Israeli high-tech unicorns aiming to run and run

Last year was an unusual one for the Israeli technology sector: the two-decade trend of successful Israeli startups seeking a relatively quick exit appears to be changing as firms instead head for longer-term growth.

In the past, it seemed that every Israeli startup dreamed of a big exit – either through acquisition by a tech giant or via a Wall Street IPO. But now the dream has changed into scaling-up to a growth company worth $1 billion or more – and developing further.

The proof appears to lie in the fact that in 2019 private technology companies founded by Israelis doubled to 30 unicorns – privately-held tech companies worth more than $1 billion, according to Techcrunch.com. And that puts it at number four globally, with only the U.S., China and India having more.

Why call them unicorns and what are the advantages and disadvantages?

The mythical unicorn was described by the ancient Greeks and Romans as being extremely fast and nimble, with an extraordinary horn that was highly valued by merchants.

Operating for a decade or less, these privately held companies have already reached the US$1 billion level – usually due to the fact that they are industry disruptors.

Lean and agile, such companies face two apparently simple choices: to remain private or to be acquired.

In the first option, a company enjoying plenty of cash investment, and with further investors lining up, clearly wants to remain independent and to develop products under the radar and out of the view of possible competitors. But remaining private might restrict growth, and companies also have to show a return on investment to their investors at some point.

Alternatively, they may seek a buyer, especially one with deep pockets which will enable them to secure faster growth rather than attempting to do so with limited funds. But will the founders find their enthusiasm and entrepreneurship squashed by the slow pace typical of a large organization?

Many investors are far from averse, however, to providing significant investment. After leading a $120 million financing round in Israeli AI-based online property and casualty insurance company Lemonade less than two years ago investment giant SoftBank followed up by leading a $300 million round in 2019.

Private funding giving breathing space

Does this indicate that the mentality of Israeli entrepreneurs is changing – from looking for a relatively fast and lucrative exit and moving on to the next start-up idea – to growing the firms they have founded well beyond the levels seen up to now?

That's a possibility, although it could also be down to the fact that a large amount – by Israeli standards at least – of venture capital money is being invested in the country every year. Last year, US$6 billion of such funds poured into the country which sees around 600 startups established annually.

Israeli work and team management platform company Monday.com announced last July that it had raised $150 million in its second financing round within a year, at a company value of $1.9 billion, almost quadruple the $550 million company value in its first financing round.

Pros and cons of working with unicorns

Nobody likes the uncertainty created by the sale of suppliers and the possibility that they may subsequently change tack – changing the focus of their development plans and products – and the need for clients to start the buying process all over again with a new supplier.

The questions for CIOs in dealing with start-ups are many and varied:

• If a firm sells products developed using venture capital investment, is it possible that it might be overtaken by a rival that has gone down the IPO route and therefore has more money and which can develop a more sophisticated product with more regular upgrades?
• If a company is dependent on private investors, might it burn the cash before it has time to develop its initial product further?
• Is it going to be more difficult for a CIO to persuade his company's directors to invest in a product created by a unicorn?
• If a unicorn is trying to operate somewhat under the radar, does that mean CIOs are less likely to identify its product?
• Does the CIO have the self-confidence and the confidence of the company's management to go along the start-up route?
• Is the company, and the CIO, a risk-taker or does it have a play-safe mentality? After all, playing safe almost ensures that the enterprise will fall behind the competition.
• Might a listed company be regarded as more prestigious, reliable and a better bet than buying from a unicorn?

The challenge for CIOs: exponential growth through risk or incremental development

IT managers are under constant pressure of being under-budgeted, under-staffed and overworked, but must still cultivate a mix of stability and innovation. CIOs need to continuously burnish their in-house reputations with the best technology decisions that will lead to higher efficiency, lower costs and a more competitive service offer.

Managers who are totally risk averse are going to struggle. The CIO needs to emphasize his value to the enterprise, and this can involve finding ground-breaking solutions that are not placed on the usual shelves.

And it is this need for a competitive advantage that provides the main impetus for CIOs to look beyond traditional vendors’ new products and identify startups that can bring in innovation at a lower cost. Being leaner and more fast-moving, startups can help grow the organization both financially and technically. And they can instill a startup-mentality into their clients' IT departments.

However, working with startups is not for non-risk takers. Companies must be united in accepting the danger of failure. Investing in a relatively early-stage solution will bring down costs, while waiting for a bullet-proof solution will lead to lost time and higher costs at a later stage.

Playing safe with a legacy provider will give a client incremental improvements, but certainly won't lead to the exponential advantages that start-ups can provide, and the savings made can be invested in dealing with other issues facing the enterprise.

Establishing solid relationships with reliable vendors and creating an almost continuous transformation of company processes are top of the CIO's priorities. Missing out on new technologies, with the resultant loss of respect from the board of directors downwards, almost ensures the firm starts the hunt for a replacement.