Uh oh. Israeli startups have learned how to scale…

A few months ago, my family decided to lean into the COVID-enabled work from home/anywhere situation and embark on an adventurous year abroad in Israel. My firm (Landmark) has a local office near Tel Aviv, we have tons of amazing clients in Israel, and we have always worked closely with the rapidly growing ecosystem of Israeli VC’s.

I haven’t been to Israel in almost 10 years. The last time I visited, Landmark had a handful of very early-stage clients (all in cybersecurity) and each company was effectively following the same playbook: technical CEO-Founder addresses specific (and usually limited) product-market fit, raises money from a US VC and looks to sell the company as early as possible. The prolific (and hilarious) Israeli Angel investor Yossi Vardi popularized this approach with the “Mirabilis Effect” – when the 18-month-old pre-revenue company sold to AOL for $400M way back in 1998 and inspiring a generation of Israeli entrepreneurs to follow suit.

Israel has always been the Startup Nation, with the highest number of startups per-capita on the planet. The entire country seems designed to promote entrepreneurial success: a strong economy fuels heavy government support of education and R&D, the mandatory army service breeds all kinds of innovation (especially from the elite 8200 intelligence unit), and the culture emphasizes fearless ambition, leadership, and global-thinking. Just take a walk through the revamped Sarona market and you can see all the wheels in motion: Technion university outposts next to a myriad of startup offices anchored around a WeWork tower with VC’s all around.

This strong startup ecosystem is also maturing – as more and more cash floods the market from abroad, Israel isn’t just generating more startups to quickly sell overseas, the country is fostering growth, stability, and scale for these companies. The kids are growing up, just not leaving the house anymore. This has a bunch of downstream effects permeating everything from the local economy (Tel Aviv is now the most expensive city in the world) to the social fabric of the community itself (as this growth drives a desperate need for talent that will hopefully break down barriers to entry for minority groups).

Sharing a few simple observations (along with supporting data) plus the domino effect I’m beginning to see (and expect to see more of) while sprinkling in some fun Hebrew slang that I’m desperately trying to pick up along the way. Yalla!

1.     There is a ridiculous amount of money flowing into Israel right now. This is kind of obvious (ashkara!), but the numbers are almost unbelievable. Israel brought in over $25B of investment in 2021 (136% increase over 2020). Yes, there is broad increase in funding globally, but Israel crushes the global average (71%), and the rate is notably higher than other main tech hubs like my former hometown (the US was at 78%). Just look at this hockey stick of money flowing into Israel:

Achla! This influx shows no sign of slowing down either, as big-time investors from overseas are aggressively expanding their local footprint in Israel: SoftBank is planning to open an Israel office soon, PE-giant Blackstone just opened an office in Tel Aviv, and a bunch of other global VC’s have Israel satellite offices (eg: Bessemer Venture Partners, Insight Partners and Sequoia).

2.     This influx of capital is driving more later stage investment (and in turn, generating more Israeli unicorns).  Instead of seeing these highly funded startups choose to sell early at high multiples like in the past, more companies are opting to scale – continuing to grow, hire, and raise additional capital while staying put in Israel. According to Pitchbook, much of the VC investment growth from bullet #1 has come “via late-stage rounds, with over two-thirds of all capital invested going to more mature startups… and later-stage startups are slowly increasing their share of deal count, to 35.1% in 2021 versus 30.1%”. Rounds valued over $100M (“megarounds”) made up almost half of that $25B mentioned above (including $250M raised by one of my favorite unicorns, Wiz).

More impressively, Israel generated 48 new unicorns last year (second only to the US) with a staggeringly high 5.2 new unicorns per one million residents (way ahead of Singapore (1.8), the U.S (1) and Canada (0.37)). At this rate, it might make sense to rename the Israeli “unicorn” to something more common, like the “blundstone” (in my estimation, 98.9% of men between the ages of 5-60 wear these boots in Israel. It’s weird).

3.     As a result, Israel is finding creative ways to adjust the ecosystem to support scale (not just startups). Adapting to sustain double the number of billion-dollar companies is a very different challenge than supporting double the number of startups. One interesting downstream effect of all this scale is an increase in local acquisition: 30% of 86 M&A transactions last year were “blue and white”—where both buyer and seller were Israeli (totaling 39 deals, up from 21 the previous year). Examples include Check Point buying Avanan and JFrog buying Vdoo (both deals around $300M each). This is a smart way to keep the technology, talent, and culture within Israel.  In an interview with the Times of Israel, Start-Up Nation Central CEO, Avi Hasson commented specifically on this trend:

“These companies are acquiring other companies that are part of their growth journey and becoming category leaders in almost every sector in which they operate… we are seeing a new generation of entrepreneurs who are looking to build big, sustainable companies, and it’s very promising.”

As a result of more companies remaining in Israel (either to scale or via M&A) there is an increasingly insatiable appetite for tech talent. In a wildly competitive market, big companies must retain their top performers and newly funded startups constantly need to fill positions to grow, all while more capital infusion is driving up labor costs. There just aren’t enough engineers and programmers in the country (basa!)– which is a big problem for the whole industry. One thing I haven’t seen yet (but should be inevitable) is a push to expand the candidate pool to include more minorities, women, Arab Israelis, and Ultra-Orthodox.  Of the roughly 25 companies I’ve met this month, only one is woman-led (Merav Bahat, the impressive CEO and Co-Founder of likely future unicorn, Dazz). This shift is already beginning to happen, but I’d expect (and hope) to see new programs and initiatives to educate, promote, and include these diverse talent pools.

Broadly, all this additional capital, growth, and scale is great for the tech scene in Israel and will trickle down to the support network of non-tech (like lawyers, accountants, etc), and the need for more talent will hopefully catalyze a more inclusive and supportive social culture. I worry a bit that the hyper-competition from bigger funds could squeeze out some smaller local VC’s, which would be bad in the long run if global interest wanes and leaves a gap of local, hands-on experience for startups. I’m also curious if the Israel startup culture (move fast, be aggressive, minimal long-term investment in company culture and stability) will catch up to these unicorns trying to build long-lasting companies, but para-para, plenty of time to iron this out. In the meantime, I’m meeting some very smart and professional young CEO’s who are more than ready to lead billion-dollar companies (looking at you Zohar Bronfman @ Pecan.AI).

It’s been an incredible experience living in Israel these past few months and the energy is unmatched (even compared to NYC). It’s exciting to see all this raw potential become actualized in real time. Sababa, and hit me up if you have good hummus recommendations (right now Blue Bus in Pardes Chana is my gold standard 😊).