The Israeli ‘Second Act’

Ben Topor
4 min readNov 30, 2022

Israeli Late-Stage Tech Companies and Their Action Plan Forward

Today there are 92 Israeli originated[1] companies that have crossed the $1 billion valuation mark (“unicorns”) with majority centered around the B2B enterprise, infrastructure and cybersecurity segments that are relatively more resilient to market downturns.

The median multiple of the unicorn universe is 6.6x[2], which is 50%-75% more than the average actual exit multiples in the 2018–2019 period. Our analysis shows that 40% comes from segments of the market that have experienced high degree of over-valuation — mainly cybersecurity and fintech. We believe that these companies will be especially vulnerable to (upcoming) private-market corrections.

Additionally, another headwind that is expected to face Israeli unicorns is that we suspect many of them are experiencing slowing growth rates, independently from the recent market conditions. Although most of the Israeli unicorns have not even reached $100 million in revenues, the ones that do, run up against either natural market-size or market-share limits to their core product or service. Hence, prolonging companies’ “high growth period” is critical for their success and ultimately their valuation.

In order to achieve this successfully, companies need to develop a ‘Second Act”, a new strategic move that scales and drives their growth going forward. The timing of initiating a second act should be thoughtfully considered. Early initiation of the second act could prevent a company from capturing all their market potential with their first offering and thus could enable competitors to gain market share. On the other hand, companies that have been delayed in developing a second act may well already cause growth to subside resulting in lower valuations, and ultimately in the loss of market dominance. For VC investors it is important to recognize the indications of portfolio underperformance and consider selling off their shares before such slowdown is readily apparent to the market.

As a company transitions into its growth stage, it is essential for CEOs to showcase tangible evidence of progress, typically in the form of successful product launches or the expansion into new market segments that yield revenue. As the company matures further to its later stages, it becomes increasingly advisable for non-core products to account for a minimum of 20% of the total revenue.

Israeli ‘Second Act’

More generally, McKinsey has recognized three viable growth strategies to get to $1 billion of revenues and beyond[3]. Israeli players have utilized these strategic moves to secure a sound and continuous growth, and some players are still in process of evaluating new markets and product offerings.

  1. First, companies that built a robust enough act one business models could simply expand their first act. These companies expanded into new geographies, new outlets, and new categories. This approach is only viable for those companies whose act one addresses a target market that is so sizable and fast growing it can support multiple phases. One of such examples is Hibob, an Israeli HR technology company that is on track to cross $100 million of ARR with high growth rates. Their software platform is targeting a massive target market estimated to be of $23bn.
  2. Second, expanding to adjacent markets. For example, some companies are using this strategy to make significant acquisitions a key pillar of their go-to-market strategy, buying footholds in adjacent markets and working diligently in overcoming integration difficulties. One such example is our portfolio company Verbit.AI who recently made an acquisition that provides a strong foothold in the media and entertainment market.
  3. Third, some companies successfully grow when they transform their core product into a platform, around which an “ecosystem” of complementary products and services can arise. One such example is Honeybook, which has developed from an event management to all-in-one platform that serves small business, including project management, online payments, and various automation tools.

Signs for a prolonged high growth period

It is imperative to make a thorough assessment of how long a company can keep up with high growth rates as slowing growth rates (with no apparent improvement in profitability) is diminishing the company’s value. There are a few key high-level principles we use:

  1. Naturally smaller firms are much more likely to maintain high level growth rates than large firms because they have more room to grow in larger potential markets.
  2. Firms that have shown rapid and consistent execution which manifested itself in growing revenues recently are more likely to see revenues grow rapidly at least in the near future.
  3. Gaining a sustainable competitive advantage. When a company has developed barriers to entry and sustainable competitive advantages it can maintain high growth for longer periods. If, on the other hand, there are no barriers to entry or if the firm’s existing competitive advantages are fading, one should be much more conservative to forecast a long growth period.
  4. In contrast to mainstream view, we believe that internet and software companies that are offering products that require specific customization, higher than usual support functions, or any other capex requirements (which is typically manifested in lower gross margins) tend to be more defensible over time due to higher investment required as well as the perception of the market of segment being “less attractive”.

[1] Israeli based or Israeli originated founders

[2] Multiple is based on last round valuation divided by company’s total amount raised to date.

[3] Grow fast and Die Slow, McKinsey, by Eric Kutcher, Olivia Nottebohm, and Kara Sprague

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Ben Topor

Founder of Titan Capital Partners, a growth stage and secondary investment firm