Focus on: Hi-tech Industry in Israel
AYR – Amar Reiter Jeanne Shochatovitch & CoView firm profile
While making up approximately only 0.1% of the world’s population, Israel stands out as one of the most innovative and technologically advanced countries in the world, earning the well-deserved moniker “Start-up Nation”.
Despite the numerous internal and external challenges presented to Israel over the past decades, the Israeli economy maintained a steady and stable growth curve, becoming a hotbed of technological innovation, with a robust economy, a strong currency and a variety of export industries.
As a “Start-up Nation,” Israel is the world leader in start-ups per capita (with 1 start-up for every 1,400 people), having founded over 2,000 start-ups in the past decade.
There are a number of reasons that might explain this phenomenon:
- The limited number of natural resources coupled with the understanding that the future of the country lays in technology.
- The unique Israeli entrepreneurship spirit which encourages risk taking, scepticism, and “outside-of-the-box” thinking.
- The fact that students in Israel are encouraged to train in advanced computing studies from a very early age.
- The fact that despite its small size, Israel boasts a number of world class universities, particularly in the areas relevant to the technology industry. In addition to the Hebrew University (in Jerusalem) and Tel Aviv University – two world ranked universities which cover a broad academic area in sciences, arts and humanities – Israel is also the home to both the Technion in Haifa – a university dedicated to the sciences – and the Weizmann Institute, a graduate only university also specialising in sciences with an emphasis on medical discoveries. All of these institutions, as well as other universities and institutions of higher learning, are deeply integrated in the local technology industry with continual cross-fertilisation between the academic and the business worlds. Another good example is Ben Gurion University situated in the city of Beersheva which is an integral part of the cyber security hub in the city.
- The existence of elite technological and intelligence units in the Israeli military which give many young Israelis an opportunity to lead teams of experts and manage complicated projects at the age of 18-20. In fact, some of Israel’s most powerful hi-tech companies have been founded by former military officers who served for many years in intelligence and technological units (the most famous of them is the “8200 Unit” whose graduates find jobs in the hi-tech world immediately after their release from service).
- Government support – Israel has a long history of governmental incentives and support for the local technology industry, including direct grants, funding of technology incubators, export grants, support for the development of generic technologies in specific areas and the like.
- Israel houses approximately 300 R&D centres of multinational corporations who contribute both to the start-up industry and the general hi-tech industry.
- Israeli start-up companies are supported by an active venture capital market.
There are currently approximately 70 venture capital funds active in Israel, some of which are international VCs with offices in Israel.
All of the above combined with a widespread use of the English language and the growing desire in the general public to enter the hi-tech world influences many talented young professionals to join the industry and creates a fertile ground for fast moving start-ups to develop.
Tech hubs in Israel
The key locations in Israel in which the start-up industry is thriving are:
- The city of Tel Aviv which is known as one of the most significant tech hubs in the world. It has the highest number of start-ups per capita in the globe and the highest investment of GDP in R&D.
- The capital city Jerusalem has a very active hi-tech ecosystems as it hosts several incubators, R&D centres, accelerators and more than 400 active technology companies.
- The city of Haifa is considered an industrial zone but also as a tech hub. It hosts leading companies such as Microsoft, Intel and Google and has leading academic institutes such as the Technion.
- In the north of Israel, the Upper Galilee tech-industry emphasises food-tech and Agrotech, as it grants access to the hi-tech world to those located in the periphery of Israel.
- In the south of Israel, the city of Beer Sheva is considered as the Cyber Centre of the country. The Israeli National Cyber Bureau, Ben Gurion University and leading global companies are all part of the cybersecurity industry of the city.
Current characteristics and trends
The following are the current characteristics and trends of the Israeli start-up industry:
- Creating Unicorns – Over the last few years, Israel has seen the creation of a growing number of “unicorns” (companies obtaining a valuation of at least US$ 1bn) and many of these companies have either hit the public markets (mainly in the US) or been sold for significant sums. In March 2021 alone, seven new Israeli unicorns were “born”.
- Extensive Growth in Capital Investments – Despite the challenges suffered by industries around the world, the Israeli tech ecosystem managed to survive and thrive throughout 2020, despite the Covid-19 pandemic.Investments totalled US$10bn for about 607 transactions, exceeding 2019 investments by 31% in capital and 20% in the number of deals.2021 is also expected to reach new heights in terms of capital investments in the Israeli hi-tech industry. Recently published data shows that, in the first half of 2021, the total capital raised for tech companies reached $11.9bn, already exceeding the amount raised in the whole of 2020. One of the reasons for this is the significant increase in the number of larger later stage financings. If the first half of 2021, there were 38 financings of amounts in excess of $100m each, accounting for about 50% of the total amount raised during that period, almost double the number in the whole of 2020.In compression, Europe’s growth increased by 123%, the US’s growth increased by 91%, and Asia’s growth increased by 69% over the same time period.
- IPO Potential – Companies throughout the Israeli hi-tech industry have reached maturity levels that enabled them to turn to capital markets as a viable exit alternative. In 2020, Israeli companies made 121 funding deals raising US$ 6.55bn on the capital markets, compared to US$ 1.95bn in 2019. Deals included IPOs, follow-up offerings, PIPEs, and registered direct deals (RDs), covering equity and debt (straight and convertible) through primary and secondary offerings. This trend has continued apace in the first half of 2021 with a very significant increase in the number of IPOs in the US and in Israel, from 20 in the whole of 2020 to 48 in the first half of 2021. This also reflects a trend which has been growing over the last few years, namely a desire among both entrepreneurs and investors to grow large independent companies rather than targets for acquisitions. Examples of this include CyberArk, Lemonade, Wix, Vroom, Monday.com and many others.
- Special Purpose Acquisition Companies (SPACs) – Another trend which relates to the public markets is the investments of SPACS. From March 2020 to March 2021, SPACs have raised over US$ 88bn and they are using such funds to invest and take Israeli start-ups to the next level. A number of these deals, particularly in the mobility technology space, have already been announced.
- Involvement of Israeli VC Funds – The share of the Israeli VC funds out of the total investments in the Israeli tech industry continues to decrease.
In 2020, Israeli VC Funds’ share amounted to 15% of the total VC investment capital as opposed to 18% in 2015-2019.
- M&A Decline – Over the last decade the value of approximately 587 M&A transactions made in the Israeli hi-tech market amounted to more than US$ 70bn. Nevertheless, the Covid-19 pandemic slowed much of the M&A activity in the global hi-tech industry and in Israel as well. During 2020, M&A transactions in Israel amounted to only US$ 5bn. It will be interesting to see whether this is related to the “unicorns” trend (mentioned above) and basically means that companies are given more time to grow and become even more influential players in their respective markets. Based upon data from the first half of 2021, we would expect the total amount of M&As in 2021 to exceed that of 2020, but that we have seen a significant shift from acquisitions to public offerings.
- Private Market – Israel’s corporate law is based upon the British system of corporate governance, having been put in place by the British Mandate administration in the 1930’s and 1940’s. Since Israel’s independence in 1948, the laws have been changed significantly, most recently and substantially when a new Companies Law was enacted in 1999. While the new law did make a number of improvements to make corporate governance less bureaucratic, and included an easier process for mergers, the system still lags behind Delaware in the ease of use and removal of hurdles in some layers of governance. A good example of this is written shareholders resolutions – in Israel (based upon UK law), a written resolution of shareholders is only effective if singed by all shareholders (without exception), the Delaware system allows for signature only by the majority required to pass such resolution where it to be submitted to a meeting of the shareholders. Mergers, while easier than previously, are still not as straightforward as in Delaware when an agreement and plan of merger can be effectively approved in one day. That being said, this has not proven to have a negative impact on the ability of companies incorporated in Israel from raising funds from foreign investors or from being sold or going public.
- Public Market – Israel’s public market, the Tel Aviv Stock Exchange (TASE), is regulated by the Israel Securities Authority (the equivalent of the US Securities and Exchange Commission) and the rules and regulations of the TASE itself. Until fairly recently, the public markets have been largely divorced from the private technology industry – very few technology companies were traded on the TASE, all reporting, prospectuses and filings for Israeli companies on the TASE is in Hebrew whereas the tech world in Israel lives in English, and the departments within law firms for Israeli offerings and hi-tech work were largely separate. However, the last year has seen a significant increase in IPOs among the Israeli tech companies and has required a re-thinking of the prior separation of disciplines. It will be interesting to see whether the Israeli public markets will embrace the different business and revenue models typically seen in technology companies which would be a sign of distress in more traditional industries. Due to Israeli securities’ regulations, it does not seem that the path is yet open for technology companies not incorporated in Israel to list on the TASE, even if a large part of their operations are situated in Israel, although discussions are ongoing on this point. Finally, the TASE recently opened a new platform – TASE UP – which represents a platform for trading of shares in private companies among accredited investors through the TASE systems. Time will tell whether this platform will become popular among the sophisticated investor community.
Legal tech environment
Not surprisingly, the Israeli legal market long ago identified the hi-tech industry as a crucial part of the Israeli economy and a key part of its growth. All the largest law firms in Israel have significant tech practices coupled with M&A practices specialising in the tech world.
There is fierce competition among the top law firms for talent which can serve the technology market. It also seems that the tech sector is home to a larger number of mergers or talent hires among the law firms compared to the number of lawyers active in the area versus other areas of legal practice. Finally, according to all studies, lawyers in the tech sector earn more than their colleagues in other areas of practice.
If you have any questions regarding the above or would like more information, please contact Partner and Head of the Hi-tech Department, Daniel Chinn at DanielC@ayr.co.il.