Is Israel The Next Silicon Valley?

Israel continues to be a major force in global technology, growing more and more unicorns and attracting massive amounts of capital never seen before. According to a recent report by Israel’s IVC Research Center, Israeli tech startups raised a staggering $17.8 billion this year, almost double the 2020 total amount of funding in 2020 with one more quarter still to go. This is driven by a large amount of mega rounds - funding rounds of $100 million or more in numbers never seen before. 

But funding is just part of the story. In addition, Israeli startups recorded $18.92 billion in exits in 2021, almost doubling 2020’s annual record with many of these coming through IPOs - 65 in total. Israeli tech is smashing record after record this year, making 2021 one for the books. 

The impacts on the industry are seen across the board. Israel now has many more new millionaires who buy new cars and expensive properties at an unprecedented rate, causing prices of real estate to go up and widening the gap between tech and other sectors. In addition, tech talent is becoming extremely expensive, resulting in many companies looking for creative ways to fill roles overseas. Israel now feels a lot more like silicon valley than silicon wadi.

With 2022 around the corner, many investors and founders are concerned about the market being inflated. Where does startup nation go from here? While many in the Israeli tech scene are looking to take advantage of the frothy market conditions, others are being careful and measured with their approach as they experience a new reality. 

There’s Hype, But We’re Not In A Bubble

With companies raising unprecedented amounts of capital, there is a belief among many that we are in a bubble about to burst soon. Others believe this is the new normal.“There is unlimited available capital which inflates value and makes salaries go up”, says Amir Orad, CEO of Sisense, a leading business intelligence software company serving over 2,000 customers around the world. “At the same time, there are endless companies with real, robust repeatable business models that provide real value for their customers. This impacts the market like never before.”  

Amit Karp, Partner at top-tier venture capital fund Bessemer Venture Partners, agrees with Orad. “The market is definitely hot and in the fear vs greed equation, most investors are way into the greed zone. 

But on the other hand I don’t think this is a bubble. Many startup companies today are generating real revenue, selling a product through a predictive recurring revenue software model and growing at a pace we’ve never even imagined in the past. In addition, the opportunity has also become much more lucrative, and the new winners are much larger than what we have ever seen before.” 

The various IPOs of Israeli companies this year are a testament to this, with companies like Monday.com, SentinelOne, Riskified and many others proving that they have a scalable business that is generating tens of millions in revenue through happy customers and where the growth potential is still extremely high. The sky is literally the limit.   

The Fight For Talent Is Fierce     

While the growth of Israeli tech has been dramatic over the past couple of years, it doesn’t come without its challenges. Orad’s Sisense raised $100 million in a funding round to accelerate growth just before the covid-19 pandemic hit the world, placing it in unicorn status. Over the past year Orad mentioned he needed to adjust his operation partially due to the market conditions in Israel and globally, especially when it comes to sourcing good talent. “The competition for talent is stronger than ever. You find an extreme situation where there isn’t enough talent available and it slows down growth.”

Karp also highlights the difficulty in recruiting employees for his portfolio companies. “There is a shortage of talent. It’s very difficult to recruit locally as supply of high quality candidates is relatively constant and the demand is growing exponentially. At this point, many of our ‘Israeli’ companies have R&D centers outside Israel and many times, even in the US as it is easier to hire here. With Israeli companies becoming much more global and distributed it’s also more difficult to define what is an ‘Israeli’ company right now.”

US Growth Investors Are Changing The Rules Of The Game

Meirav Oren is the co-founder and ceo of Versatile, an Israeli construction-tech startup that uses machine learning and AI to optimize construction processes. The company’s solution captures and analyzes data points to deliver real-time insights on job site performance and streamline decision-making. 

Recently, the company announced an $80 million round led by Insight Partners and joined by Tiger Global. Both firms used to focus on much later stage rounds in the past, but over the last couple of years made a strategic decision to invest earlier, a development that has had a serious impact on the VC scene in Israel.  

For Oren, this is a natural development of an ecosystem that is clearly maturing. “Local tech in Israel is maturing as founders choose to lead all the way and avoid early exits. We have built Versatile towards becoming a big company from day one. As capital is looking for the best places to land, great companies offer a unique opportunity for investors to fuel growth of innovation earlier and earlier, which is exciting.”

Karp validates this and concludes: “We see many more growth investors investing in Israel at earlier rounds. This ‘squeezes’ most of the local investors to focus on even earlier stages, and results in more competition, higher valuation, and larger rounds across all stages.” 

Will this make Israel more similar to Silicon Valley in years to come? That is definitely a real possibility.