What’s at stake for Israeli tech in 2017? Image Credit:Shutterstock
2016 was the year the Israeli tech ecosystem continued to establish itself as the most exciting, active and unique ecosystem outside of the US. This by itself is of course nothing new, as Israel keeps attracting the attention of top global funds looking for great deal flow outside of Silicon Valley, NYC and Boston; large corporates interested in tapping into innovation coming out of Israel; and large scale startups acquiring smaller Israeli startups as a strategy to get a foot in the Startup Nation door.
Given all that, it is no surprise that funding for Israeli startups has reached a record high in 2016 with Israeli tech companies raising $4.6 billion this year, up from $4.4 billion in 2015. The growth in funding is supported in part by massive influence of Chinese investors who “want a piece” of Startup Nation too and invest directly in companies as well as in Israeli VC funds.
On the flip side, 2016 was the year we saw a major decline in exits of Israeli companies which took a plunge of 67% compared to the previous year, with no huge, billion dollar Waze-type exits. While global market dynamics definitely played a role here, this is also a sign of maturity of the Israeli tech ecosystem where startups are less excited to sell early and strive to grow bigger companies.
As we get closer to dropping the ball and saying goodbye to 2016, many wonder what’s at stake for Israeli tech in 2017. Will exits continue to slow down or bounce back to 2015 levels? Will investment levels continue to climb? As we turn our attention to the new year, here are 5 bold predictions for Israeli tech in 2017.
AI, Machine Learning and Chatbot Startups Will Dominate
Today’s world revolves around generating massive amounts of data and applying it to specific applications. Artificial intelligence (AI) and machine learning technologies are taking it one step further and help predict certain processes based on user behavior, helping with increased personalization ultimately resulting in improved ROI. Israeli VCs have taken note of this trend and have been backing numerous startups across a variety of industries lately including companies such as Dynamic Yield and Know Mail, helping drive innovation in this area. Adding to the hype is Snapchat’s recent acquisition of Israeli-based AI startups Cimagine, which developed AI technology that allows users to visualize products in life-like 3D images at the click of a button.
Whether it’s commerce, consumer app or cyber security, machine learning and AI are becoming the standard in the tech industry and Israeli founders are well equipped to lead the way in these areas given their deep domain expertise. In addition, Chatbots are becoming more and more popular as both large and medium size startups and enterprises are looking for ways to incorporate this technology into its lineup of products. Over 100 companies presented at the Chatbot Summit in Tel-Aviv in November, and I expect the number to rise up in 2017.
Funding Rounds Will Continue To Grow
Large funding rounds for exciting startups have been more of a norm in Silicon Valley and as of recently, NYC. Israeli startups on the other hand have been taking a leaner approach and many founders are proud for having a capital efficient approach for raising money. In 2016, we’ve seen that changing as founders of growing startups and investors realized that larger rounds will enable companies to scale faster and compete more aggressively in the market.
A few examples of larger than typical funding rounds include analytics startup Sisense ($50M round D); car ride sharing company Via ($100M series C); and most recently the funding of group video chat app HouseParty ($50M round led by Sequoia). I expect that funding rounds will grow not just in later stage companies, but also in seed and series A stage, making the Israeli market a bit more competitive in both valuations and funding amounts with its Silicon Valley and NYC counterparts.
The Cyber Security Bubble Will Burst
Many Israeli tech founders I meet with joke that if they only told investors they are building security startups they’ll pour money into their companies. “All they want to fund is two guys who went to the army and can build the next layer of cyber security” I’ve heard many times with anger and frustration. That’s how popular cyber is among the Israeli venture community. The myth is that Israel is the Silicon Valley of Cyber Security. After all, with so many startups innovating in this area, and so much tech talent coming out of the Israeli army, there is no doubt that Israel is a world leader in this industry.
The Israel Export Institute stated at the Israel HLS & Cyber Conference that investment in cyber-security startups climbed more than threefold and exports increased 15% in the first half of the year, compared with the same time in 2015. That made Israel the No. 2 destination for cyber-security investment globally after the United States. With the expectation by US-based security VCs that 2017 will have lots of M&A activity in the space, this has great potential for startups in this area. However, this also means that there will be lots of consolidation and only companies that show business value (not just superior tech) will be the ones to draw attention.