Go Israel: Cheaper startups with higher return & shorter exit time

There is no doubt that Israel is a nation for innovative startups with the largest number of startups per capita in the world. According to Forbes, Israel has 1 startup for every 1,400 people, while France has 0.112 startups for every 1,400 people. Germany has 0.056 startups for every 1,400 people, and the UK has 0.21 startups for every 1,400 people.

However, when I talked to the VC investors, some of them believe that the Israeli startups are often overvalued since all the money around the world goes to Israel, and the Israeli startups have the most sufficient funding sources in the world. On the other hand, my Israeli VC friends argue that the Israeli startups are actually undervalued. Who are right then?

As a 100% data-driven person, I collected some data from Pitchbook and compared the startups in Israel and in the US. First, I collected data for all the deals with Israeli startups and analyzed the verticals that most Israeli startups were developed into. Not surprisingly, more than half of the Israeli startups are innovating in ten enterprise-facing verticals: SaaS, Industrials, Artificial Intelligence & Machine Learning, Life Sciences, Manufacturing, Big Data, Cybersecurity, Cleantech, Fintech, Internet of ThingsTo compare apples to apples, I compared the US startups and the Israeli startups from the above verticals, and I assumed that there was no fundamental difference between the Israeli startups and the US startups from these deep-tech verticals.

Here are some of the interesting findings:

1. The Israeli startups offer a higher IRR (51.90%) than the US startups (29.01%).

2. Seed-stage startups are cheaper in Israel than in the US. The median valuation of seed-stage Israeli startups is $1.86 million, while the figure is $6.00 million for the US startups.

3. It is cheaper to acquire Israeli startups than to buy the similar US startups. The median value of exit deals (M&A and IPO) is $39 million in Israel, while it is $50 million in the US.

4. It takes a slightly shorter time to get acquired/go public for the Israeli startups (7.29 years) than for the US startups (8.32 years).

5. The exit activity level is higher in the US than in Israel. The “exit deal/seed-stage deal” ratio is 37.08% in the US, and it is 19.69% in Israel.

Based on the data, it is reasonable to believe that the Israeli startups are not overvalued at least comparing to their US counter-parties. Moreover, the Israeli startups are offering a higher IRR for VC investors with a shorter exit time frame.

While Israel is selling its startups to global buyers, US buyers like to purchase domestic startups. By looking into the list of acquirers for Israeli startups and US startups, we can find that Israeli startups have been sold to global acquirers such as Samsung, Huawei, Siemens, Apple, and Microsoft. However, it looks like only the giant US companies will buy startups from Israel, while most of the medium-to-large US companies still favor purchasing domestic startups regardless of the potential inflation.

Many people have been claiming that the US startups are overvalued (Source 1Source 2). Some people explained the over-valuation by arguing that US had a better startup ecosystem that would secure a rapid growth for the startups. However, I am not sure how much the “ecosystem” should be compensated for. Moreover, is the ecosystem equally important to all types of startups? Or does the ecosystem matter more to the consumer-facing start-ups than the deep-tech companies?

Any thoughts about the disparities are welcome. A spreadsheet with raw data can be downloaded here.

This research project is completed through a collaboration between Fan Wen at Yale SOM and Josh Liggett at OurCrowd.

Disclaimer: The article is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation.

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