McDonald's, Nvidia and Salesforce all want a bite of the Tel Aviv tech crop - here's what you need to know about Israel's bustling M&A scene
- In mid-March, the US chip company Nvidia announced an eye-popping $6.9 billion acquisition of Israeli semiconductor company Mellanox, underscoring the buzz around Israeli tech companies.
- Two weeks later a more curious US-Israeli tech deal took place when McDonald's acquired AI company Dynamic Yield for more than $300 million.
- While the highs are getting higher, mid-$100 million exits remain the common exit for Israeli tech startups, according to experts in the space.
- Here's what you need to know about the bustling tech mergers and acquisitions scene in Israel.
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In late March, McDonald's announced its $300 million-plus acquisition of Dynamic Yield, an Israeli startup that uses algorithms to personalize shopping experiences to the individual.
The Golden Arches were a surprising new home for the eight-year-old company, which launched as a publisher-focused project at Bessemer Venture Partner's office in Tel Aviv, before picking up speed with retailers like Sephora and Ikea.
"I call that our bread and butter, in terms of exits," said Adam Fisher, founding partner at Bessemer Israel, which has had 13 exits (acquisitions or other transactions that let VC backers cash in their investments) since launching the firm's Israeli outpost in 2007. "Below $100 million, it's hard to make an impact. Above $500 million - we all aim for that, but it requires a special kind of company."
While founders and investors in Silicon Valley pursue $100 million venture capital rounds at billion-dollar valuations, their peers in Israel - affectionately dubbed the "51st state" - tend to eschew hypergrowth and world-domination for the security of a corporate parent company.
In 2018, there were 61 exits of venture-backed Israeli tech companies, with an average deal size of $81 million, according to consulting firm PwC, which excluded deals valued under $5 million from the study. Fifty-two of those exits were acquisitions, while just nine companies, primarily in biotech, opted to sell shares to the public.
"When I joined the industry 15 years ago, it was really rare to see a $200 million exit. Nowadays, a $200 million exit is the lower bottom," said Natalie Refuah, an investor with Viola Growth, which led Dynamic Yield's $38 million Series D just months before it got acquired.
"I do think that this is increasing and probably in the years coming it will be a higher amount," Refuah said. "We are great believers in the billion dollar company."
Billion-dollar exits are rare
The impact of American corporate M&A on Israel can be charted across the Tel Aviv skyline. Amazon, Microsoft, Apple, Google, IBM and Cisco all have large research and development facilities in the city or just outside in Herzliya, an affluent suburb that draws frequent comparison to Silicon Valley's Menlo Park.
Intel, the chipmaking goliath which opened its first Israeli office in 1974, is the country's largest tech employer. The company's footprint in Israel has increased thanks to a combination of organic growth and acquisitions, including its eye-popping 2017 acquisition of autonomous vehicle chip company Mobileye for $15.3 billion.
For Leonard Rosen, CEO of Barclays Israel, it's the big deals that keep things interesting. At the end of February, Rosen and his team closed KLA's $3.4 billion acquisition of the semiconductor company Orobtech, for whom Barclays was the exclusive advisor. That deal was delayed nearly a year after it was first announced due to regulatory holdups in China.
"A lot of these companies will buy here just so they have a stake to start looking at other companies and earlier stage companies, and keep ahead of the game," said Rosen from his office in Tel Aviv, just hours after news broke about Nvidia's $6.9 billion acquisition of the publicly-traded chip company Mellanox.
It was Nvidia's first big move in the country, and it beat out both Intel and Barclay's own reported client Xilinx in the process.
"Competition is really tough in the world, and Israel has an advantage. If you don't have a presence here and your competitor does, you're potentially missing out on technologies that will help you lead," Rosen said.
Scaling big means leaving Israel
The strong American presence has its pros and cons for the local startup scene. As in Silicon Valley, cohorts of ex-employees tend to leave tech giants where they get their start with a dream to build the next big thing. And more startup exits means more wealthy founders and investors who recirculate that capital into other startups.
But anecdotally, industry people lament that Amazon's new office in the Sarona Tower, the largest skyscraper in Israel, has driven up wages for talented engineers.
And Silicon Valley's appetite for Israeli startups may be nipping growth potential. There were just four acquisitions valued at more than $1 billion in 2018, and all four of those acquisitions were a second-exit for a company that had already gone public or was owned by a strategic acquirer. It's just not very common for an Israeli tech company to get that big.
Fisher, an early backer in Wix before it had the biggest IPO in Israeli history, thinks founders have good reasons to exit before reaching the acclaimed "unicorn," of $1 billion valuation, status. While Israel has tons of engineers, most tech companies need to build out sales and marketing teams in the US once they surpass $15 million to $20 million in revenue, he said. Oftentimes, the CEO needs to relocate to California.
Growing that big takes a lot of work, Fisher said, and a couple hundred million dollars isn't nothing.
"As much as capital is flowing into Israel, I think everybody here is cognizant of the fact that that could change over night," Fisher said. "We live in a volatile region of the world, we know that people get skittish all of a sudden. We're highly dependent on foreign capital. And sometimes, a bird in the hand is what you want to go with."
Talent is key for corporate acquirers
For the corporate acquirers, it's a pretty good setup.
John Somorjai, executive vice president of corporate development at Salesforce, said the company has found success building out its research and development operations in Israel. The San Francisco giant has bought four Israeli startups since 2011, including its July 2018 acquisition of Datorama for $800 million, one of the biggest deals of the year.
"What we found is that we're able to hire incredible talent in Israel, and they've made a lot of contributions, specifically to our AI innovation," Somorjai said.
Though Datorama was fairly large, Somorjai said that the sweet spot for most Israeli startups to sell is when they are "sub-scale," before they've built large go-to-market organizations that can tackle global sales.
Somorjai, who's based in San Francisco, said he travels to Tel Aviv twice a year to meet with employees, founders and venture capitalists, and his team in London makes more frequent trips because of the proximity. Beyond acquisitions, Salesforce has made 12 venture investments in Israeli startups, including Redkix, a small email startup that Facebook bought last summer.
IPOs are rare but that could change
Despite the Israeli ecosystem's drive toward exits, the IPO well has been more or less dry over the last few years. Just nine Israel tech companies went public in 2018, and of those seven were in the life science sector, according to PwC.
However, that could all change in the next few months.
"In IPO, there's always been heights and downs. And for many years, the IPO was closed for Israeli tech companies," said Refuah. "I hope that it's changing. It looks like there are signs that it's opening but it's yet to be seen."
Already, 2019 is starting strong. The cybersecurity company Tufin will kick off the year with an IPO on Thursday, where it will list on the New York Stock Exchange. The company is expected to see a market cap around $500 million.
Payments company Payoneer, a rare Israeli unicorn, has reportedly hired a bank to mull over a possible IPO, and the cloud company Zerto is reportedly considering its own listing in New York. The freelancing marketplace Fiverr has also reportedly hired banks for its own public offering at around an $800 million valuation.
Most companies considering an IPO will look to New York, and other foreign exchanges in London and Australia for their listings, rather than the local exchange in Tel Aviv.
Whether this crop of companies make it to the public markets before attracting interest from a big acquirer is yet to be seen.
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