Offices of investment bankers on Wall Street have recently been experiencing brisk business, the like of which has not been seen for several years. The relatively successful IPOs last month of two tech companies - Reddit on the New York Stock Exchange and Astra Labs on Nasdaq ended a long series of failures for tech flotations. As a result tech companies that had been sitting on the fence, including Israeli companies, have begun moves to go public on Wall Street either later this year or early 2025.
Danny Akerman, a former investment banker with Goldman Sachs and cofounder and managing partner of global investment firm Key1 Capital, which focuses on tech growth companies, tells "Globes" that the performances of the likes of Reddit and Astra Labs since their IPOs have "Stimulated the appetite required by investors to invest in additional flotations."
"It seems that the conditions are ripe for the start of a new wave of IPOs," adds Akerman. "In recent months we have seen a significant stabilization of the economy in the US and an expansion of growth, inflation that is in a general downward trend, a halt in interest rate hikes, and the stabilization of the multipliers in the capital market. In addition, the fear index (VIX) has consistently stayed below 15 points, mainly since the start of the year."
Cato Networks has chosen its banks
The first wave of Israeli tech IPOs is expected from October onwards for4 high growth companies with revenue already in the hundreds of millions of dollars. Cybersecurity company Cato Networks founded and led by entrepreneur Shlomo Kramer, is the most advanced Israeli company in its plans for a Wall Street IPO. It is already in what is termed in the industry as the 'beauty contest' stage, in which it is choosing who will be its investment bankers that will act as underwriters.
"Reuters" reports that the Israeli company has chosen Goldman Sachs and JP Morgan and that now it is writing the prospectus for the US FCC regulator. After the prospectus is approved, Cato will be ready for its flotation within a short while. In principal, Cato could be ready for an IPO within a few months but the company will likely delay the flotation until it is convinced that the IPO market is stable.
At the end of 2022, Cato reported annual recurring revenue (ARR) of $100 million, with annual growth of 60%, which means that by the end of 2024 ARR might be as high as $260 million. For the sake of comparison, prior to holding its IPO in 2021, Israeli cybersecurity company SentinelOne (NYSE: S) reported ARR of $90 million, although its accounting revenue was closer to $120 million.
Not far behind Cato is Israeli-US cybersecurity company Snyk, which raised money from the Qatari royal family before the war in Gaza. The company, which conducts itself under the radar and does not disclose figures, is working to file a confidential prospectus but has not yet chosen underwriters.
Market sources believe that two other Israeli companies that considered an IPO in 2020 and 2021 are also leading candidates for the new wave of Wall Street IPOs - smart transportation company Via, which filed a prospectus in 2021 and raised money last year at a valuation of $3.5 billion, and online trading platform eToro's, which in recent months has been benefitting from the Wall Street rally and the rise in value of cryptocurrencies - two markets which substantially impact its business activity.
Wiz, Vast Data and Deel
Senior capital market figures believe that another three Israeli tech companies currently undergoing rapid growth and a rise in valuation, approaching $10 billion are also candidates for IPOs. First and foremost is cloud security company Wiz, which regularly reports on its revenue. Earlier this year Wiz announced it has ARR of $350 million. Sources close to the company say that it is not preparing for a flotation and it will only happen when ARR reaches $1 billion - a target likely to be reached in 2026.
Another possible IPO next year could be conducted by Israel data platform company VAST Data, which surprised in its most recent financing round in December 2023 by tripling its valuation to $9.1 billion and reporting ARR of $200 million. The company also reported ARR growth rate more than tripling at 3.3 times, and that it has had positive cash flow for the past 12 quarters and gross profit of almost 90% from huge customers like the US Air Force, the US Department of Energy, Pixar and Zoom. Vast Data has developed a system that integrates data for companies between various storage services, databases and "containers" - data clusters in the cloud.
Payroll management company Deel, founded by Alex and Philippe Bouaziz has also reached a stage of maturity from which an IPO is possible with ARR of $500 million. At the end of 2023 the company reported $387 million ARR and the company already has 3,000 employees and is expanding rapidly both worldwide and in the US.
Other companies that have been reported by the media as managing procedure for a potential IPO include Israeli cybersecurity company Claroty, which serves the medical and industrial sectors. However, the company has denied these reports saying that no procedures have begun and "There is not yet any schedule for an IPO." Sources tell "Globes" that Claroty is far from beginning any procedures because it has a low rate of growth, which would dictate a relatively low multiple for any pre-IPO pricing. Claroty could be meeting with bankers to explore an IPO, but its current valuation does not justify the move.
The second and third wave
In the second wave of Israeli IPOs in New York - which is expected to take place between the last quarter of 2025 and the second quarter of 2026 - according to estimates, fast-growing companies that may be ripe for the process by then, or companies that were on track for an IPO in 2021 but the cooling of the capital market reshuffled the cards, could go public.
One such an example could be AppsFlyer, which has been profitable for some years, and produces annual revenue of $300-350 million from SaaS sales for ad management, as it has reported in the past. In order to hold an IPO it will need to convince investors that it has the potential for major growth in the advertising market.
Gong has been talking for some years about future plans for an IPO. The company has grown very quickly after dominating the software market for analyzing sales calls in large companies, but its growth rate slowed down due to competition from US company ZoomInfo, which bought the Israeli Qoros, which competed fiercely in the niche sector. The acquisition in July 2021, is today very challenging for Gong, but it is still producing enough revenue to allow it to consider an IPO in 2025 or 2026.
In the third expected wave of technology IPOs, between mid-2026 and mid-2027, companies such as Rapyd may go public, which, according to estimates, is planning an IPO at a valuation of $10 billion - the valuation during its most recent financing round, even though it has also conducted several secondary share deals with a valuation of nearly $15 billion.
Two other companies whose rate of growth has slowed in recent years and are looking for additional revenue streams, but which could be considering an IPO, are Lightricks and Transmit Security. Meantime, their coffers are full of cash coffers in order to help them find new markets. Lightricks can also make the necessary adjustments to embrace AI models and promote its brand in the process, so it could be a sought-after IPO for investors looking to increase their exposure to AI.
The problem of sentiment
Despite the positive sentiment, the market is not without concerns. Investors in Israeli companies claim that only the larger and more well-known companies are considering an IPO, and for the next generation of companies the way forward is less clear. In addition, as long as the war in Gaza and the north continues, Israeli companies suffer from a sentiment problem that may make it difficult for them to go public, and they are priced very high compared to the current market. Many unicorns were paid in cash at a value that turned out to be too high, and in order to go public they must be prepared to cut their valuation significantly. In order to go public, for example, Instagram reduced its valuation from $40 billion to $8 billion, while Reddit cut is valuation from $10 billion to $6 billion.
Akerman explains that unlike the IPO market in 2020-2021, IPOs over the next two years are expected to be more mature and include very few SPAC mergers, which listed companies on Wall Street that were not mature enough and were distrusted by many investors. "A company is required to meet a valuation of at least $2-4 billion to successfully issue 15-20% of the company's shares for a sufficient number of investment houses. The more the cash flow in the company is positive and grows even more than other indices, the higher the multiples will be. Compared with 2021, what will be issued to the public this time is expected to be more stable and solid."
Published by Globes, Israel business news - en.globes.co.il - on April 11, 2024.
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