks. The most successful year for crowdfunding was 2015, when $298m. from various investors were raised for start-ups, eventually investing $57m. in 50 deals.

Of the 145 Israeli hi-tech firms that have gone this funding route, some 55% of them are Internet and software firms and around two-thirds of the companies were still in the seed or early investment stages when they received the funds.

More than a quarter of the crowdfunded companies can be classified as midstage and a third of all the companies have gone on to additional financing rounds, with 12% making the touted exit.

For many young Israelis, establishing a start-up and exiting in a multi-million dollar sale is today’s career aspiration. The largest exit of a crowdfunded company was Replay, which Intel bought for some $175m.

One start-up, ReWalk Robotics – which provides a wearable robotic exoskeleton to help paralyzed persons – was the first Israeli crowdfunded company to reach an initial public offering in 2014.

In the past four years, two other crowdfunded companies went public and some 15 were acquired by larger companies. And half of all crowdfunded mergers and acquisitions were done in 2016. One Israeli company helped by crowdfunding, big-data firm Crosswise, was bought by Oracle last year for a reported $50m.

More than half the number of investments are on OurCrowd while more than 80% of the dollar amount also goes through crowd funding platform. Other crowdfunding players include IAngels, ExitValley and Pipelbiz.