Despite the ongoing healthcare pandemic creating a huge challenge for various sectors across the globe, the Israeli startups have witnessed a record-breaking level of venture capital investments during the first quarter of 2021, said a Jerusalem-based senior industry leader.
The rise of Israeli unicorns, an aggressive coronavirus vaccination campaign, normalization with more Arab countries, and a diversified tech sector are behind the record-breaking level of venture capital investments in Israel during the first quarter of the year. And those factors will continue to drive growth in the sector, said Jon Medved, founder and CEO of Jerusalem-based OurCrowd.
“Things here in Israel have been firing on all cylinders,” Medved said Wednesday in an online press briefing. “And I think the country will continue at this pace.”
Israeli tech startups raised $5.37 billion in the first three months of 2021, after raising about $10 billion in all of 2020, according to figures from IVC-Meitar — a record for annual capital raised, despite the emergence of the coronavirus pandemic. If the growth continues, Israeli startups are on a path to double the amount of capital raised in 2020.
“It's really remarkable,” Medved said.
Startups are raising more money at later stages, resulting in more so-called unicorns, or private companies worth more than $1 billion, Medved said.
“Last year, we thought things couldn't get any better,” Medved said. “Now, we are counting a total of 63 Israeli unicorns founded here in Israel or founded abroad by Israelis, and already 12 new unicorns this year.”
“That's an absolutely wild pace of growth of unicorns,” Medved said. “It's startup goes scale-up.” Earlier this week the American private equity giant Blackstone announced it would open an office in Israel.
“The ecosystem here has become a well-oiled machine with entrepreneurs at the heart, and the flywheel around it including the venture capital funds and multinational investors, angel investors, the tech units of the IDF, the incubators and accelerators — it's quite an amazing story.”
“Israel is really becoming a well-oiled machine,” Medved said, for funding and growing startups.
Increased foreign investment is also playing a major role in the sector's growth. Tech investments from Europe have jumped 63% in 2020, and investment from Japan is now 11%, compared to 2% five years earlier. Investment from China, however, has declined during recent years.
“But the big opportunity of course is with the Gulf, and what's going on between Israel the UAE and other new partners, which is leading to huge amounts of VC investment in the two countries,” Medved said. The breadth of Emirati interest in Israeli tech has been surprising, Medved noted, and partnering with the Gulf countries “is allowing Israel to penetrate markets we've never dreamed of in Southeast Asia and around the broader Islamic world.”
At the same time, Medved said OurCrowd's portfolio, which began with Israel-based startups, has also expanded to be more geographically diverse. Now, about 55% of the companies it funds are located in Israel, about one-third are in the United States and 10% are elsewhere.
Medved said that OurCrowd and the Israeli tech sector, in general, are already benefiting from the new relationships formed after the Abraham Accords created diplomatic and economic ties last August with the United Arab Emirates and Bahrain, and the other normalization deals that followed with Morocco and Sudan. He said the new relations, especially with the UAE and its global business hub in Dubai, are key to continued growth and diversification for Israeli tech companies.
“This is one of the greatest developments for Israel and for Israeli high tech,” Medved said.
OurCrowd now has six employees in the United Arab Emirates and is planning joint ventures with Emirati investors that can reach not only the Gulf market but places beyond.
“We can now reach South Asia, South East Asia and the broader Islamic world,” he said. “People are going to need to get used to seeing not just Israel, but the Middle East lead.”
Another factor boosting the high tech sector is Israel's rapid and ongoing coronavirus vaccination campaign. Israel currently has the highest vaccination rate per capita in the world, with over 5 million people inoculated, which has resulted in a sharp drop in cases and deaths, and the economy opening up to nearly full capacity.
“We are coming out of the COVID crisis so strongly, and not only are we aware of it,” Medved said. “But the world is aware of it.
“Everywhere I speak, the first thing they want to ask is how we did it. This has turned out to be a huge positive factor in terms of our tech penetration of the world, and an amazing branding exercise in which the startup nation became the vaccine nation.”
He noted that the UAE was also among the world leaders in vaccinations per capita. “I think people are going to have to start getting used to thinking about the Middle East, meaning Israel and its partners in the Gulf, as the place where good things are happening.”
A renewed interest in semiconductors and custom computer chips that are essential in everything from laptops to mobile phones to new technology like driver-assist features in cars, is also bringing more money to Israel's tech sector. It was semiconductors and Intel's establishment of a facility to make them in Israel back in the 1970s that helped kick off the country's world-renowned tech sector.
“Now there is a chip war,” Medved said, with companies like Apple and Google designing their own chips, and often relying on Israeli companies to make them.
While recent months have seen increased investment in certain sectors, like food and agricultural technology, Medved said that the key to long-term success is a broad portfolio. OurCrowd backs companies in a variety of sectors, including financial technology, cybersecurity, cloud computing, food and agri-tech, and medical devices.
“The most important part about VC is diversifying, and not putting all your eggs in one basket,” he said. “Sectors ebb and flow.”
He also points out that OurCrowd has stakes in tiny startups, as well as later-stage players, citing its stake in property insurance platform Lemonade, valued at nearly $1.6 billion when it went public last year. The OurCrowd platform, open to accredited investors with assets worth more than $1 million, carefully vets its allocations, ultimately investing in less than 2% of potential companies. The platform is growing, with nearly 100,000 accredited investors.
While both public and private markets are growing now, Medved says downturns are inevitable.
“Every business is cyclical, and it's a never straight line up to the right, there's always zigs and zags,” he said. But as long as venture investors have a long time frame, of 5-10 years or more, and keep their portfolios diversified across sectors, they will ultimately benefit, mainly because technology itself is developing so rapidly. He points to cloud computing, 5G networks, open-source code available to all, and e-commerce.
“There are all these elements now that allow entrepreneurs to build stuff,” he said. “Technology is just on a tear.”