{"id":4165,"date":"2023-01-07T07:35:00","date_gmt":"2023-01-07T07:35:00","guid":{"rendered":"https:\/\/innovationisrael.org.il\/en\/?post_type=report&p=4165"},"modified":"2023-08-15T14:56:19","modified_gmt":"2023-08-15T14:56:19","slug":"growth-of-the-israeli-innovation-ecosystem","status":"publish","type":"report","link":"https:\/\/innovationisrael.org.il\/en\/report\/growth-of-the-israeli-innovation-ecosystem\/","title":{"rendered":"Growth of the Israeli Innovation Ecosystem"},"content":{"rendered":"\n

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High-tech companies undergo significant changes throughout their life-cycle, especially between preliminary start-up stages and more mature start-up stages, such as scaling. In preliminary stages, most of the company\u2019s resources are allocated to R&D and the product has generally not yet reached the market. In later stages, such as scale-up, companies have successfully developed an in-demand product and have fast-growing sales, and accordingly allocate much of their resources to marketing, sales, support, and sometimes manufacturing.<\/p>\n\n\n\n

There has been a recent trend of maturation in Israeli high-tech. This is evident in the significant uptick in the number of companies in more mature stages, which have grown both in sales and in the number of workers they employ. This growth has led to a relatively higher proportion of mature companies in the high-tech industry, which is reflected in various indices that analyze the state of Israeli high-tech.<\/p>\n\n\n\n

Figure 3.1 illustrates the size of investments in Israeli companies by stages in their life- cycle.1<\/a><\/sup>The stages of high-tech companies as defined by the IVC: Seed stages \u2013 a start-up company in its infancy, in the stage of product development and capital raising R&D stages \u2013 a start-up company discovering new knowledge about products, processes and services, and implementing this new knowledge to meet market demands Initial revenue stages – a company whose revenue does not exceed 10 million dollars a year Growth stages \u2013 a company whose revenue exceeds 10 million dollars a year<\/span> Particularly noticeable is the continuous growth in total investment in start-up companies that have matured to initial revenue and growth stages. The past decade has seen a dramatic surge in investments in companies offering a mature product, with sales climbing from 1.6 billion dollars in 2010 to 7.2 billion dollars in 2019.2<\/a><\/sup>For additional information on developments in start-up companies at seed stages, see chapter four of this report<\/span><\/p>\n\n\n\n

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Source: IVC data processed by the Israel Innovation Authority<\/h5>\n\n\n\n

Figure 3.2 provides further evidence for the growth of mature companies, and shows the change in sales and in the number of people in Israel employed by companies in revenue and growth stages. The diagram demonstrates that from 2011 to 2019, the number of workers employed by these companies increased from 23,000 to 70,000, and sales rose from 12 billion shekels to 61 billion shekels.<\/p>\n\n\n\n

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Source: Central Bureau of Statistics data processed by the Israel Innovation Authority<\/h5>\n\n\n\n

The number of companies that successfully reached the revenue and growth stage has risen accordingly. In 2011, there were 2,400 companies in Israel in these stages. By 2019, the number had increased twofold to around 4,500 operational companies.<\/p>\n\n\n\n

There are also over 30 Israeli unicorns \u2013 private companies valued at over one billion dollars \u2013 in the revenue and growth stage. Twelve of them became unicorns in the past year.3<\/a><\/sup>Based on data from TechCrunch.com and NoCamels.com<\/span><\/p>\n\n\n\n

Another interesting group of companies in revenue and growth stages is high-growth companies – companies whose number of employees has increased for three consecutive years and whose annual growth rate exceeds 20%.4<\/a><\/sup>High-growth companies, as defined by the OECD and EuroStat. High-growth businesses have at least ten employees in the start-year and an average annual employment growth exceeding 20% for 3 consecutive years. High-growth companies had an average of 83 employees in 2018<\/span>,5<\/a><\/sup>Data from Central Bureau of Statistics, Business Demography 2016-2018, processed by the Israel Innovation Authority<\/span> Figure 3.3 shows that the number of high-growth companies has almost doubled in size over the past decade.<\/strong> In 2010, 172 of these companies operated in Israel; in the past decade, this number increased by roughly 78%, reaching 322 companies in 2018.<\/p>\n\n\n\n

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Source: Central Bureau of Statistics data<\/h5>\n\n\n\n

The increased focus on mature companies is not exclusive to the Israeli high-tech industry. Investments in start-up companies at more mature stages have grown worldwide, alongside a decrease in investments in companies at earlier stages. Another expression of higher investments in start-up companies at more mature stages is evident in the increase in funding raised via external financing rounds by high-tech companies in Israel and worldwide.6<\/a><\/sup>KPMG, Venture Pulse, Q3 2019<\/span><\/p>\n\n\n\n

As outlined in the first chapter of this report, the increasing number of companies in revenue and growth stages is part of the welcome trend of the maturation of Israeli high- tech. The significant number of later stage companies in Israeli high-tech calls for closer study of the obstacles potentially impeding their growth in Israel. The remainder of this chapter explores one of the primary obstacles \u2013 Israeli companies\u2019 difficulty in raising debt.<\/p>\n\n\n\n

Appropriate Financing for High-Tech Companies in Growth Stages<\/h3>\n\n\n\n

High-tech companies in growth stages require substantial capital to finance their engines of growth, such as marketing existing products, business development, increasing sales, geographic expansion, technical support, manufacturing, and the acquisition of synergetic companies that facilitate their expansion to additional geographic markets and sectors.<\/p>\n\n\n\n

When these companies begin to raise capital, they need to decide which financial instrument to employ. Financial instruments used by companies are generally equity based, debt based, or a combination of the two. Equity financing includes stock, options, and convertible loans (loans that can be converted to stock). Debt financing generally comes in the form of loans, bonds and more. There are also hybrid financial instruments that combine equity and debt (quasi-equity), such as mezzanine credit<\/a> (from the Italian word mezzano, meaning \u2018go-between\u2019).7<\/a><\/sup>\u00ccnvestopedia.com\u2019s definition for mezzanine debt.<\/span><\/p>\n\n\n\n

Figure 3.4 displays the appropriate type of financing in the various life-stages of a high-tech company. The change in financial instruments throughout the life of the company reflects the diminishing level of investment risk in accordance with the maturity of the company and the cost of capital, respectively.<\/p>\n\n\n\n

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Source: StartExplore and TechCrunch diagrams processed by the 8<\/a><\/sup>Israel Innovation AuthorityIsrael Innovation Authority, based on startupxplore.com and crunchbase.com<\/span><\/h5>\n\n\n\n

Debt financing has two main advantages over equity:<\/strong><\/p>\n\n\n\n