IPOs out, VC in

Tali Tsipori

10 Israeli startups have raised NIS 1 billion during the past month.

No Israeli IPO has taken place in the US capital market so far in 2016. The most recent was in August 2015, almost six months ago, when Intec Pharma Ltd. (TASE: INTP) raised $30.2 million. This was preceded by another biomedical company, Chiasma, which raised $117.2 million. The most recent Israeli technology (not biomedical) company to have a Wall Street IPO was Kornit Digital(Nasdaq:KRNT) in April 2015. Since then, there has been a drought of Israeli technology IPOs, even though the market conditions are still conducive to IPOs.

On the other hand, since mid-December until the present time, 10 Israeli startups have raised a total of $255 million - almost NIS 1 billion - in just one month. Two of them raised $50 million each, far more than Intec raised in its IPO. Formerly, an amount like $50 million could be raised only in an IPO. 10 companies and NIS 1 billion means that IPOs are out, and venture capital is in.

This is not confined to the Israeli technology industry; it is a global trend. It is enough to mention companies like Airbnb, Uber, and Dropbox to realize that more and more companies prefer to grow and become big, or even extremely big, before they issue shares to the public, are obligated to disclose their financial statements, and have to cope with a share price going up and down in public view.

The explanation starts with the macroeconomic situation - with a very low, almost zero, interest rate environment that is pushing more and more investment concerns (especially those investing in the venture capital funds that fund startups) to open their wallets. It is true that the risk incurred by investing in companies of this type is high, but the potential return is almost equally high. That is what venture capital investors want and look for. Secondly, the venture capital industry and the technology industry have matured, and that is also something not true exclusively for Israel.

Both venture capital investors and high tech entrepreneurs have realized that economic and social benefit is greater when the company is built - far from the public spotlight, which can be quite cruel and distracting for executives - for the longer term in an effort to make it as big and significant for the economy and society as possible before it is judged every quarter by whether its profit per share wound up one cent short of expectations.

The truth is that the US capital market is also not really in a rush to welcome companies that do not have enough of a track record, i.e. annual revenue in the tens of millions of dollars, and/or being on the verge of making a profit. Even Wall Street seems to be hungrier for more mature companies than it used to be. Actually, some of the 10 companies in the above list cannot really be counted as startups. In addition to starting up, they have already begun their marathon, having foregone the 100-meter dash. This means that they have annual revenue in the tens of millions of dollars, annual growth rates of over 10%, or even over 100%, and a fairly loyal set of customers and investors.

The neglect of Wall Street will not last forever. These companies, and companies like Airbnb, will eventually offer their shares to the public, among other things in order to enable their investors to make money by selling their holdings, and equally importantly, to enable all their employees to exercise their share options and sell the shares on the market, so that their paper profit can become cash.

It is possible that the current blitz will subside as a result of the capital market and economic cycles, but the need for technological innovation will not stop for a second, and there will always be a need for someone to finance it.

Published by Globes [online], Israel business news - www.globes-online.com - on January 14, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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