Private funding by Israeli tech startups slumps to 5-year low, data report shows - The Times of Israel

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Private funding by Israeli startups in the first half of 2023 dropped to a five-year low as the “ripple effect” from the growing uncertainty around the controversial judicial overhaul is taking a toll on the country’s tech ecosystem, according to a report published by Start-Up Nation Central (SNC), a nonprofit organization that tracks Israel’s tech industry.

In the first six months of the year, Israeli startups raised a total of $3.9 billion from private financing rounds, marking a 29% drop from the volume of funds raised in the second half of 2022, and a 67% decline from the $11.9 billion nabbed during the same period last year, the data compiled by SNC’s Finder startup database showed.

More concerning, the report pointed to a quarter-on-quarter fundraising decline of 10% from the first quarter to the second quarter of this year, while in the US private funding trends are stabilizing, it was noted in the report.

Health tech and fintech were among the sectors that got hit hardest during the first half of the year in nabbing private funding, while climate tech firms attracted more capital and the downturn in investments in cybersecurity firms stabilized.

“The uncertainty and internal changes in Israel together with global economic changes are prominently expressed in the activity of the Israeli ecosystem and reflect a significant slowing down and an ebb in activity,” said Yariv Lotan, Start-Up Nation Central VP of Digital Products, Development, Data and BI. “This sharp drop stands in opposition to the stable trends in funding and venture capital seen in the US.”

Tech executives, startup founders and employees have been at the forefront of mass protests against the changes to Israel’s judicial system advanced by the coalition government, led by Prime Minister Benjamin Netanyahu, since the start of the year. The concern is that the judicial overhaul plan undermines Israel’s system of checks and balances and its democratic character, which in turn, it is feared, threatens the ecosystem’s position as a stable hub for investments.

Tech workers protest Israel’s right-wing government in Tel Aviv, on January 24, 2023. The Hebrew on the blue sign reads: ‘No democracy, no high tech’; and the yellow sign reads: ‘No to the coup d’etat.’ (AP/ Maya Alleruzzo)

Israel’s tech ecosystem is a key engine of growth for the local economy, as it generates about 16% of GDP and over 50% of exports, and contributes more than 25% of the total income tax collected by the government.

“It is essential to acknowledge the uncertainty in Israel resulting from the recent judicial reform,” it was cautioned in the report. “The ripple effect is already being felt with indicators such as decreased fundraising and fewer emerging Israeli startups.”

The market for initial public offerings has dipped to its lowest since 2018, and the volume of mergers and acquisitions activity amounted to an aggregate $1.3 billion in the first half of this year, a sharp drop of more than 64% compared to the same period last year.

Investor participation in private financing rounds nosedived to the lowest level in the past nine years, plunging by 53% in the first half of 2023 compared to the same period last year, the report showed. In the first six months of the year, foreign venture capital investors led more financing deals than their Israeli counterparts for the first time in a decade.

“Even in the face of an 11% dip in their participation from H2 2022, these international financiers led 70% more rounds than Israeli investors and initiated 17% more new investments, serving as a steadying force in these uncertain times,” according to the report.

Based on data from its Finder platform, the SNC report assessed the activity of six sectors of the local tech ecosystem: Cybersecurity, fintech, enterprise IT & Data, climate, health and agriculture-food tech. The Finder platform is a startup database that tracks more than 7000 Israeli tech startups. It maps over 850 investors, including VCs, corporate VCs, private equity, and angel investors. Finder also maps where startups congregate: accelerators, incubators, hubs, and co-working spaces.

Wiz’s offices in Tel Aviv. (Courtesy)

Total private investments into health tech startups in the first six months of the year slumped more than 70% to $504 million from the first half of 2022, which marked the lowest figure since 2018. Quarter-on-quarter analysis showed that despite a slight increase in investments from the first quarter to the second quarter of 2023, there was a decline of 42% in the number of financing rounds. The health tech sector includes digital health, pharma, and medical devices firms.

Israeli fintech startups raised a mere $545 million from private funding rounds in the first half of this year, marking a 40% drop from the second half of 2022, and an 87% decline from the first half of last year. This year’s investments included the $62 million raised by One Zero Digital Bank Ltd., set up by tech entrepreneur Amnon Shashua, and the $250 million secured by trading platform eToro.

In line with global trends, total investment in Israeli fintech startups dropped from $6 billion in 2020 to $2.6 billion in 2022.

“Despite the drop in investments, it appears that a new wave of companies are succeeding in gaining a foothold by partnering with large strategic partners and leveraging the power of Generative AI, a field with high growth potential,” it was noted in the report.

The global macroeconomic slowdown coupled with the local instability around the judicial overhaul has also been affecting investment into Israeli startups in the agriculture and food tech sector, which has been sliding downward since the second half of 2022.

In the first half of this year, the aggregate amount of investment round deals in the sector plunged to $200 million, compared to $600 million in the same period last year. Most of the downturn was felt by food tech startups as many face challenges in scaling up production and large multinational food companies are becoming more risk-averse due to the macroeconomic slowdown, according to the report.

In the first half of 2022, Israeli companies were leading the world in food tech investments in the plant-based alternative proteins sector, and came second only to the US in funds invested in the alternative protein industry as a whole, according to the Good Food Institute (GFI) Israel, a nonprofit organization that seeks to promote research and innovation in food tech.

Against this, climate tech startups attracted $900 million in public and private funding in the first six months of the year compared with $700 million in the second half of 2022. There is still a large gap from the peak the sector experienced in the first half of 2022 when investments reached $2.5 billion.

“There is reason to be optimistic that the sector will remain relatively resilient to the current market and economic conditions thanks to the urgency for climate solutions and the expectation that regulation and corporate commitments for decarbonization will necessitate the rapid rollout of these solutions,” according to Yael Weisz Zilberman, climate tech sector lead at Start-Up Nation Central.

In the first half of 2023, total private investments in the cyber sector dropped 57% to $1.05 billion year-on-year but stabilized relative to the second half of 2022 during which a similar amount was raised signaling that the industry could be balancing out after a consistent downward trend since the end of 2021. About 70% of the funding was invested in data and cloud security firms.

One of the most notable financing deals was by US-Israeli cybersecurity startup Wiz, which raised $300 million via a private funding round at a staggering $10 billion valuation.

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