Following the outbreak of the Coronavirus, it is widely believed that the Israeli high-tech industry is going to suffer. The speculated impact is said to be similar to what happened in the dot-com bubble burst in the year 2000. The painful memories of those years are still engraved in the minds of entrepreneurs, their workers and suppliers, even 20 years later. Who could have ever imagined that just a half a year later, numerous israeli companies would have increased their sales, profits and the number of employees in their companies. Even more so, the high tech sector did not suspect high-profile companies like Lemonade and JFrog to begin trading on the stock exchange with high prices during a recession-like time. In recent weeks, at least 5 tech companies have announced their willingness to be traded on Nasdaq, each one aiming to reach at least 3 billion dollars in market value. Among the names we can mention are Payoneer, Taboola, Outbrain, eToro, and Kaltura. There are more to come.
IPOs of Israeli companies on the Nasdaq are nothing new. The first Israeli company was listed on Nasdaq in 1972. The previous wave of IPOs took place prior to the dotcom bubble burst in March 2000. The difference between now and then is in the maturity of the companies that go public and in the growth rate of their revenues. During 1998-2000 companies began trading with valuations of 200-300 million dollars, but with no revenue, just a dream. Today, the minimum threshold, from the point of view of investors, is at least a market value of 1 billion dollars and revenues of 100 million dollars a year. One recent example of this trend is eToro, a social trading and multi-asset brokerage Israeli company that is expected to be reaching an IPO on Nasdaq at a valuation of 5 billion dollars in the second quarter of 2021.
In the last decade, IPOs have been slightly less popular in the entrepreneur’s toolbox, also due to the transition of companies into a reporting company model that is conducted according to quarterly reports and analyst expectations. In some cases, it doesn’t seem wise for technology companies to lose most of their managerial flexibility for making decisions, and to commit to transparency, with implications on management and products.
So who benefits from the maturation of the high-tech sector? Everyone, including the State of Israel, which will receive tax revenues from profitable companies. The success of Israeli companies, whether from IPOs or from significant fundraising, strengthens Israel as an attractive investment destination, which is attracting a growing number of large international VCs. The return of the IPO channel, which can also include giant companies, is good news, since the competition for investor capital is small on the part of giant companies that raise hundreds of millions of dollars in followup fundraising. Mature companies that are not ready to go public, have less competition with companies that have already gone public. As well, the opportunities of large VCs to meet with other companies grow.
Led by excellent Israeli executives, the decision of companies such as Wix, Lemonade, Fivver, JFrog and eToro to go public is a positive sign signaling the continuity of companies breaking into the international market. One of the most common criticisms of Israeli entrepreneurs, ever, has been that they know how to manage a company in its early stages, however, when the company gets bigger they decide to sell the company, due to the massive challenges that arise. Undoubtedly, running a company with over 1,000 employees is completely different from a company that has a development center in Israel and a sales headquarters in the United States.
Not so long ago, the success of a company was measured by the time it takes to exit. However, things have changed when companies like Wix and Fiverr proved that consistency and patience can be worthwhile. The courage of Israeli executives and entrepreneurs to be hugely successful, thus choosing the IPO path instead of an exit, is going to add to the sometimes lacking Israeli high tech landscape. The knowledge of managing and leading companies independently to the next stages, will also permeate all subsequent layers of the organization. Even if there are managerial mistakes as the companies grow on their own, after all they are the basis for a managerial heritage that will develop more and more in Israel. This will be the complementary side of Israeli high-tech, which will now benefit not only from technologically brilliant programmers, but also from executives who can lead big tech companies.
Liron Rose, is a serial entrepreneur and venture capital investor and consultant to high-tech companies and start-ups.