Cut-price shares for sale in Israeli unicorns

In December 2021, Israeli fintech company Tipalti announced the closing of a $270 million financing round, which gave the company a valuation of $8.3 billion, four-times its valuation in the previous round in October 2020. Since then the valuations of tech companies on Wall Street have collapsed, with fintech which had skyrocketed during the Covid pandemic, the chief casualty. For the sake of comparison, Tipalti’s rival Bill.com, which is traded on the NYSE, has seen its market cap fall 41.5% since the start of 2022.

Tipalti is still a privately-held startup, and its valuation is only set during financing rounds. So until Tipalti sets out to raise more money, its valuation officially remains at $8.3 billion, regardless of what is happening on the stock markets. However, according to information reaching “Globes,” at least one Tipalti shareholder has expressed interest in selling its stake as part of a secondary deal, at a much lower valuation of $4.7 billion – 48% less than in the most recent financing round, at a price that reflects the general trend in the market.

Prepared to sell shares at half price

This price is part of an offer submitted to organizations in the tech market by an international company that specializes in secondary investments – the direct sell of shares in privately-held companies to other investors. The offer includes options to invest in an entire range of Israeli startups, in most cases at a discount on the valuation in the most recent financing round when the market was peaking in 2021. These offers are based on shareholders who want to realize their holdings in unicorns at the moment, and understand that it would be difficult to do so at 2021 values. In some of the cases, shares worth several millions of dollars are involved and in other cases the shares being offered are worth up to $20 million.

Tipalti said, “This is false. There are no secondary deals at Tipalti. All share deals at Tipalti require approval from the board of directors and the board of directors has categorically not approved any deals at the moment.”

Take for example the offer sent to investors including the option to acquire shares in eToro, the online capital market trading platform, at a valuation of $4.5 billion. eToro was supposed to list on Nasdaq through a SPAC merger at a company valuation of $10.4 billion, which was then cut to $8.8 billion. The merger was canceled due to the market conditions and now at least one eToro investor, according to the offer, is ready to sell their holdings, at a little over half the last agreed valuation.

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eToro’s SPAC merger, like the planned Wall Street IPO of online fraud prevention company Forter and cybersecurity company Cybereason, were meant to provide liquidity to investors and shareholders. According to reports, both Forter and Cybereason planned IPOs this year at valuations of $5 billion, after raising money in their most recent financing rounds at valuations of $3 billion.

In current conditions it’s difficult to complete IPOs

However, in the current conditions on stock markets, it would be more difficult to complete offerings, especially at valuations planned in the past. So perhaps shareholders in these companies are prepared to sell their holdings now at lower prices. Offers seen by “Globes” for Cybereason shares puts the company’s valuation at $2.5 billion and Forter’s valuation at $2.4 billion.

Shareholders of Sisense, a business analytics company founded 17 years ago, which raised money at a valuation of $1.1 billion in early 2020, are currently offering shares at a valuation of $700 million. Electric vehicle battery company StoreDot, which raised money at a valuation of $1.5 billion at the start of 2022, has at least one of its 100 shareholders prepared to sell holdings at a valuation of just $890 million. StoreDot said, “This is certainly a reasonable discount on the most recent valuation and represents the prioritizing of liquidity for certain types of shareholders. This discount does not represent the market situation.”

A discount that reflects the market situation

It is important to emphasize that a discount on the valuation that is given to a company raising capital is acceptable. The number given during the financing round generally represents the valuation of the company for holders of preferred shares. Preferred shares give the most recent investors priority in getting their investment back, if the company is sold in an unsuccessful deal, and therefore they are worth more. In contrast, the shares that are being offered for sale now are regular, not preferred shares. But usually this discount ranges between 5% and 15% and when the market was at its peak in 2021, it narrowed to a minimum. Now the discount is larger because it expresses the state of the market and the gap between supply and demand for shares.

Despite market conditions, some holdings on offer, even today, are at a minimal discount on the valuation of the most recent financing round. “Globes” has seen an offer for shares of Israeli fintech company Melio, at a valuation of $4 billion, the same valuation as its most recent financing round, while shares for OpenWeb, which has a platform for managing posts on content sites, are on offer at a company valuation of $1 billion, close to the valuation in its last financing round.

Even valuations of the world’s biggest startups have been cut

This trend is no major surprise. In recent months some of the world’s biggest startups (privately-held tech companies) have seen their valuations slashed. The world’s most valuable startup, fintech company Stripe, cut its valuation by 28% in an internal assessment last month. More dramatically, the Swedish loans company Klarna, recently raised money at a valuation of just $6.5 billion, down from $46 billion last year. In such a situation, it is clear that shareholders in Israeli unicorns need to compromise on valuations they received last year.

Israel Secondary Fund (ISF) founder and managing partner Nir Linchevski, who specializes in large secondary deals, says, “The activities of unicorns have not changed and they are still fantastic companies, so that cutting valuations does not say anything about them. “What has changed is the multiples on revenue and through these the valuations are fixed. They have been adjusted and rationalized compared with 2021. Therefore, in most cases the price that was given in 2021 is already not relevant and needs to undergo adjustment to the multiples of companies on the stock market with similar performance.”

Linchevski says that he sees more shareholders in large startups that want to sell their holdings during this time as part of secondary deals. “Shareholders in large and good companies think that they can realize their holdings in the company when it holds an offering in 2022-2023 but now understand that the likelihood of this happening is low.”

The board of directors of privately-held startups needs to officially approve every sale of shares between people. However, the company does not always know at what price the deal has been struck and for the most part only checks if the buyer has any conflicts of interest. “A startup has an interest in their being a lively turnover of its shares and deals between sellers and buyers are a good sign, even if they are conducted at a lower value,” observes Linchevski.

Some of the companies mentioned in this report did not respond prior to web-posting.

Published by Globes, Israel business news – en.globes.co.il – on August 4 2022.

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