From the Chinese stock market crash that shook global equity markets to the obsession with hunting for unicorns, 2015 was a year filled with volatility and non-traditional capital flowing into the private markets. Israel felt the effects of these global trends, with an unprecedented $5 billion in investments, $8 billion M&A activity and a significant drop in IPOs (to $4 billion). Yet beneath the surface of these high-level statistics lies a wealth of interesting data.

Whether it’s sectors like cyber and fintech heating up or syndications and co-investments leading to increased round sizes and valuations, the story of Israel’s 2015 startup activity shares much in common with the global technology ecosystem.

Sector spotlight

Cyber. Sony’s security breach last December accelerated the worldwide realization that, as the TV series Homeland puts it, “The soldiers are hackers, the battlefield is online.” Israel’s edge in security, fueled by the IDF’s elite 8200 unit and headlined by Microsoft’s $320 million acquisition of three-year-old Adallom had investors contribute $520 million to Israeli cyber in 2015.

The realization that Israeli cyber companies can successfully IPO (CyberArk in 2014) or quickly exit for large sums has caused the appetite for Israel cyber to skyrocket this year.

Fintech. The $4.7 trillion in financial services revenue at risk for technological disruption was a prime target in 2015. Startups around the globe raised $11 billion in venture capital in the first three quarters, up from $6 billion through the same period in 2014. Israeli fintech exits grew to $1.3 billion in 2015, up from $700 million in 2014.

Meanwhile, marketplace lender Prosper established an R&D center with its acquisition of Billguard, Barclays’ launched an accelerator to tap into Israel’s talent pool and cash flow optimizer Fundbox raised $90 million.

Adtech. Global adtech experienced a significant correction in H2, despite IronSource’s $150 million merger and Taboola’s $117 million Series E in H1. Highlighted by Fidelity’s mark down of Taboola from $1 billion to $500 million, Appnexus’ fraud cleanup and Turn and Pubmatic’s recent layoffs, investors are requiring ad networks to reinvent themselves and find meaningful points of differentiation and sustainable business models. This shifting mentality amongst VCs caused a significant drop-off in Israel’s adtech fundraising efforts, from $260 million in H1 to $52 million in H2.

B2C. A majority of the 61 U.S. unicorns that emerged in 2015 were B2C plays. Once a taboo for investors in Israel, success stories like Google’s $1.1 billion acquisition of Waze, Wix’s IPO and Rakuten’s $900 million acquisition of Viber have buoyed investor confidence in Israel’s ability to build consumer-facing unicorns. This year’s Israeli B2C investments were highlighted by Fiverr’s $60 million round, Moovit raising $50 million and Lemonade landing a $13 million seed round, challenging the notion that these kinds of rounds are only possible in Silicon Valley.

Enterprise and medtech. Much like the Israeli cyber and fintech sectors, which benefited from significant global attention in 2015, enterprise software and medtech (including life sciences, biotechnology and medical devices) continued to flourish as the backbone of Israeli high-tech. Together, they contributed to around half of Israel’s total fundraising and exit activity.

Global tech IPO slow down, M&A growth reflected in Israel

After a hot start in the first half of 2015, China’s market crash in June caused widespread market volatility, resulting in the lowest number of tech IPOs since 2009. Israeli IPOs suffered in parallel, with only $4 billion in IPO activity this year (down from $10 billion in 2014). Private markets, on the other hand, told a far different story. Aligned with the $713 billion in global tech M&A, dwarfing the previous record of $412 billion set in 2000, Israeli tech M&A surged to a record $8 billion in 2015, up from $5 billion in 2014.

Late-stage activity accelerates, but why?

With 61 private companies surpassing $1 billion valuations, the global trend to “stay private longer” was fueled by a plethora of hedge funds, mutual funds, private equity funds, corporations and private individuals. This trend impacted Israel too, as average time to exit increased from six to seven years in 2015, and late-stage investments in Israel grew from $1.3 billion in 2014 to $2.2 billion in 2015. Furthermore, late-stage funds raised $689 million, more than triple the $214 million in 2014.

Watching Uber’s valuation grow 20x in 20 months while the Barclay Hedge Fund Index reported a measly .93 percent YTD return frustrated institutional money managers. Rather than analyzing and investing solely in publicly traded companies, a swath of new institutional money managers invested alongside VC and PE funds both globally and in Israel in 2015. By getting in earlier, these funds can share in the value created pre-IPO and enjoy some of the wealth created in the venture capital industry.

The story of Israel’s 2015 startup activity shares much in common with the global technology ecosystem.

Much like institutional investors, individuals frustrated by low interest rates and poor public market performance looked to new financial instruments like P2P lending and equity crowdfunding to diversify their portfolios and seek higher returns. With equity crowdfunding platforms supplying access to highly coveted Israeli startups, participation from private investors continued to grow. Furthermore, public adoption of these platforms enabled VCs and angels to syndicate more deals with private individuals through the Internet, creating additional capital for companies seeking private funding.

Corporations continued to show heightened interest in technology startups with a growing need to stay relevant and innovative. To this end, 17 Israeli accelerators were established in 2015, with Barclays, GE, Intel, Cisco and Samsung amongst the prominent foreign corporations that realized an Israeli accelerator is a necessity to stay globally competitive. With a total of 80 accelerators launched in the past four years, Israeli startups’ connectivity to the global business community is initiated at the earliest stages of formation.

What are the consequences for Israel?

The influx of cash from institutions, corporations and private individuals has impacted the Israeli startup ecosystem in four main ways.

First, the flow of capital from non-traditional sources endowed entrepreneurs with more options, negotiating leverage and thus, better terms. These factors shortened the fundraising horizon for Israeli startups, allowing them to spend less time worrying about money and more time building their businesses.

Second, the record investment in Israeli high-tech created a significant number of new jobs, pushed wages to unprecedented heights and intensified the competition for senior developers, product managers and data scientists. Startups will need to think creatively to attract and retain Israel’s best and brightest.

Third, average round size grew 34 percent, to $6.3 million. 2015 saw a record number of syndications, and co-investing became commonplace. Many VCs, angels and equity crowdfunding platforms that had often competed for deals chose to collaborate.

The fourth and final consequence, higher valuations, cannot be separated from the astounding 61 new unicorns worldwide. The meteoric rise in late-stage valuations globally has affected the venture capital industry and investors throughout the company life cycle. In light of both increasing demand for technology investments and bullish financial projections, prices rose across the board. Average seed-stage valuations in Silicon Valley ($5.1 million), New York ($4.5 million), Europe ($3.2 million) and Israel ($2.7 million) are at their highest levels since the dot-com boom.

These effects have led many to wonder: Is this a bubble? We may very well be at the peak of the business cycle, but it doesn’t mean we are heading toward a big bust. In the past few years, we’ve hit a critical mass of smartphone adoption, affordable Internet access at scale, reliable cloud computing infrastructure and the democratization of data.

These secular trends, combined with the era of open-sourced code and APIs, have enabled entrepreneurs in every industry — materials, telecommunications, healthcare, transportation, agriculture, finance, consumer products, energy, industrials and utilities — to reimagine how businesses can and should operate.

Certain sectors like adtech already experienced a significant correction this year, and others may follow. Public markets may have a rocky year, and many unicorns will follow Gilt, sold for hundreds of millions, not billions. But that doesn’t mean we should expect a meltdown in 2016. In the aggregate, we remain cautiously optimistic that 2015 wasn’t a fluke, but rather a new baseline for Startup Nation.

Featured Image: Steve Allen/Shutterstock

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A Global Perspective Of Israeli Tech In 2015