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With its wide range of cutting edge technologies and a start-up scene ripe for consolidation, Israel has become a hub for automotive players looking to deploy the first commercially available autonomous vehicles.

Israel received a major vote of confidence in its automotive technology capabilities just over a year ago, when Intel [NASDAQ:INTC] announced it was paying USD 15bn to acquire Mobileye, a Jerusalem-based maker of sensors and software for driver assistance.

Hundreds of startups are estimated to be developing technology with automotive applications in Israel. “It may be hard to have another deal of the magnitude of Mobileye, […] but I would not be surprised if we see more deals of USD 1bn or more,” Micki Shapira, partner at Tel-Aviv-based law firm Weinstock Zecler & Co, said.

Automotive data marketplace Otonomo, which has raised over USD 40m in funding, is one startup that has received M&A interest, a sector executive said. Otonomo is an attractive target, a partner at an automotive corporate VC agreed. It has already received investment from a strategic player, automotive supplier Aptiv [NYSE:APTV] (formerly Delphi), an industry consultant said. Otonomo did not reply to requests for comment.

Automotive cyber security firm Karamba Security, which has raised USD 17m in funding to date, is also seen as a target, especially after its peer Argus Cyber Security was acquired last November by auto parts supplier Continental [ETR: CON], David Riemenschneider, a director focused on the automotive sector at TMT boutique Hampleton Partners, said. The sale of Argus was reported to have been for USD 450m. The corporate VC investor agreed that Karamba was a likely target.

Karamba did not respond to requests for comment. Executive chairman David Barzilai told this news service at the beginning of May that the company was assessing acquisitions of IoT companies operating in sectors other than automotive.

Innoviz, a developer of LiDAR (light detection and ranging) sensors, and Cognata, which develops software to test autonomous vehicles, are also potential targets, as both they, like Otonomo, have received strategic investment, the industry consultant said.

Aptiv and Magna [TSE:MG], another auto parts maker, were among the participants in Innoviz’s USD 65m Series B round last September. Last month Magna also announced it had won a LiDAR contract with BMW Group [ETR:BMW] with its partner Innoviz.

Cognata has participated in a “virtual accelerator” program run by automotive semiconductor firm Nvidia [NASDAQ:NVDA] and received investment from Airbus’ corporate VC firm Airbus Ventures.

A spokesperson for Innoviz declined to comment on potential M&A plans.

Cognata did not respond to an emailed request to comment. Cognata CEO Danny Atsmon told Mergermarket last month that the company expected to close up to USD 15m in a Series B by the end of this quarter.

Automotive chipmaker Valens, which has so far raised USD 100m in total funding, is also heading for an exit. Its management expects to launch another “large round” before a planned NASDAQ IPO in two years, CEO Dror Jerushalmi told Mergermarket earlier this year.

Several of Israeli mobility-focused VC Maniv Mobility’s portfolio companies are seen as promising takeover candidates, according to the corporate VC partner, particularly Phantom Auto, which is developing technology to remotely control self-driving vehicles in emergencies, and Upstream Security, an automotive cybersecurity firm.

Phantom Auto did not respond to requests for comment.

A spokesperson for Upstream said that the company is “100% focused on our customer and partner success and establishing our company as the partner of choice for Connected Car Cybersecurity”, declining to comment on M&A speculation. Dan Sahar, Upstream’s VP of product told Mergermarket in February that the company could consider a Series B later this year.

Maniv Mobility is also a shareholder in Otonomo and Cognata.

While deal volume so far has been low, there have been a few significant exits by Israel-based automotive technology companies aside from Mobileye, including real-time traffic information app Waze’s sale in 2013 to Alphabet [NASDAQ:GOOGL] for USD 966m and Argus’ sale to Continental last year.

Two main factors are making Israel stand out from other auto tech hubs and attract the interest of Original Equipment Manufacturers (OEMs) and suppliers.

One is the country’s focus on hardware technology, which for the automotive sector has meant the development of sensors and chips that are a key part of the advance of self-driving and connected cars. This has set Israel apart from other tech hubs like Silicon Valley, which tend to have an emphasis on software, according to Wolfgang Bernhart, senior partner at consultancy Roland Berger.

The other factor is Israel’s famous proficiency in cybersecurity, an area that has become paramount for the automotive industry given how connected cars can turn deadly and destructive, if compromised.

The country’s expertise in defence technology has helped in this respect. Alumni of Unit 8200, Israel’s legendary cyber agency, have gone on to found some of the country’s most successful startups, including Argus. Karamba also has connections to Unit 8200. It recently appointed Guy Sagy, a Unit 8200 alum, as its new CTO and Dani Harari, the former Commander of Unit 8200, has served on Karamba’s advisory board since 2016.

The Israeli government and private companies are further encouraging the industry by designating the city of Be’er Sheva as a hub for cybersecurity.

Robust early-stage investment environment

The Israeli auto tech scene has benefitted from a robust investment environment for early-stage companies. Startups in the country are able to draw on funding from local venture capital firms at an early stage, before having to attract international investors, Keren Wieder Fanan, global head of ventures at Gett, an Israeli ride-hailing company backed by Volkswagen [ETR:VOW3], said.

Valens, whose technology is used in advanced driver-assistance systems, has followed this playbook. In 2007, it raised its Series A round from local early-stage VC firms Genesis Partners and Magma Venture Partners. In subsequent years, it went on to raise funds from international strategic investors, including Tawainese semiconductor firm MediaTek, Samsung’s VC fund Samsung Catalyst and Aptiv [NYSE:APTV], a spin-off of auto supplier Delphi [NYSE:DLPH].

The support from strategic players, via their corporate VC arms, can be an attractive source of funding for automotive startups. Besides money, corporate backing can provide new businesses with access to relevant supply chain contacts and potential customers.

Porsche, owned by Volkswagen, and Daimler [ETR:DAI], owner of Mercedes-Benz, both invested in Israeli mobility status firm Anagog earlier this year. Daimler has also backed electric vehicle battery firm StoreDot and rideshare firm Via, which was founded by two Israelis and is headquartered in New York.

Outside of the automotive industry, US-based insurer Nationwide and Alibaba Innovation Ventures, the VC arm of Chinese ecommerce giant Alibaba [NYSE:BABA], have invested in Israeli road safety firm Nexar. Nexar could consider raising a Series C round in the next 24 months, Chief Business Officer Marc Gaffan told Mergermarket in January.

Corporate VCs tend to take less equity than traditional VCs, Riemenschneider said. “[Traditional] VCs are tough. VCs want return on investment, they will drive you really hard – OEMs want the tech,” he said.

However, corporate funding does not come without its pitfalls. A startup which accepts investment from a strategic investor may find it more difficult to sell to a competitor, Shapira said. Potential bidders may be afraid they would waste their time, in case the strategic investor ends up vetoing the sale, he added.

Race for talent

As another way of getting closer to Israel’s tech scene, automotive companies have started to establish their own R&D centres inside the country. Traditional players including Aptiv, BMW and Toyota [TYO:7203] have all announced investments to set up local labs in the last 12 months, in a move also taken by more tech-oriented companies such as HERE Technologies. The Netherlands-based digital maps and location services company, which was owned by Nokia [HEL:NOKIA] before it was sold to a consortium of German car makers Audi [ETR:NSU], BMW and Daimler, launched a mobility unit in Israel in January.

These centres are an opportunity for startups to engage with potential clients more easily, but they could present a potential challenge for the automotive startup community as well.

“[There is] huge competition for good engineers between startups and multinational automotive OEMs,” Jerushalmi, CEO and co-founder of Valens, said.

In a different industry, Amazon [NASDAQ:AMZN] opening an R&D centre in Israel drove up the salaries for retail technology developers, Shapira said. It is difficult for local companies to compete with American ones in terms of compensation, he said. Last November, The Jerusalem Post reported that Amazon was offering computer programmers salaries which were 50% higher than average.

Even if the OEMs and their suppliers drain the talent, there will always be would-be entrepreneurs in Israel finding market opportunities.

“The tech sector here is very well-connected,” Gil Doten, founder and CEO of Israeli automotive technology startup Guardian Optical Technologies, said. “We spend time together in the military. It’s physically small. There are 4,000 startups in Tel Aviv, we hang out in the same bars, there’s a lot of synergy.”

As Reilly Brennan, partner at San Francisco-based transportation-focused venture capital firm Trucks Venture Capital, “entrepreneurs in Israel are good at finding new problems to address.”

by Yining Su and Natalia Lapotko in London, and Laura Larghi in San Francisco, with analytics by Frederik Pedersen

Selection of Israeli autotech startups

Deals included in the table fall outside MergerMarket inclusion criteria, therefore information may be limited and not complete

Company Funding Rounds Announcement

date Funding Companies Bidder Geography Combined Deal value

(USD m)

Gett Inc Series

A

Series B

Series C

Series D

Corporate round 06-Jun-12

08-Aug-13

13-Aug-14

04-May-15

24-May-16 Leonard

Blavatnik; Kreos Capital; InVenture Partners; Vostok New Ventures Ltd;

Private Equity Managers SA; and

Volkswagen AG Russia; Germany;

Poland; Bermuda; United Kingdom 495

StoreDot Ltd Series

A

Series B

Series C

Series D

Undisclosed rounds 25-Jun-13

01-Oct-14

19-Aug-15

09-Sep-17

01-Mar-18

22-May-18 Wertheimer

family; Genesis Angelsl; Samsung Ventures; Roman Abramovich; Luxin Venture

Capital Group Co; Daimler AG; TDK Corporation; Singulariteam; and BP ventures United Kingdom;

Israel; South Korea; USA; Germany; Japan 146

Moovit App Global Ltd Series

A

Series B

Series C

Series D 18-Dec-13

14-Jan-15

03-Nov-15

21-Feb-18 Sequoia Capital;

Bernard Arnault (Private Investor); Keolis SA; Nokia Growth Partners; Vaizra

Ventures; BMW i Ventures; Sound Ventures; Vintage Capital Partners LP; Intel

Capital; Gemini Israel Funds Ltd; and BRM Group Israel; USA;

India; China; France 128

Valens Semiconductor Ltd Series

A

Series B

Series C

Series D 16-Jul-07

06-Jul-11

06-Jan-16

06-Apr-17 Aptiv PLC;

Goldman Sachs & Co LLC; Israel Growth Partners; MediaTek Inc; Samsung

Electronics Co Ltd; Pegatron Corporation; and Magma Venture Partners Taiwan; United

Kingdom; Israel 101

Innoviz Technologies Ltd Series

A

Series B 08-Aug-16

07-Sep-17 Magna

International Inc; Delek Automotive Systems Ltd; NAVER Corporation; Vertex

Ventures Israel; Aptiv PLC; Magma Venture Partners; 360 Capital Management

SA; Zohar Zisapel (Private investor); Amiti Ventures; SoftBank Ventures Korea

Inc; Samsung Catalyst Fund; Glory Ventures Limited; Delek Assets and

Investments; Vertex Ventures Israel; Magma Venture Partners; Zohar Zisapel

(Private investor); and Amiti Ventures Israel; Canada;

China; Luxembourg; South Korea; United Kingdom; USA 82

Oryx Vision Ltd Series

A

Series B 18-Oct-16

08-Aug-17 Bessemer Venture

Partners; Third Point Ventures LP; Walden-Riverwood Ventures; Maniv Mobility;

Trucks Venture Capital; Union Tech Ventures; Bessemer Venture Partners; Maniv

Mobility; and Trucks Venture Capital Israel; USA 67

Nexar Ltd Seed

Series A

Series B 28-May-15

15-Jun-16

24-Jan-18 True Ventures;

Alibaba Capital Partners; Ibex Investors LLC; Slow Ventures; Aleph Venture

Capital; Nationwide Mutual Capital; Mosaic Ventures; and Tusk Ventures Israel; China;

Hong Kong; United Kingdom; USA 45

Otonomo Series

A

Series B 01-Nov-16

07-Apr-17 StageOne

Ventures; Maniv Mobility; Bessemer Venture Partners; Aptiv PLC; and

LocalGlobe Israel; USA;

United Kingdom 37

Bringg Delivery Technologies Ltd Series

A

Series B 19-Dec-15

14-Mar-17 Coca-Cola

Enterprises Inc; Pereg Ventures; Aleph VC; Salesforce Ventures; Shmuel Harlap

(Private investor); and ITURAN Israel; USA 30

Karamba Security Ltd Seed

Series A

Series B

Series C 04-Apr-16

29-Sep-16

16-May-17

10-Apr-18 Asgent Inc;

Fontinalis Partners LLC; GlenRock Israel Ltd; Liberty Mutual Group Inc;

Paladin Capital Group; Presidio Ventures Inc; YL Ventures GP Ltd; and Western

Technology Investment Israel; USA;

Japan 27

Anagog Ltd Series

A

Series B

Undisclosed round 25-Jan-16

26-Feb-18

04-Apr-18 GigPeak Inc;

Daimler AG; MizMaa Ventures; and

Porsche Digital GmbH USA; Germany;

Israel 14

Upstream Security Limited Series

A 12-Dec-17 Maniv Mobility;

Glilot Capital Partners; and Charles

River Ventures Israel; USA 9

Guardian Optical Technologies Series

A 4-Dec-17 Maniv Mobility;

and Mirai Creation Fund Israel 5

Cognata Ltd Series

A 8-Jun-17 Emerge; Maniv

Mobility; and Airbus Ventures Israel; USA 5

Criteria:

Based on announced deals, excluding lapsed and withdrawn bids; dominant geography of target company being Israel; dominant sector of target company being Automotive & Computer Software.

Activities excluded from table include property transactions and restructurings where the ultimate shareholders' interests are not changed.

Data correct as of 23-May-2018.