Israeli high-tech capital raising in 2021 has reached a new record, with $25.6 billion raised in 773 deals, a 146% increase from the amount raised in 2020. More than 170 M&As and IPOs recorded with a total exit value of a whopping $82.4 billion, a 520% year over year increase.
This was a momentous year for the Israeli high-tech industry while the entire industry’s learning curve reached new heights (more experienced entrepreneurs, consultants, more high-quality events, etc). We saw glamorous IPOs and SPACs of Monday.com, SentinelOne, Jfrog and many other enterprise software companies that represent the bread and butter of Israeli expertise. The technology sector benefited from tailwinds of the corona-induced environment both by increasing demand for software products and by lowering the costs of operations:
a. As enterprises must quickly adopt new solutions to address the new business reality and the work from home environment (with emphasis on ecommerce, productivity tools, security, and others).
b. Velocity of meetings with sales prospects increased as in-person meetings are no longer a must.
c. Lower traveling-budget is needed which is typically a large cost center for tech startups.
d. New pool of clients and the rise of “cash rich” tech startups that are ready to adopt new solutions that can provide a competitive edge in the market. These clients could prove to be a force-multiplier as some have the potential to grow quickly and substantially in size.
A few market dynamics contributed to successful business momentum:
a. More exits to Israeli domicile players — expanding the universe of potential buyers — one of the big dislocations that the Israeli industry suffered in the last decade.
b. Confidence of Israeli companies to utilize M&A to grow in scale and take advantage of the increasing sophistication of the Israeli financial markets.
c. Rise of “Mega Rounds” in which companies are no longer required to list early in order to raise substantial amounts of capital (i.e $100M funding rounds) and bear the necessary costs and scrutiny.
From EBITDA Multiplier To Booking Multiplier
However, as abundant capital seeks returns in an inflationary environment, valuations continue to increase and pricing of transactions deviates from traditionally accepted norms, due diligence access is restricted due to “internal rounds”, and we found it increasingly difficult to bridge between the asking price and our risk appetite.
Tech companies’ most acceptable measure of valuation shifted from multiples of Revenues, to ARR, to CARR to Bookings. Today, venture capital investments are following Michael Mauboussin’s 2003 book “Expectations Investing”; an investor is asked to pay for a company as if it has already met its two years projected financials, and the only question is whether the investor has enough confidence and visibility to the company’s sales pipeline which, in many cases, is very limited.
Near Term Outlook
Looking at the year ahead, a new financial environment emerges with the upcoming interest-rate rise by the Fed. We see valuations in the public markets, as expected, going down. Traditionally, it takes 1–2 quarters for these effects to trickle down to the private markets (VC/PE). Growth stage companies have already witnessed a direct impact: revaluation of deal terms, term sheets withdrawn, and more crucially for us, secondaries not offered as part of fundraising rounds.
As a result, we encounter a significant increase in deal flow levels from ex-employees, management teams and shareholders who would like to “catch the last valuation” as they assess exit times will be prolonged longer than expected.
We think that it is more than probable that a more significant price correction will happen in VC in a few months’ time where it will be clearer if the rebound of the tech market, if any, will be V shaped (quick rebound) or L shaped (long time for pricing to come back). At Titan we are even more excited — if volatility continues, we expect more sellers will be interested to lock their financial gains and accept sharper price-per-share discounts. Notably, it would probably be wise to be very picky and not rush for the next few months and see where the market lands, whilst transaction terms are expected to be more attractive later in the year.
The Russia-Ukraine conflict also had its share of effects. One of the biggest drivers of secondaries is the changing regulatory environment, and currently Russians are encouraged to sell down their positions in Israeli tech as the US and the western countries impose more and more financial sanctions. We at Titan are looking into numerous secondary situations involving LPs that are required to sell due to these regulatory reasons.
