As Rosh Hashana is quickly approaching, many people are taking the opportunity to reflect back on the past year and look forward to the upcoming one. And indeed it’s been an insane year when it comes to the world of startups. There seems to be a new record fundraise every day and Israeli companies have taken the public markets by storm.
I’d like to provide my perspective on the current state of the market and where we might be headed. But before that, I want to tell to you about my grandparents.
My Original Optimists
This week marks one year since my grandparents, Abraham and Leona Mandelbaum, passed away due to contracting Covid-19. They were full of life, laughter and love, and left behind an incredible legacy of four children, 17 grandchildren and 10 great-grandchildren (and counting!).
And while there are many adjectives people have used to describe my grandparents, the one I would like to focus on is: optimism. For anyone that knew them, that might not be the first word that comes to mind, but in my eyes they were the paradigmatic optimists.
My grandfather was born in Brazil to parents who fled Germany in the wake of Hitler’s rise to power. At the age of twelve, he moved to New York, forced to trade in his love of soccer for a newfound love of the Yankees.
My grandmother was born to parents who were hit hard by the great depression. Her upbringing was everything but easy, something that was reflected in her love of dark humor.
My grandfather was ordained as a Rabbi, and soon after marriage my grandparents set off to France, where he served as a Chaplain on a US military base. That’s where my father and my aunt were born.
Throughout my father’s childhood, the family moved to over twelve different cities spanning three continents, that included unsuccessful business ventures, successful community building and a lot of spiritual guidance.
They went through a lot. Both good and bad. I wouldn’t have blamed them had they been relatively pessimistic people by the time I came into the world. People who were skeptical about most things and resisted change.
But that couldn’t be further from the truth. Six years ago my grandparents moved to Israel for one final journey.
I’m sure that there were many hardships involved in that transition, but as a grandson, I wasn’t privy to them. I viewed them as optimists. All I ever saw was my Sabba’s contagious grin, and all I ever heard was my Savta’s tickling cackle.
Israel to the Moon!
Contagious grins and cackles have been going around these days. Israel’s startup ecosystem has never been better.
As the image above shows, Israeli startups raised more capital in the first half of 2021 than any previous year’s total. And for those of you following the news, it hasn’t slowed down at all.
It’s easy to call the current climate a bubble, easy to say that this can’t hold up for much longer. But I’ll take a page out of my grandparent’s book and take the optimistic approach: Israel is only getting started.
Let’s take a closer look though, at some of the things happening on the ground.
Valuations
Speak to anyone in venture and they will tell you that valuations are crazy and higher than ever. And that’s true….to an extent. The chart below displays the change in average post money valuation for seed deals only since 2017 (data is based on TLV Partners’ investments).
Despite the relatively small sample size, anecdotally this aligns with what I’ve been seeing in the market. Yes, valuations are higher than they’ve ever been. But not drastically so.
There are a few important points I’d like to make here:
Israel has always lagged behind the US market from a valuation perspective by about 12-18 months. If the recent information out of the latest Y-Combinator batch is true, then valuations are about to get much crazier
Valuations at the seed round are mostly a function of round size as well as VC ownership expectations. Round sizes have indeed increased (which is a topic for another post), therefore it makes sense that valuations have risen as well
There are A LOT more outliers than usual. Which I guess means that they shouldn’t be considered outliers.¯\_(ツ)_/¯ There were always serial entrepreneurs raising rounds at higher than normal prices, but the commonality of some of these rounds seems to have increased. I’ve seen multiple $20m seed rounds on $60m pre-money valuations this year
This is perhaps the most important point. As the ecosystem matures overall, founders have more of a pedigree. This begets an increase in valuations because the founders deserve it. I expect this trend to continue
Angels Galore
The sheer number of millionaires walking the streets of Tel Aviv due to public listings, acquisitions or secondary transactions is baffling. While this might be ruining many of our hopes of buying real estate, this has had an incredible effect on the early stage funding landscape.
There are more qualified angel investors than ever before. There are hundreds of founders and VP level execs who have the disposable income and expertise to successfully support the next generation of Israeli founders.
Angels (and nano funds) serve a critical role in the composition of a successful financing round. These investors bring knowledge, networks and experience that no VC can claim.
It’s not uncommon for funding rounds of some of the hottest companies to focus more on the angel investors than the VC firm that’s leading the round. And that’s because the right type of angel investors also serve as a company’s top advocates - which serves as a signal that helps create momentum and buzz.
If you’re raising a seed round today, adding a strong group of angels and nano funds to your round is a must.
Product-Led
This is a quick one. The hardest positions to hire for seem to be product design and product marketing. Hiring in general is hard, but these two positions seem to be the most elusive. (Of course, hiring developers continues to be extremely difficult!)
I think this speaks to a more macro trend of more and more Israeli companies focusing on putting their product and go-to-market front and center as opposed to their technology, but there could be some serious confirmation bias here.
From Generation to Generation
More than anything, what gets me most excited about the current state of the Israeli startup ecosystem, is that we are witnessing a passing of the baton from one generation to another.
Really for the first time ever, there are a multitude of success stories to turn to. Real, multi-billion dollar companies that have created lasting brands and are sure to be meaningful companies for years to come.
These companies have served as the training grounds for the next generation of founders, and this next generations’ ambitions are bigger than their predecessors.
Companies like Wix, Fiverr, Monday, Lemonade, Riskified, SentinelOne, Global-e and many many more, have laid the groundwork for the future success of Israeli founders. And founders are rising to the challenge.
With that in mind, it’s impossible to not be optimistic about the future of the ecosystem, high valuations or not. Might there be a market downturn? Sure, but I’m no macro-economist and I can’t predict what may or may not happen.
What I can say with full confidence though, is that this new generation of founders is giving it their all to make the previous generation proud. Just like I’ll be spending the rest of my life doing the same for my grandparents.
Wishing everyone a Shana Tova!
"most excited about the current state of the Israeli startup ecosystem" - But with problems now in hiring?
https://www.calcalistech.com/ctech/articles/0,7340,L-3918201,00.html