I just returned from my first trip to China, taking 5 Israeli startups to the beautiful island of Hainan to pitch and meet with dozens of Chinese investors hungry for new technology. In just 2 days of networking, I learned more about business in China than in years of working with incoming Chinese delegations in Israel.
Growing M&A Activity by Israeli Unicorns and Scaleups
It seems that every week we hear news of a new Israeli unicorn and mega round of investment. Israeli high-tech funding reached a record $25 billion in 2021, with $18.93 billion (74% of total capital) raised in rounds over $50 million, according to the latest data from Israeli research institute IVC. 2021 also saw 33 privately held technology companies join the billion-dollar club, the largest amount in a single year. But what do companies do with all this capital?
Axis Innovation - data from IVC
Grow, grow, and grow. In order to fuel their growth objectives, acquisitions have become a valuable tool for these highly capitalized startups. In this blog, we will outline the main reasons for the rising number of Israeli acquisitions. Our unique analysis primarily focuses on acquisitions made by Israeli unicorns (companies valued over $1 billion).
Our data shows that both the number of unicorns and the number of acquisitions made by unicorns has increased dramatically in recent years. Our analysis also covers acquisitions made by Israeli scaleups who are valued less than $1 billion. Following our analysis, based on Axis Innovation’s proprietary research and data collection, we have made some predictions for the future of Israeli unicorns and M&A activity.
Part 1: Reasons to acquire
There are four essential reasons for a growth company to make an acquisition:
Expansion into new markets
Let’s break them down one by one.
Team - When a buyer acquires a company because of their team, it is known as an aqui-hire. When startups raise large investment rounds, the majority of funds go to enable the company to grow at super speed. This growth requires a rapid increase in manpower. Hiring is one of the biggest challenges here, not only for finding the number of people to be hired but also for finding the right talent in today’s crowded market. Additionally, much of a startup's growth is international. Acquiring a foreign startup is a quick and easy way to find talent in a new target market. Thus, as top talent is often working in early-stage startups, aqui-hires have become the most popular motive behind acquisitions.
Example: An recent example of this is Gong’s acquisition of Israeli startup Vayo, which specialise in data analytics for sales teams. Gong acqui-hired Vayo’s team in order to add to their A.I capabilities.
Technology - A company may also look to acquire a start-up to buy their proprietary, patented technology. As companies grow, expanding their IP is critical to maintaining a strong market share and differentiating themselves from competitors. Unicorns will often look to acquire start-ups if their technology can solve a targetted problem or help them expand into a new business area.
Example: A recent example of this is eToro’s acquisition of Delta in 2019. The Delta app enables investors on eToro’s platform to make smarter decisions regarding their crypto investments by providing portfolio tracking and pricing data. Their technology is beneficial for eToro, which recently ventured into the crypto space, as it enables eToro’s crypto traders to better analyse and track crypto stocks.
Expansion - Often companies may be looking to expand and enter new markets in order to gain access to a wider customer base. By expanding into new markets, companies can work with new consumers and fuel growth. One way of carrying out this strategy is to acquire a company that is already set-up in a market of interest. This is very common amongst unicorns, who have the necessary capital to do so.
Example: Gett recently acquired UK-based company Radio Taxis, in order to expand their share of the taxi market in London. Following this acquisition, approximately 1,500 more London black cab drivers are now using Gett’s app.
Revenue - Another means of gaining access to a new revenue source is simply acquiring a company that brings in an impressive amount of income each year. This is a useful strategy for large companies (often after they are public) looking to increase their long-term income, as eventually the increased revenue year-on-year will outweigh the cost of the acquisition.
Example: A recent example of this is ironSource’s acquisition of Tapjoy, which cost the company $400 million. While this is a large amount of money, Tapjoy’s income reached roughly $80 million in 2021, therefore ironSource will receive a significant boost in their revenue in return.
Most acquisitions take place due to more than one of these reasons - often they can be for all four!
Part 2: Israeli Unicorns Acquisition Activity
At Axis Innovation, we decided to analyze the acquisition activity of Israeli unicorns. We wanted to understand what was the driving force behind these acquisitions, where the acquisitions were taking place, and what opportunities will present themselves in this space in the coming years.
“Israeli Unicorn” - any privately held company founded by Israelis, whether the HQ is in Israel or not, with a valuation of $1B or greater. With this definition, we reviewed data from multiple sources including Crunchbase.com, Startup Nation Central, Calcalist Tech list of unicorns, and Tech Aviv’s list of unicorns. Based on this, we identified 85 companies as of January, 2022.
Israel’s 85 unicorns have made 97 acquisitions in total, 42 of which took place in 2021. Israeli unicorn M&A activity has increased since 2014, and 2021 was a record year. Over 40% of Israeli unicorn acquisitions took place last year. 87% of acquisitions occurred after 2018, suggesting that it is becoming an increasingly popular growth strategy for unicorns.
Local or International?
When Israeli unicorns look to acquire startups they tend to shop abroad, which is quite different from US or European unicorns which acquire a majority of local companies. This may be explained by the small size of the Israeli market and the fact that many acquisitions may be for market expansion and not just talent.
Our data shows that 61.9% of M&A deals were acquisitions of US-based companies, 21.6% were European and only 9.3% were Israeli. Roughly 70% of acquired companies were from the same industry as their unicorn buyer.
The Hungriest Unicorns
When analyzing the list of unicorn acquisitions, a large disparity emerged. 40 have made at least one acquisition, while 45 have not made any. Within the group that have acquired companies, a select number have made a disproportionate number of acquisitions - 37% of acquisitions were made by 5 unicorns.
The top 5 ‘hungriest” unicorns who have made the most acquisitions in 2021 are:
Let’s take a look at each of these companies and their activity.
Compass, a proptech company who provide an online platform for people to buy and sell real-estate assets, have been the most active with 16 acquisitions, 6 of which were made in 2021. All 16 acquisitions were US-based companies and 14 out of 16 were startups within the real estate industry.
Trax Solutions, a retailTech company, made 6 acquisitions, all of which took place between 2018 and 2020. They are one of the few Israeli unicorns who acquired a non-European or US based start-up. Trax acquired LenzTech in 2019 a Chinese-based startup who focuss on image recognition for consumer goods in the retail industry.
SpotOn is a finTech company that have developed a mobile payment technology and management system for restaurants and small businesses. They have made 5 acquisitions, all from the US. All acquisitions were from within the same industry apart from Lifeyo, a US-based web design platform.
Snyk is a cybersecurity company and have made 5 acquisitions. In contrast to SpotOn, their 5 acquisitions came from 5 different countries, namely France, Sweden, Canada, Switzerland and Singapore.
Gusto provide a cloud-based payroll, benefits, and human resource management solution for businesses. They have made 4 acquisitions, 3 of which took place in 2021. All companies acquired by Gusto were US-based.
Pony and Scaleup Acquisitions
Our analysis so far has highlighted the M&A activity of Israeli unicorns. However, some companies are also making acquisitions before they reach the coveted $1B valuation. For the purpose of this report, we will refer to scaleups who are valued between $500M and $1B as ‘ponies’.
Once again using data from Crunchbase.com and TechAviv, we analysed the M&A activity of Israeli ponies and scaleups. We found a total of 81 Israeli companies below a $1B valuation who have made acquisitions, 16 of which are ponies. These 81 companies have made a combined 89 acquisitions, including 10 acquisitions made by Israel’s 16 ponies.
Israel’s most acquisitive pony is Minute Media, a digital media company valued at roughly $700 million, have made 5 acquisitions, including Israeli startup Wazimo who they purchased in 2021.
Optimove, valued at roughly $500 million, acquired US-based startup PowerInbox in 2018 and Israeli-based startup Axonite in 2020.
However in Israel, M&A is not carried out exclusively by unicorns and ponies. We found that acquisitions is a very popular growth strategy for Israeli scaleups valued less than $500 million as well.
Allot, a telecommunications company valued at just over $300 million have made 5 acquisitions from Israel, US, New Zealand and Spain. Their latest acquisition took place in 2018, when they acquired Israeli cybersecurity startup Netonomy.
Bookaway, a ground travel booking platform, is another Israeli company valued under $500 million making acquisitions. Following their series B investment round where they raised $35 million, Bookaway acquired Croatia-based ground transportation provider GetByBus and Thailand-based ticket-selling platform 12Go.
2021 was also a record-breaking year for Europe’s technology sector. $107 billion in investment brought 98 new European unicorns. We analysed the M&A activity of European unicorns and found a similar pattern to what we have seen in Israel over the last decade. Using data from Crunchbase, we found there to be 125 European unicorns. Out of this list, 71 have made 231 acquisitions, 79 of which were carried out in 2021.
Our analysis shows that, much like what is happening in Israel, M&A is becoming an increasingly popular growth strategy for European unicorns. Roughly three-quarters of European unicorn acquisitions took place after 2018.
Part 3: Forecast for Israeli M&A and Unicorns
Based on our research and studying trends, we have some predictions for the future of unicorn M&A activity in Israel.
Prediction 1: Growth of the speed of unicorning
Our first prediction is that Israel’s unicorn population will continue to grow more and more rapidly. 43 out of Israel’s 85 unicorns are 6 years old or younger. A recent study by Catalyst Investments shows that the average time taken for an Israeli tech startups to reach unicorn status has decreased by half in the last 10 years.
One of the primary reasons for this trend is an increase in US-based investment. In the first half of 2021, there were 27 investment rounds over $100 million and 23 of these were undertaken by US institutions. This investment is accelerating the transformation from startup to scaleup and eventually unicorn status, and is therefore increasing the speed of ‘unicorning’.
Prediction 2: From Ponies to Unicorns
As mentioned earlier in the report, there are numerous Israeli ponies who are near unicorn status but have not yet reached the $1 billion valuation mark. Many of them are well on their way to becoming fully-fledged unicorns by 2022.
For example, Future Meat - a food-tech scaleup founded in 2018 focussed on clean meat and cellular agriculture as a replacement for traditional animal-based foods - has a valuation of over $900 million. We expect Future Meat will be one of the first ponies to join Israel’s ever growing unicorn population in 2022.
Prediction 3: Unicorns acquiring earlier
Traditionally, M&A activity has always been viewed as a growth strategy for more mature firms. However, using the 39 unicorns that have made atleast one acquisition as our data, our analysis shows that the time taken for these companies to make their first acquisition has decreased dramatically.
Whilst this relationship is merely correlational, there is a clear trend that can be seen. One reason for this trend is greater access to capital - both domestic and foreign investment in Israel’s economy have increased since 2001. 2021 was a record breaking year for Israeli hitech, which as mentined before raised over $25 billion. Assuming investment into Israel’s economy continues to rise, Israeli scaleups, ponies and unicorns will have access to greater capital and will therefore be presented with more opportunities to make acquisitions.
What the experts are saying
In a recent interview with Calcalist Tech, the Co-founder of Entrée Capital Avi Eyal stated that 2021’s record-braking investment in Israeli high-tech won’t necessarily continue into 2022. Following the drop in the market cap of some public Israeli tech companies, Eyal argues that some private companies may follow suit.
Mike Rimon, a partner at Meitar, believes that a jump in M&A activity should be expected and that startups that have raised a lot of capital in private markets or through IPOs will look to acquire both locally and globally.
Another partner at Meitar, Itay Frishman, stated that he expects 2022 to “be characterized by a record number of Israeli companies buying other companies”. This is in reaction to the pressure these companies will be under to prove the valuations at which they raised these funds.
Part 4: Summary
Following a record-breaking year of both domestic and foreign investment into Israel’s economy, Israel’s unicorn population is booming, with more scaleups expected to join in 2022. Global powers such as the US continue to provide funding for Israeli scaleups and ponies to grow, accelerating their path towards a $1 billion valuation. Acquisitions are becoming an increasingly popular growth strategy amongst Israeli companies, especially unicorns. Scaleups are no longer waiting until they are ‘mature’ enough to acquire and conversely are making acquisitions when they have sufficient funding. What will 2022 bring for Israeli and European M&A?
By Sam Lander and Jason Weiss