With huge tech growth, Israel's start-up nation becomes scale-up nation

While Israel has had a number of high-profile companies for many years, the past two years have seen an explosion of scaled-up company investments and exits.

Israel Start up (photo credit: INGIMAGE)
Israel Start up
(photo credit: INGIMAGE)
 There is no doubt that the scale-up nation is here. While Israel was once seen as a country filled with mid-sized hi-tech companies waiting to be acquired by bigger fish, it is now home to a wealth of significant global players.
The Israeli tech ecosystem had its biggest month for fundraising ever in January, with a record $1.2 billion in January, raised by 27 companies, according to Geektime. That included four new companies joining the unicorn club.
The term unicorn refers to privately-held start-up companies valued at more than $1 billion. There are about 530 such companies in the world today, according to CBInsights, and nearly 10% of those have an Israeli connection.
According to a list published by TechAviv, Israel has no fewer than 50 unicorns, with nine joining in the past three months. Three years ago, there were just 18. And a new phrase, double unicorn, has been used with increasing frequency to describe companies like Next Insurance that are worth $2 billion.
Those numbers don't count the more than 80 Israeli publicly-traded companies listed in the United States, with many others expected to do IPOs this year.
While Israel has had a number of high-profile companies for many years, the past two years have seen an explosion of scaled-up company investments and exits, said Lonne Jaffe, managing director at Insight Partners. "There was a cohort of companies that received very high investment valuations that may have signaled a sort of inflection point and served as role models for others," he said. "At around the same time, you also saw the entrance of a few new growth stage investors from overseas enter the market, filling a niche that was lacking beforehand."
Ayal Shenhav, head of the Hi-Tech & Investment Funds Department at the Gross law firm, which represents many tech firms, agreed. "For many years, Israelis were known to be very good at developing technology that would be sold to multinationals in order to scale. It used to be that a large investment round would be around $10 million, but with more funds coming to Israel to invest, we are seeing $100 million rounds more often."
In addition, Shenhav said, the tech ecosystem has matured. "We are seeing a lot of second-and third-time founders who sold their first companies early, and now are building new companies with the intention to stick around for the long-run. These founders aren't as hungry to cash out, and they come back with extensive experience working on the multi-national scale."
A mature market for secondary shares, which can allow a founder to cash out some of his stake in the company without an exit, is another factor that allows executives to continue growing instead of seeking an exit, Shenhav said. High stock market valuations and the rise of SPACs as a tool to do an IPO quickly have also helped to inject much larger numbers into the Israeli tech ecosystem, he noted.
It helps that many of the kinds of technology fields that Israel excels at- cybersecurity, biotech, automation, among others- are exactly the fields that came into the limelight during the pandemic, Jaffe noted.
Jaffe stressed that scale-up companies can create significant growth engines for entire economies. A report by US research firm Wakefield Research, published by Insight Partners, found that scale-ups are an under-appreciated driver of innovation and growth that are particularly resilient to economic shocks like an economic downturn or a pandemic. "Scale-ups are always hiring, burning a lot of capital and growing really rapidly, so even a slowdown in the economy won't hurt them too much. They tend to be more prepared to weather a storm than smaller start-ups or large, less-innovative corporations."
For the report, Wakefield defined scale-ups as high-growth companies with revenue growth and employment growth of above 20% per year in each of the past three years. "There is a point where companies have to shift their mindset toward a very different set of tasks. You need develop sales, marketing, legal, and human resources teams with a different approach," Jaffe said. 
"The report was intended to call attention to the fact that things can be done on the national level to encourage the growth of scale-ups once they are recognized as an important part of the economy," Jaffe said. "Policymakers need to understand that scale-ups are where job growth happens."