THOUGHTS / JANUARY 12, 2022

Israeli unicorns and the coming geoeconomic transformation

The recent news that there are 77 Israeli unicorns, representing eight percent of all startups valued at more than $1 billion, is, quite simply, staggering. Even despite the recent fall in both public and private company valuations, we believe this development is about to fuel a massive global geoeconomic transformation — one with unique opportunities and challenges for U.S. startups, companies, VCs, and even policymakers.

To understand just how jaw-dropping this development is, one has to remember that Israel has fewer people than Michigan, has a smaller footprint than New Jersey, and is younger than Larry David. To wit, in the year that Shockley Semiconductor was founded in Silicon Valley, the State of Israel was a seven-year-old desert nation that had just fought its war of independence, was rationing resources, and was about to battle Egypt over its blockade of Eilat; let’s just say that development of the technology sector wasn’t at the top of the priority list.

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How things have changed.

By now, the transformation from desert nation to “Startup Nation” is well known. Israel has more startups per capita and more venture-capital dollars per capita than anywhere in the world, including Silicon Valley. That ecosystem has yielded some eye-popping results, including more than 1,000 exits of Israeli companies over the last decade. Among those transactions were numerous high-profile deals, such as Intel’s acquisition of Mobileye for $15.3 billion, and Google’s acquisition of Waze for $1.1 billion.

But the news that Israel is now spawning unicorns is a sign that the country is poised to experience yet another transformation. In fact, we believe that the next era of Israeli innovation will create a geoeconomically transformative event; just as Shockley and Fairchild Semiconductor unleashed the centripetal force of Silicon Valley, we’re about to witness a massive geoeconomic orientation towards Tel Aviv.

There are several reasons for this. One is the fact that today’s Israeli CEOs are no longer seeking quick exits. Rather, they are mission-driven executives committed to developing platform companies that strengthen Israel’s economic base. For proof, look no further than the fact there were nine IPOs of Israeli companies in 2019, and more than double that number in 2020, including high-profile companies such as Monday.com, WalkMe, Playtika and IronSource. This dynamic is fueled by Israeli CEOs who are now on their second or third company. These aren’t glassy-eyed first-timers; most have already started and exited their first companies, and are now looking to build global enterprises that become regional magnets.

The current wave of Israeli unicorns has also created a fertile landscape for new Israeli startups to pilot their solutions with large corporations. In the past, Israel startups had to travel to the U.S. to prove out their technologies. Now, they can validate their capabilities with local tech giants, which makes their leap to the U.S. market more credible and expeditious. 

 

In addition, the large volume of Israeli exits over the last decade has spawned a homegrown community of angel investors who are funding early stage startups. Historically, Israeli startups had to travel to the U.S. to access angel investors. That’s no longer the case, which means startups can achieve liftoff faster. And since the country is number one globally in VC investment dollars per capita, follow-on investment is rarely a problem.

These dynamics are fueling a global geoeconomic transformation — one with unique opportunities and challenges for U.S. startups, companies, VCs, and even policymakers.

For example, Israeli companies are about to initiate a wave of M&A not yet seen in the history of the country. Flush with capital from IPOs and investments, Israeli companies — once the target of multinationals thirsty for innovation — are now in acquisition mode. Examples include Israeli cybersecurity firm Kape, which acquired ExpressVPN for nearly $1 billion in September (its fifth acquisition), and Israeli unicorn Verbit, which acquired Pennsylvania’s VITAC for $50 million in May. Myriad other deals, including the acquisition of Waltham, Mass.-based insurtech AP Integro by Israel’s Next Insurance, have also been announced. As domestic startups increasingly look towards Tel Aviv for exit opportunities, U.S. investors and corporations will need to be more proactive about understanding, tracking and investing in the Israeli ecosystem.

That means U.S. companies will increasingly need to visit Tel Aviv, and not wait for Israeli startups to cross the Atlantic. Already, more than 300 multinational companies have a direct presence in Israel, and we predict that number will increase significantly this decade. U.S. companies that aren’t on-the-ground in Tel Aviv — or don’t partner with firms already there — will be at a strategic disadvantage, especially since U.S. commercialization remains a top priority for Israeli entrepreneurs.

Large global private-equity firms will need to pay attention as well. So far, the largest PE firms have disregarded or deprioritized the Israeli innovation ecosystem, often attempting to cover the Israeli market from Hong Kong or London. But that’s about to change; Blackstone just appointed a high-profile banking CEO to run the firm’s new Tel Aviv office, and we expect other major firms to strengthen their presence shortly.

 

Policymakers in the U.S. will also need to figure out how to position the U.S. versus China as the market of choice for Israeli startups. Israel-Chinese commercial relations are booming, and the Chinese acquired or invested in 463 Israeli companies between 2002 and Dec. 2020. If the U.S. is serious about keeping emerging and “foundational” technologies out of China’s hands, they’re going to have to make the U.S. market more appealing and frictionless for the next generation of Israeli entrepreneurs.

The concentration of unicorns in Israel is creating massive opportunities for U.S. investors and companies, but they’ll need to get on-the-ground fast, or partner with firms already embedded in the ecosystem, to take advantage of the next wave of innovation.

For more information, contact any of our partners by email.