Israel has experienced an interesting phenomenon in its ecosystem in the last few years: startups have begun scaling up, instead of selling out, in the hopes of becoming the next multinational company worth $1 billion, or a “unicorn."
During this month's DLD Tel Aviv conference, some of Israel's most influential entrepreneurs and ecosystem analysts further addressed this trend in a panel titled “The Prospects of Becoming an Israeli Unicorn." Looking across several factors, they discussed what it takes to become a unicorn and what it means for the ecosystem as a whole.
The concept of unicorns itself is a hot topic with a short history. In 2013, investor and founder of Cowboy Ventures Aileen Lee coined the term “unicorn" in a TechCrunch article, referring to companies started since 2003 that are valued at $1 billion by private or public markets. At the time, she identified 39 U.S. companies with such value, but Israel had yet to join what Lee called the “unicorn club."
However, in just two years' time, Israel has since produced several unicorns, such as consumer navigation app Waze, acquired by Google for a reported $1.3 billion. Waze's success is partly credited for setting Israel's ecosystem in a new direction. Destination: Unicorn.
While recognizing that Waze's success set loftier goals, Levine warned that the quest to become a unicorn should never be an entrepreneur's motivation.
“The question isn't how to become a unicorn, but how to solve a big problem," Levine said. “If you can produce a product that people are using on a regular basis, then becoming a unicorn is just going to be a milestone. But it's not the goal."
According to panelist Shahar Waiser, founder and CEO of Gett, the next Israeli unicorns will be in the consumer space, like Wix and Waze.
“If you look at big problems, there are only three mass markets in the world that touch everyone every day: food, telecom, transportation," Waiser said. “The shift now is to have more talent in the consumer space. Once we see that, I think we'll see more Israeli companies with unicorn potential. Waze was one of those amazing examples when you had a large-scale consumer space startup."
Traditionally, Israeli startups have set their eyes on penetrating the American market, which is considered a benchmark of success in and of itself. But despite the American market's large size and influence, Israeli startups need to look elsewhere if they want to become unicorns, said Saul Singer, co-author of Start-Up Nation.
“I think the conventional way we think we build unicorns here in Israel may not be the same way we should think going forward. When we imagine unicorns, we basically think of the Facebook/Google model, which is a company that grows up in the United States, takes over the American market, spreads to the whole world, and becomes a multibillion dollar company. That's been the pattern until now," said Singer.
“But I think we're in a new world that is not just about the U.S. market. And when we think about the next unicorns, it might be even more likely that these multibillion-dollar companies will solve a problem that's not a U.S. problem but that starts somewhere else. The biggest problems, which are the biggest opportunities, are happening outside the U.S. We're moving into a less U.S.-centric world."
Another unconventional path to building a unicorn is through acquiring other companies — a unique model that worked well for Stratasys, a leading manufacturer of 3D printers and 3D production systems.
“I don't know that you start that strategy [of acquisitions] from the get-go," explained Ilan Levin, director of Stratasys. “But as you go along, you build a certain strategy and platform to allow for them."
“We had a long-term vision and lots of time to mature, which helped us prepare for successful mergers. In 2012, we initiated a whole series of acquisitions because we realized that we wanted to do more and more with our platform, and the acquisitions allowed us to build it."
The Investor Pursuit of Unicorns
Of course, entrepreneurs aren't the only ones focused on building unicorns. Investors are also making strategic moves. Israeli venture capital funds had a record year in 2014 with $914 million raised — the most raised by Israeli venture capital funds in six years, according to the IVC Research Center.
This year has already proven to be another record breaker. According to a report by IVC, 179 Israeli high-tech companies raised $1.12 billion in Q2 of 2015, exceeding the former record high of $1.11 billion invested in Q4 of 2014. It also shows a 12 percent increase from the $997 million raised by 163 companies in Q1 of 2015.
But here's the eye-opener: among all sector stages, late-stage companies attracted the majority, 43 percent, of all capital in Q2 of 2015 with $480 million, followed by mid-stage companies with $379 million.
“It's a matter of maturity. Some of these unicorns are built by those who have already had success and that includes investors," said Dov Moran, founder and managing partner at Grove Ventures. “Now we are seeing late-stage VCs in Israel. We didn't see that before. The targets are changing."
Indeed, there is a growing tide of late- and growth-stage venture capital funds that target companies with proven product viability and increasing sales. The idea and hope is that these mature companies will scale to become multinational corporations; and they're encouraging the demand for more late-stage funding. According to a report by Globes, several Israeli funds are currently raising capital that will focus on late-stage investments.
And while there is a great precedent amongst Israeli companies to be acquired by foreign entities, the trend is on a slight decline. According to PwC, mergers and acquisitions of Israeli companies totaled $5 billion in 2014, down from $6.45 billion the year before. This drop indicates that mature Israeli tech companies are increasingly choosing to make an IPO rather than be acquired — after all, the former keeps them in the running for unicorn status.
The panel attributed this trend to the fact that the Israeli ecosystem has grown more mature, making it less eager to exit at the first opportunity.
“I had the privilege to build companies in the past. If it's your first company, you're more eager to sell it," said Waiser, when asked why he has yet to sell Gett. “As long as we [Gett] change the world, continue growing at 300%, and impact the market, we'll keep going."
Levin agreed that the opportunity for continued growth is an incentive to stay vested. “I agree that success breeds success," Levin said. “I don't think it's just in Israel, but it's more of a global trend where entrepreneurs and companies are sticking around a little longer before selling to a multinational company. From our perspective, it was never a question of personal wealth. It was a question of do we still have room to grow?"
Start Up or Scale Up?
With its 250 multinational R&D centers, 87 NASDAQ companies, and $15.0 billion worth of exits in 2014, Israel has well established itself as the “startup nation," a term coined by Saul Singer's best-selling, namesake book. However, with all this focus on scaling up — perhaps to reach unicorn status — Singer warns that Israel should not lose sight of what it does best: starting something from nothing.
“For a long time, [Israel has] been saying, 'Where's our Nokia?' Even though Nokia is not really relevant anymore, it was the symbol of a big tech company that came from a small nation," Singer told DLD Magazine following the panel. “Now people are saying, 'Where's our Google or Facebook?' and I don't think that's the relevant target right now."
“Let's say we did build a Facebook. I don't know that it would necessarily be a good thing because we're such a small country, and we don't want to have one huge company dominating the tech sector. We want to have thousands of startups; we want to keep being the startup nation."
While Israel can never compete with the rate of U.S. unicorns in absolute terms, it can, Singer argued, build more unicorns by partnering with emerging ecosystems around the world.
“Everywhere I go, I see startups in Nairobi, Bogota, Seoul, Tokyo, and in Europe, and they're all trying to get their first $200 million exits, which we [Israel] produce at a tremendous clip," Singer said. “Our opportunity as an ecosystem is to actually help them get there, not by telling them how to do it, but by innovating with them, by building companies with them and combing our strengths. If we do that, together we can build unicorns faster."