Israel’s high-tech sector has been said to rival California’s Silicon Valley in the areas of entrepreneurship and innovation. Entrepreneurs from Israel set up between 600 and 700 new tech companies every year in a country with a total population of less than eight million. But in the two decades since the Israeli high-tech sector came into its own, it has never produced a company anywhere approaching the size and scale of American heavy hitters such as Google, Apple or Facebook. Indeed, since the tech bubble burst in 2000 — and with it, the market for initial public offerings (IPOs) — few Israeli companies have opted to remain independent.

Israeli companies typically follow a trajectory that starts with forming a team and developing an idea, then raising two or three rounds of venture capital and ending within a few years by selling out to a larger firm. That is not an unusual story for start-ups in America either, but Israeli start-ups are almost always acquired by a foreign company rather than by another locally based business. Thus, mergers and acquisitions cause Israeli companies to disappear as distinct entities, rather than aggregate into bigger ones. More often than not, the start-up becomes a research and development center for the acquiring company.

Onavo, a mobile utility app maker acquired by Facebook in October 2013, is a case study. It was formed three years ago by two alumni of Unit 8200, the Israeli Intelligence Corps unit responsible for signal intelligence and code decryption. The company raised $13 million from Hong Kong billionaire Li Ka-shing’s Horizons Ventures, U.S. VC funds Sequoia Capital and Motorola Mobility Ventures, and the Israeli VC fund Magma Venture Partners. Facebook, which paid about $150 million for the company, plans to use Onavo’s team as the basis for its first Israeli R&D center.

Israeli tech companies are once again lining up to go public in the U.S., with an estimated 15 or more having either filed for an IPO or considering one.

Recently, however, there are signs that this pattern may be changing. Start-ups have been raising record amounts of capital, with many companies “doing rounds” that attract double-digit millions of dollars as they move beyond the R&D stage to become full-fledged businesses. Israeli tech companies are once again lining up to go public in the U.S., with an estimated 15 or more having either filed for an IPO or considering one. The start-up companies that are selling today tend to be bigger and more mature than in the past.

Signs of Maturity

The maturing of the sector is likely to be welcomed by many in Israel, where policymakers have grown concerned that the industry provides little employment or other stimulating effects for the rest of the economy. Onavo, for instance, employed just 30 people in Israel when Facebook bought it. Most of the investors in these companies are foreigners, so much of the capital gains they generate don’t stay in Israel, observers point out.

But 2013 turned out to be a banner year for Israeli VCs and the high-tech companies they finance. Israel-based high-tech companies raised $2.3 billion from VC funds and other investors in the third quarter of last year, the most in any three-month period since 2000, just before the tech bubble burst, according to IVC Research Center, which tracks the Israel tech-finance industry. The pace remains hot: In the first months of 2014, at least seven companies raised some $66 million, including $16.5 million by CloudLock and $15 million by Adallom, two network-security start-ups. Ofer Sela, partner in KPMG Somekh Chaikin’s Technology group, says he expects fundraising to remain at 2013’s elevated levels for the rest of this year.

It’s not just that companies in the aggregate are raising more, but also that individual start-ups are getting amounts that were rarely seen in Israel in the past. In the past few months, Credorax, a payment-processing start-up, raised $40 million; online content recommendation service Outbrain and fabless chip company Wilocity raised $35 million each; Check, a finance app maker, raised US$24 million, and there were $20 million rounds by Sensible Medical Innovations, which is developing a non-invasive thoracic fluid status monitor, and Revizer, a maker of advertising tools for software developers. By far the biggest such fundraising was achieved in July by Mobileye, which makes technology to prevent vehicle collisions. The company raised $400 million, but this transaction is not included in IVC’s data because it was classified as a private equity deal.

The bigger funding amounts reflect not only higher valuations, but also the fact that companies are letting their businesses mature before seeking buyers, putting into place sales and marketing operations, and thinking about how to evolve their product offerings to keep pace with the market. Last year saw a big jump in start-up fundraising, as well as an increase in the proportion of the money going into mid- and late-stage deals. Meanwhile, more Israeli start-ups have become the acquiring party in M&A deals. Conduit, a browser toolbar and mobile start-up, is merging part of its operations with another Israeli company, Perion. In October, Matomy bought the social advertising operations of U.S. company Adquant for an undisclosed sum — its third acquisition in the past year.

Even for those start-ups opting to be bought out, the scale of deals has grown. Most notable was the US$1 billion acquisition of the navigation app company Waze by Google.

“Israeli entrepreneurs and investors are looking for higher sums and are declining offers from acquiring companies,” notes Kobi Simana, the CEO of IVC Research Center. “The result is that Israeli companies need to raise more capital before they go to the exit, or go ‘all the way’ like Conduit, Mobileye and [others] are doing.” Isaac Hillel, a managing partner at VC firm Pitango, told TheMarker, an Israeli business daily, that there are 15 to 20 start-ups in Israel with sales approaching $100 million a year, and he predicted that 10 of them would go public in the next year.

Return to the Markets

That would be an important development, observers say. IPOs are the route typically taken by companies that plan to remain independent and continue growing their business. There are 70 Israeli or Israel-related companies listed on the NASDAQ, the most for any country after the U.S. and China. The U.S. IPO market has recovered in recent years, and NASDAQOMX — the market of choice for Israeli tech companies — is coming off of its strongest year for IPOs since 2007, with 125 companies listing in 2013. Apart from a powerful stock market rally that saw the NASDAQ Composite index jump 38% last year, the U.S. Jumpstart Our Business (JOBS) Act of 2012 is aiming to create a friendlier regulatory environment for smaller companies to go public.

As part of this revival, a slew of Israeli companies are coming, or returning, to the market. In the final weeks of 2013, Enzymotic (nutritional ingredients and medical foods) raised $63.5 million, Wix (website platform building) raised $127 million and Evogene (plant genomics) amassed $74 million via IPOs, while Alcobra Pharmaceuticals (drugs for treating ADHD and autism) and Mazor Robotics (surgical robots) came away with $33 million and $46 million, respectively, in secondary offerings. The data-protection company Varonis has filed for a $100 million offering and MediWound (topical products to treat burns and wounds) filed to raise $80 million. Can-Fite BioPharma, a developer of small molecule drugs for inflammatory and cancer disease already trading on the Tel Aviv Stock Exchange, listed its American depository receipts for trading on the New York Stock Exchange in November, while Matomy is reportedly planning a London IPO.

“This is really a big change,” says Jonathan Medved, a venture capitalist whose crowd-funding investment platform OurCrowd assembles groups of investors to put money into start-ups. “Many of these entrepreneurs are out for the second or third time. They have been around the block before…. Perion and MyHeritage are acquiring companies. You’re seeing early stage companies getting active and building up long-term huge companies.”

Angel investors, accelerators, corporate investors and, most recently, crowd-funding have grown more prominent on the Israeli scene.

Even for those start-ups opting to be bought out, the scale of deals has grown. Most notable was the $960 million acquisition of the navigation app company Waze by Google in June. Since then, IBM has acquired cybercrime prevention company Trusteer for $650 million; Apple has agreed to buy PrimeSense, whose technology was applied in Microsoft’s Xboxes to allow use of the entire body to operate games, for as much as $350 million, and Asurion has agreed to purchase Soluto (a start-up whose shareholders include Israel’s Economy Minister, Naftali Bennett) for $130 million. Although 2013 did not surpass the 2006 record for exits set when the publicly traded companies Mercury Interactive and M-Systems were sold to HP and SanDisk, respectively, it nevertheless capped three consecutive years of strong M&A activity.

More than Just Froth?

The recovery is also reaching domestic Israeli VC funds, which have been struggling to raise money despite the tech industry’s acknowledged successes. Although foreign VCs have been pouring money into Israel and now account for most of the capital invested in local start-ups, Israeli VCs play a key role in the initial — or seed-stage – funding, observers point out: Without them, fewer start-ups would get off the ground.

The biggest of the local VCs, Pitango, raised $270 million and the newly formed Aleph Fund raised $140 million. At least five others are in the process of raising capital. Their efforts are being helped by the growing presence in the Israeli high-tech scene of Asian investors, who are providing a new source of capital to tap, on top of the VCs traditional bailiwick of U.S. institutional investors. Asian investors are not just looking for returns, but also an inside line on innovation that they can take back to their home countries, observers note. Another factor favoring the VCs is the industry’s improved financial performance over the past three years. IVC figures show that the ratio of exits to investments averaged 1.6 in the 2011-2013 period and even less in the years before. But, in 2013, the ratio was about 2.2, and if valuations continue to rise, the returns Israeli VCs earn should improve further.

In any case, VCs are no longer the only fundraising source in town, experts say. Angel investors, accelerators, corporate investors and, most recently, crowdfunding have grown more prominent in Israel. Medved notes that his firm, OurCrowd, which organizes investment candidates for groups of accredited investors, is already accounting for 5% of all deal flow in Israeli tech — 30 out of 600 companies — since it was launched in February 2013.

But there remains the risk that the rising valuations represent the start of another global technology bubble. Although valuations on Wall Street have not yet approached the levels seen in 1999, the phenomenon of tech companies with no profit or revenues going public has reemerged, critics warn. Investors facing an environment of low interest rates and shares at record highs seem to be less wary of risking a bet on speculative tech IPOs. The inflated valuations, in turn, feed back into higher prices for start-ups raising money from VCs. The first few weeks of 2014 have not been encouraging, with stock markets sliding amid expectations of rising interest rates.

Medved, however, is optimistic. “It’s hard to tell if we’re back to 1995, 1996 or 1999 or none of the above,” he says. “My bet is none of the above. Valuations are exciting — or if you want to be critical, frothy — but the companies are much better quality than back in the 1999-2000 era, and the markets are being much more selective. The companies getting out are good companies.”