10 years, 10 companies, $100 billion: Israel’s tech ‘Big Bang’ is here
In the next year or two – assuming market conditions don’t change – 20 to 40 Israeli tech companies will go public in New York, with an average valuation of $3 billion. Waiting in the wings are dozens more small companies, all in earlier stages of growth.
While it’s true that the IPO market is currently “hot” – thanks to the low interest rates, influence of the coronavirus crisis and other external factors – this group of companies, which grew in the Israeli high-tech ecosystem in recent years, represent real value that rightfully belongs on the stock market.
How big will this Big Bang be?
Much like the Big Bang that gave birth to the universe, the big technological bang ahead of us will create a new reality, changing the Israeli economy in coming decades. It will create tens of thousands of new jobs, both in tech companies and in the circles around them. It will generate huge wealth to the Israeli economy, and if the government acts smartly, we could all benefit.
There have been a lot of IPOs in the past. Why will it be so different this time? Let’s look at the numbers.
We took Wix public in 2013. In the 10 years prior, there were only five Israeli companies that went public.
Since 2013 there have been nine IPOs. In contrast, 2020 alone saw seven issues and 2021 has already seen more than a few. Now imagine 30 IPOs in the space of 18 months. It’s a paradigm change for Israel.
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So what changed?
At the start of the 2000s, Israeli high-tech looked considerably different; it was focused on developing software for strategic foreign clients. In those years, it was customary for a management team (or at least the CEO) to move to Silicon Valley or New York. Entrepreneurs (and investors) dreamed of an exit, and the measure of success was how fast you could do it, and for what valuation.
When we started Wix in 2007, we were also subject to pressure from investors and board members to move our CEO, Avishai Abrahami, to the U.S. The assumption: it’s impossible to make it in the biggest target market without the CEO being based there. However, the pressure didn’t work. Avishai, like the rest of our management team, are Israelis who operate in Israel and wish to remain here.
That’s just one example of the dilemmas we faced as we grew the company. We wanted to prove it could be done differently, that it was possible to build a tech company selling a product to end users and operating in Israel. We took on the challenge of proving you can build a large high-tech company that starts – and remains – in Israel.
We weren’t the only ones seeking to change Israeli high-tech. Within a few years, several local companies smashed this glass ceiling, primarily because of the rise of the “unicorn” generation. A generation which in recent years has shown a dramatic rise both in valuations, and in the size and frequency of their funding rounds. Skeptics claimed that company valuations were inflated and that this was a bubble disconnected from the real world. But the increasing number of public offerings shows us that the opposite is true: the value of these companies on the private market tends to be lower than what public investors are prepared to pay.
From Start-Up Nation to High-Tech Nation
Until Wix’s IPO, the most common questions we got were, “What’s with the exit?” and “Will you have to sell the company at some point?” A public offering wasn’t even on the table.
In 2010, I was invited to breakfast with Michael Eisenberg, who at the time was a Wix board member for Benchmark Capital and today is a managing partner at the Aleph venture capital fund. He suggested taking Wix public on the Nasdaq.
The proposal surprised me. I immediately called Avishai to ask for his thoughts. His first response was, “I have no idea what to think about an offering.” Neither we nor anyone in our circle had any experience with, or practical knowledge of IPOs or public companies.
That’s why in 2014 we founded the Israel Growth Forum, along with other companies like IronSource, Fiverr and CyberArk, to work together on realizing the vision of a High-Tech Nation. We dubbed our concept “10x10x10”: within 10 years, 10 Israeli companies would be worth $10 billion.
The forum was set up as a place where companies could support and advise each other, and to build an organization that could work with the government on developing the regulatory infrastructure to build large high-tech companies.
Today, the market has progressed and so have the companies. The most common question in the Israeli ecosystem nowadays is less, “How do we get to an exit?” and more, “How do you build a large company that lasts for the long term?”
What kind of high-tech will the Big Bang breed?
The Big Bang outlines a path for growth that looks at the long term. Public companies represent management team’s interest in taking the company all the way to significant expansion and growth. An IPO is just the first step on this path. These companies will end up in the ‘major leagues’. And this is powerful.
We had a perfect example of this from the first COVID-19 lockdown when we developed a system that helps Home Front Command (branch of the IDF) communicate with the elderly and provide solutions to their needs. To work quickly, we got help from Twilio. To get that help, all I had to do was make one call to the CEO – a call I wouldn’t have been able to make in the past.
Companies on the path to going public will have their brands considerably strengthened and will become internationally known, both among end-users and investors. This move is likely to change the companies themselves. The public market matures these companies by demanding results, consistency and fulfillment of their objectives. Management teams will have flexibility and freedom of action, since the offerings will considerably expand their circle of shareholders. These companies will also get a powerful tool to reward employees, who will be able to realize their holdings at significant value.
But the influence on the companies themselves is nothing compared to the influence on the local economy. This is a dramatic change with inherent challenges and opportunities.
Firstly, the Big Bang will create tens of thousands of new jobs. While the Start-Up Nation mostly required programmers, an environment with large, mature companies that keep their headquarters in Israel has much broader employment opportunities. Along with a continued demand for RD personnel, there’s also a need for people in many more professions like management, marketing, sales, operations, tech support and design. The ramifications are clear: new types of people who weren’t relevant to technological growth can now enter the workforce. Only 50% of Wix employees are RD; the rest belong to other disciplines.
Another dramatic effect will be an increase in government tax revenues, both directly and in terms of external capital flow subject to Israeli taxes. All this is even before considering the auxiliary influence of companies supporting high-tech – suppliers, services, rentals, and the tourism and catering industries. These secondary circles can expect to enjoy the business stability of constant and expanding consumption.
Third, opportunities for outstanding Israeli talent will no longer be overseas. Mature tech companies will create significant management opportunities in Israel. Knowledge that – in the past – never flowed through Israel will accumulate and be transmitted to broader circles here, rather than moving abroad. The myth that “Israelis don’t know how to manage” will fall away and we will develop a generation of senior managers of international stature. Thus we will not only fight human capital flight, we will be able to become a destination for individuals who look for better opportunities.
The local Big Bang will break out past Israel’s borders and impact the global economy. Mirroring the influence of going public on the companies on brands, we’ll see new and exciting content pour into the Israeli economy brand – an economy that will not be defined as merely a “Start-up Nation” which excels in coming up with fast and improvised solutions. It will be a focal point for the development of technology on a global scale.
With – or without – the government
Along with its opportunities, the Big Bang also poses macroeconomic challenges for the economy.
First, the Big Bang puts more pressure on the dollar against the shekel. Currently, the shekel has been strengthening due to the relative success of Israeli high-tech and the fact that it brings large amounts of foreign currency into the country. Absurdly, the high-tech sector’s success does serious harm to itself, a trend that will intensify after the Bang. A strong shekel against the dollar creates significant problems for large tech firms that are covering expenses in shekels. For small startups, this could be a death blow – they raise funds in dollars but pay their employees in shekels. It’s even fair to assume that some startups won’t survive the Bang.
Another challenge will be a fundamental change in the high-tech labor market. Take for example, employee compensation. After an IPO, the aggregate of compensation tools that a company has becomes more sophisticated, with the availability of liquid shares as opposed to options in a private company. Thus, competition for human resources will dramatically intensify, which could lead to wage increases unparalleled anywhere, even in Silicon Valley.
Competition for tech employees will escalate for another reason: shortage of tech manpower. This shortage is longstanding in Israel with the coronavirus crisis bringing only temporary relief. As the industry expands, we can expect to see an increase in offshoring – hiring of employees outside of Israel. We’re already seeing a trend of setting up development centers in Eastern Europe that employ thousands of excellent workers, particularly in tech professions.
The problem is even greater in non-technology jobs. There’s no training or academic infrastructure for these careers in Israel. While tech education has gotten some government attention, the management side of technology companies hasn’t been cultivated in Israel. It comes as no surprise then, that public companies generally prefer to hire foreigners for these jobs.
How can Israel cope with the challenges of the Big Bang?
Make no mistake: we’ve reached the Big Bang stage in Israeli high-tech through the maturing of the market and the aspirations of entrepreneurs who want to see their companies grow. Not due to government planning or directed policy.
As a result, many opportunities were not exploited, and companies coping with challenges got no help. If we don’t prepare, lay the infrastructure and incentivize desired behaviors with a clear and stable work plan that looks years into the future, we are liable to squander some of the opportunities the Big Bang will bring, and we won’t meet the challenges it poses to us as an economy.
This work plan must include several important national infrastructure projects, first and foremost in the realm of education. While it can take years before reforms in educational infrastructure bear fruit, we will absolutely enjoy those fruits for many years.
The educational system must treat coding as a core subject, from elementary school through a mandatory matriculation exam. Programming is a language in every sense of the term, and must be studied as such. Learning coding as an additional language will meet several objectives:
It will create equal opportunities to enter high-tech for people in outlying areas, women, the ultra-Orthodox and Arab populations. It will also give every pupil the tools to maneuver in a complex technological era. Countries like Japan, Singapore, New Zealand, Ireland, and cities like New York and Chicago, are already teaching coding as a language from kindergarten. So we are already falling behind.
Along with teaching programming, there must be fundamental changes in the way English is taught; it must focus on practical, everyday and business English. The pupils of the future are going to need English as a natural spoken language, so they can use it to sell, address audiences and make presentations.
High school and academic studies also need revamping. Programming studies should be expanded to full high-tech studies that include research and development studies, along with skills that are not RD, from digital marketing through how to build a product to user experience. In day to day practice of a tech company, the employees need to have a multidisciplinary background and know how to work in heterogeneous groups.
The business infrastructure must also be improved. We must build a regulatory infrastructure that gives companies simple and updated frameworks to do business in 2021, which makes it easier to do business and give Israeli companies a competitive advantage. One must recall that Israeli companies already suffer the inherent difficulty of not operating in their target markets, putting them at a physical distance from their investors and users. This makes a relative advantage in everything related to infrastructure – regulation, corporate governance, taxation, the structure of the workforce – even more important.
Finally, to assure the continuity and survival of the trend of large companies, we must make sure that Israel is always at the forefront of existing technological capabilities and that the experience of the user – the citizen – is the most technologically advanced. To achieve this, internet infrastructures must be enhanced along with the pace of new technology penetration by removing obstacles and bureaucracy.
Just as the previous stages of the development of Israeli high-tech didn’t happen thanks to the Israeli government, so will the Big Bang take place with the government or without it. The government must answer a question that has nothing to do with the Bang but with its own values – whether it wants equal opportunities for social and geographic peripheries, to boost the economy’s productivity, increase tax revenues and accelerate digitization. If the government can maximize the potential inherent in the processes Israeli high-tech is undergoing, we could also see a social Big Bang.
The goals we set for ourselves when we established the Israel Growth Forum are no longer relevant. We need a new strategic goal for our industry. I propose a new goal of 10 years, 10 companies, at $100 billion value. It may sound like a fantasy, but that’s what the previous goal sounded like when we set it. If, alongside the goal, we create a roadmap for the long term and stick to it, the path to an even more ambitious goal will be shorter than ever, as will the path to true profit for the Israeli economy, state and society.
The writer is the President and Chief Operating Officer of Wix, and Chairman of the Israel Growth Forum.