START-UP NATION CENTRAL: FINDER INSIGHTS SERIES

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START-UP NATION CENTRAL:FINDER INSIGHTS SERIESTHE STATE OF THE ISRAELIECOSYSTEM IN 2018Rinat KorbetMacro Analyst

THE ISRAELI ECOSYSTEM AT A GLANCETHE COMPOSITION OF THE ECOSYSTEMCOMPANIES:80%6600 offer B2Bproductsactive companies( 500 in stealth mode)Current Active Companies:Employee DrilldownCurrent Active Companies:Product Stage Drilldown1%2% 2%4%10%3% 3%500 66%AlphaClinical TrialCustomer DevelopmentUnknownUnknownINVESTORS:There are more than430 investors with apermanent presencein Israel, of which23% are non-IsraeliThe most prominent early-stage investors are fromIsrael and the US, followed by the UK, Germany,and China. The most prominent late-stage investorsare from the US, then Israel, followed by China, theUK, and JapanMULTINATIONAL COMPANIES AND HUBS:There are 320 multinationalcompanies active in Israel,of which more than 300have R&D activities across360 different officesThe vast majority ofmultinational activity in Israelcomes from Americancompanies, with Germanyand the UK as runners-upTHE STATE OF THE ISRAELI ECOSYSTEM IN 2018There are currently225 hubsincluding accelerators,co-working spaces andentrepreneurship programs2

HIGHLIGHTS OF 20182018 WAS ANOTHER STRONG YEAR FOR ISRAELI HIGH-TECH681fundingrounds 4M was themedian size for allround types (a 33%increase from 2017)The total amountraised was 6B(a 15% increasefrom 2017)The three leading verticals by capital raised were:HealthcareCybersecurityFinancial ServicesApproximately1,500 investorsput money intoIsraeli companies97 exitsfor atotal of 3.53BThe leading technology was:Artificial IntelligenceTOP FUNDING ROUNDSUndisclosed RoundIndustrial Technologies 300MD RoundSoftware Applications 165ME RoundRetail Solutions 125MTOP M&AAI & Advertising 850MAcquired by SalesForceMedical Solutions 292MAcquired by Philips HealthcareCloud & Mobile 200MAcquired by PerforceTOP IPOsPharmaceuticals 73M (NASDAQ)THE STATE OF THE ISRAELI ECOSYSTEM IN 2018Pharmaceuticals 70M (NASDAQ)Pharmaceuticals 50M (NASDAQ)3

INTRODUCTION BY PROF. EUGENE KANDELCEO, START-UP NATION CENTRALThe Israeli technological innovationecosystem is one of the mostdense and active of its kind inthe world. Whether we comparethe expenditure on R&D as apercent of GDP, or the number ofinnovative companies per capita,or VC investments per capita, oras a percentage of GDP – Israelleads the world. It is also one of theworld leaders in absolute terms in certain areas of technology,including Cybersecurity, Fintech, Industrial IoT, and Agritechamong others.The Israeli innovation ecosystem is in the midst of a periodof strong growth. 2018 was another year in which we sawthis ecosystem produce great companies and cutting-edgetechnologies. Another indication of this is the growing presenceof the world’s leading companies in Israel: in every year over thelast decade, more than 20 new R&D centers of multinationalcompanies (MNCs) opened shop in Israel, many of themthrough acquisitions.Although acquisition by an MNC is still the main form of “exit”for Israeli startups, we have begun to see another trend overthe last few years – that of growth companies. This trend isfueled by the emergence of a new breed of entrepreneurs, whostrive to build large Israeli stand-alone companies. Moreover,many MNCs are changing how they work with Israeli innovationand increasingly engaging in open innovation with the entire1ecosystem, as well as, or instead of, acquiring Israeli start-ups.This is a very positive trend, as the ecosystem must have abalance between both MNCs and local companies.1At Start-Up Nation Central, we believe that the potential ofthe Israeli ecosystem is even greater than the outstandingachievements of the last decades. The accelerating rate oftechnological change and the disruption that almost everysector in the global economy is going through, are fertilegrounds for Israel’s culture of innovation. This requires muchmore international exposure, in order to find and understandthe relevant global challenges and opportunities. One of ourtasks is to assist with such exposure.While the technological innovation sector in Israel is in goodshape today, it faces increasing competition for tech leadershipin the world, and therefore cannot become complacent.The role of Start-Up Nation Central is to help the Israeli techinnovation ecosystem maintain its leadership position. As anorganization, we leverage our in-depth knowledge of Israel’sinnovation sector to draw insights and act on them, workingin partnership with individuals and organizations in Israel andaround the world, to help this sector expand, and increase itspositive impact on the world, while staying firmly anchored inIsrael.This report, which focuses on the state of the Israeli innovationecosystem in 2018, is another effort in our mission, and followsour previous reports that focused on human capital and theecosystem sectors.For example, see Figure 14 in Start-Up Nation Central: Finder Insights Series - Israel’s Fintech Industry ReportTHE STATE OF THE ISRAELI ECOSYSTEM IN 20184

GLOBAL VENTURE LANDSCAPEVenture capital financing reached new heights in dollarterms in 2018, both in the US and globally.2 Investorscontinue to see this asset class as a good diversifier forthe main parts of their portfolio and are allocating morecapital as their portfolios grow. This has been supportedby rising equity markets (until late 2018) and the continuedglobal economic expansion.This increase in venture capital has continued over anumber of years and has led to a number of changes inthe market structure. We have seen the creation of “megafunds” such as Softbank’s 100B Vision Fund, whichdwarfs everyone else, and even Sequoia which recentlyraised 6B and plans to raise an additional 2B.3 Funds of 1B now manage 40% of all VC money.4Larger fund sizes have in turn led to larger fundingrounds, thus rounds exceeding 100M reached a record382 in 2018.5 The median deal size for Series D hasnearly doubled since 2016, from 26M in 2016 to 50Mby the Q3 2018.6 This may explain why the number ofinvestment rounds has fallen after peaking in 2015,7 whilethe total financing amount has risen. The decline is mostpronounced at the Angel and Seed stage.8 In addition,company valuations have been rising at all stages since2010.9 This has caused the size of early-stage rounds toincrease, meaning that fewer companies can be fundedfor the same amount of capital, as the amount of capitalallocated to early-stage investing has not increased atthe same rate as valuations (unlike later-stage investing).Investors have also become more selective in choosingearly-stage companies, preferring to invest in a smallernumber of higher quality prospects.After many years of rising VC financing amounts, thereare many companies seeking late-stage financing. At thesame time the number of newly founded companies hasbeen gradually declining.An additional element has been the increasing prominenceof Corporate Venture Capital funds (CVCs). Globally,corporates participated in 32% of all VC deals in Q4 2018,up from 25% in Q3 2017.10 This may be reinforcing theabove trends, as CVCs typically have a strategic focus inmind in addition to financial goals and tend to invest inlater-stage rounds.2345678PwC / CB Insights, MoneyTree Report Q4 2018, page 2The Q3 2018 Global VC Report: New Records Hit Amid SeismicShift In The Industry - CrunchBasePitchBook-NVCA Venture Monitor Q4 2018, page 30PwC / CB Insights, MoneyTree Report Q4 2018, page 75Venture Pulse Q3 2018 reportPwC / CB Insights, MoneyTree Report Q4 2018, page 79PitchBook-NVCA Venture Monitor Q4 2018, pages 8 and 13THE STATE OF THE ISRAELI ECOSYSTEM IN 2018Another important trend has been the globalization ofVC investment. For example, much of the funding for theSoftbank’s Vision Fund comes from Sovereign WealthFunds in the Middle East, which are looking to deploy largeamounts of capital into this asset class. This globalizationis also affecting where the capital is invested. In 2018, ofthe 207B invested globally, less than half went to theUS.11 81B were invested in Asia, the second largest andthe fastest growing destination, up from 37B in 2016.12Some of the largest deals are also occurring in Asia:Chinese online payment services provider Ant Financialraised a 14B round, after a 65% jump in profit from 2017,while Chinese ride-hailing platform Didi Chuxing received 4.6B in late-stage financing.The total number of exits remained steady, but there wasan increase of 33% in the total amount of exits in 2018to 122B - the highest since 2012. IPOs accounted formore than half of the total exit value, with the median valuerising to 348M, which included large, well-known namessuch as Spotify, Dropbox, Eventbrite and Docusign. Thismay signal even larger listings in 2019, including Uber andAirbnb, however the end of the year decline in most stockmarkets may change the outlook. The median value ofacquisitions rose to 105M, a 30% increase comparedto 2017.13While the US had a strong year for public listings, Asiaperformed even better. The Hong Kong stock exchangewas the most prolific stock exchange globally for IPOs,with a record 125 companies raising 36.5B, the highestamount since 2010. This represented a 17.6% share ofthe global IPO market, compared to the New York StockExchange, which had 64 IPOs that raised 28.9B, or13.9% of the total market.14The increase in fund sizes, as well as the large amountsavailable for later-stage funding have led to a risingtrend in secondary exits.15 With the abundance of largefunds looking to invest large amounts, and the fact thatcompanies wish to stay private for longer, some earlyshareholders are interested in liquidity before a sale or anIPO. Some of the big public secondary deals of the yearwere those of Uber, LegalZoom, Credit Karma, Saavn andOla.91011121314Venture Pulse Q3 2018 report, page 12PwC / CB Insights, MoneyTree Report Q4 2018, page 78PwC / CB Insights, MoneyTree Report Q4 2018, pages 6, 74PwC / CB Insights, MoneyTree Report Q4 2018, page 85PitchBook-NVCA Venture Monitor Q4 2018, page 27 and 28Hong Kong regains global IPO crown from New York in 2018thanks to its listing reforms15 The deals that made 2018 the year of VC secondaries - Pitchbook5

ISRAELI HIGH-TECH ECOSYSTEM LANDSCAPEFINANCIALSINVESTMENTSDuring 2018, 645 Israeli high-tech companies raised 6B in 681funding rounds.16 With a 15% increase from 2017 ( 5.2B) anda 140% jump from 2014, it seems that Israeli companies havebecome increasingly attractive to investors. In comparison,the amount of investments in U.S. companies jumped 64%between 2014 ( 60.5B) and 2018 ( 99.5B), according to PwCMoneyTree Q4 2018.17 This makes the 2018 VC funding percapita 303 in the US, compared to 674 in Israel.The number of rounds rose gradually between 2014-2016,then dropped in 2017. The number of funding rounds in 2018increased by 2% from 2017 but remains 6% below the 2016peak (721 rounds). However, the median size of all round typesrose from 1.5M in 2014 to 4M in 2018.The number of Seed rounds began to decline after 2015, andin 2018 there were 20% fewer Seed rounds compared tothe peak (see Figure 2). This trend corresponds to the globalslowdown in the number of Seed rounds.Not surprisingly, the average time it takes to raise a Seedround went up, from 16 months in 2014 to 24 months in2018. Industry experts identify several contributing factors:There was a gradual increase in the number of Pre-Seed roundsfrom 2014 to 2017 and their total amount raised grew by 109%in this time period. Consequently, the conditions for raising aSeed round are tougher than in the past, since Seed investorsnow require more mature and “promising” companies. Themedian Seed round has doubled from 750K in 2014 to 1.5Min 2018 (see Figure 3). Moreover, some companies are able torely on technological tools at the Pre-Seed stage and requirefewer employees.Figure 2: Deal Activity by StageFigure 1: Israeli Equity Investments681555NUMBER OF DEALSCAPITAL RAISED ( B)668NUMBER OF DEALS721674Pre-SeedBetween 2014-2018, the median size of early-stage roundsmore than doubled from 1M to 2.3M, while late-stagemedian size grew from 12M to 18M. According to Pitchbook,the trend in the U.S. was even more pronounced: the mediansize of an early-stage round grew from 1M to 3M during thesame time period, while the late-stage median size also grewconsiderably, from 13M to 28M.A RoundB RoundC RoundUndisclosedFigure 3: Median Deal Size by Stage20DEAL SIZE ( M)When compared to 2016, the minor slowdown in the numberof rounds stems from a 16% drop in early-stage rounds. Latestage round numbers rose by 8% compared to the same year.Both types experienced an increase in the total amount raisedin 2018. Early-stage rounds attracted 1.46B, double theamount raised in 2014 ( 729M). Late-stage rounds raised atotal of 3.46B in 2018, 132% higher than in 2014 ( 1.49B).Seed151050Pre-SeedSeedA RoundB RoundC RoundAll16 This includes 33 Israeli high-tech companies that raises more than one round or had extension round(s) during 2018.17 PwC / CB Insights, MoneyTree Report Q4 2018, page 6THE STATE OF THE ISRAELI ECOSYSTEM IN 20186

The number of Series A rounds soared in 2014-2016, only todecline in 2017-2018. In 2018 there were 21% more Series Arounds compared to 2014, and their median size leapt by 68%to 6.5M. The total investment in Series A rounds in 2018 was 947M.Series B rounds have shown a dramatic rise in median dealsize – from 10M in 2014 to 17.5M in 2018. Their numbersalso swelled from 49 rounds in 2014 to 80 rounds in 2018,an increase of 63%. A few notable Series B rounds in 2018include:The three largest funding events of 2018 (below) come fromdifferent verticals, and raised money from different investors,which indicates that Israel offers a variety of opportunities to awide range of investors, with varying interests.Landa Digital Printing has developed a new technology calledNanography, for the commercial, packaging, and publishingmarkets. Landa raised the largest funding round of 2018from Altana AG, a chemical company, and SKion GmbH, aninvestment company, both from Germany and both of whichare wholly owned by the same person.18Next Insurance, an InsurTech company developing solutionsfor small businesses, raised 83M from Munich Re and TLVPartners, among others.Habana.ai, which develops AI processors optimized for thespecific needs of training deep neural networks, raised 75Mfrom Intel Capital, Bessemer, Battery Ventures, and WRV Capital.Lightricks, which provides visual editing apps for contentcreators, raised 60M from ClalTech and Insight VenturePartners.Claroty, which develops industrial cyber solutions raised 60M from Team8, Bessemer Venture Partners, InnovationEndeavors, and Temasek.JFrog provides DevOps platforms, which enable theautomation and acceleration of software update processes.The company’s core products, Artifactory and Bintray, serve asan automated toolset for developers to manage and distributesoftware releases. JFrog raised 165M in a series D roundof funding led by Insight Venture Partners, with participationfrom Battery Ventures, Spark Capital, Sapphire Ventures, ScaleVenture Partners, Dell Technologies Capital, Vintage InvestmentPartners, and Geodesic Capital.19Trax Image Recognition combines image recognition, machinelearning and data collection methods to build a proprietaryretail database and analytics products used by tier-one retailersand manufacturers. The company enables in-store executioncontrols and the ability to unlock revenue opportunities at allpoints of sale. Trax raised 125M from Boyu Capital, one ofthe largest investment funds in China, and DC Thompson, aScottish publishing and television production company. Someof the funds will be used to buy shares from previous investors.2018 Press Release, Globes, Calcalist, Times of Israel, PC.co.il19 DevOps platform JFrog raises 165 million with valuation ‘way north’ of 1 billion20 Trax Image Recognition raises 125mTHE STATE OF THE ISRAELI ECOSYSTEM IN 20187

In terms of country of origin,22 Israeli and American investorswere present in most deals (see Figure 4). In 2018, almost twothirds of the deals had at least one Israeli investor and 43%had at least one American investor. Although there were somefluctuations in the rate of involvement, this is a stable trend.British investors follow US investors, while German investorswere fourth as their participation rose steadily from 2% in 2014to 5% in 2018. Japanese and Chinese investors show a smallincrease in their rate of IPATION RATEIncubatorFigure 4: Participation by Number of Deals –Countries (2018)Figure 5: Participation by Number of Deals –Investor TypeAngelInvestment deals typically involve more than one investor butinformation on the amount of capital invested by each investorindividually is not available. Nevertheless it is possible toanalyze the data on the participants in each transaction andthis provides a helpful overview of the space. We looked atevery deal that occurred during the year and checked whetherthere was at least one investor of each country or investor typethat participated in it. The numbers add up to more than 100%since investors from different countries/types often participatein the same round.Interestingly, Angel involvement - both that of individual Angelsand Angel groups - has declined considerably over the years,from 29% in 2014, to 17% of all deals in 2018. This is a trendthat has been seen worldwide as the size of early stage dealshave risen, and VCs and corporates are better placed to investat those sizes.CorporateSixteen new investors set up a presence in Israel in 2018,including RED Capital Partners, the first VC firm investing incompanies co-led or led by female entrepreneurs in Europe andin Israel; Playtika Growth Investments, which raised a 400Mfund and invests in consumer Internet and digital entertainmentstart-ups generating revenues of at least 10M; and CactusCapital, a VC run by Ben-Gurion University students.VC & PEMore than 430 professional investors have a permanentpresence in Israel,21 23% of which are non-Israeli. Close to1,500 investors, representing more than 30 countries, investedin Israeli companies during 2018.In terms of investor type, at least one VC firm participated in59% of the deals in 2018, the same as in 2014 (see Figure5). However, the involvement of corporates – both by thedirect investment of multinational companies or that of theirinvestment arms – has grown strongly from 13% in 2014 to26% in 2018. In recent years, corporate investments aroundthe world have increased significantly, as corporations realizedthat they must not only engage with external innovators (mostlystart-ups) but must also develop the capabilities with which todo lUnitedStatesUnited 0%201750%60%201821 This includes all types of investors: Angels, Venture Capital firms, Private Equity firms, corporates and their venture arms, accelerators, incubators and more.22 Country of origin means the country in which the HQ of a parent organization is located. For instance, Samurai Incubate Israel is located in Israel, butits parent organization is Samurai Incubate Inc., headquartered in Japan, so it is considered a Japanese investor. This analysis does not refer to thecountry of origin of investors’ limited partners, since complete data on their identity is unavailable.23 VC & PE describes firms that combines both venture capital and private equity investing.THE STATE OF THE ISRAELI ECOSYSTEM IN 20188

EXITSOther notable acquisitions:During 2018, 97 Israeli high-tech companies had an exit for atotal of 3.53B. This was a 9% decline in the number and a49% decline in the total amount, compared to 2014, which wasthe peak year for exits over the last f

4 PitchBook-NVCA Venture Monitor Q4 2018, page 30 5 PwC / CB Insights, MoneyTree Report Q4 2018, page 75 6 Venture Pulse Q3 2018 report 7 PwC / CB Insights, MoneyTree Report Q4 2018, page 79 8 PitchBook-NVCA Venture Monitor Q4 2018, pages 8 and 13 9 Venture Pulse Q3 2018 report, page 12 10 PwC / CB Insights, MoneyT

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