After a year that began with attempts to overhaul the judicial system and ended with a war, Start-Up Nation Central exudes optimism and believes that the blow to Israel's tech industry is less painful than it seems. The NGO, led by CEO Avi Hasson, the former Israel Innovation Authority head, says Israel has returned to the normal pre-Covid investment level, before investments soared due to zero interest rates and the tech needs of remote work.
According to Start-Up Nation Central, whose lead donor is Elliot Management hedge fund co-CEO Paul Singer, Israeli privately-held tech companies raised nearly $10 billion in 2023, similar to the amount raised in 2019. Total funding for privately-held tech companies that was reported in 2023 was $7.9 billion, but the NGO reveals that another $2 billion not yet disclosed and reported will be credited to 2023, a figure that would put the amount of investments in early stage startups in 2023 at about $300 million - above the amount raised in 2019.
Start-Up Nation Central's measurement method differs from other research firms like IVC, because it refers to the time when the investment agreements were signed. IVC, on the other hand, refers to the date of the public announcement of the funds raised, which might take place months after the actual signing and the transfer of the funds to the company's coffers.
In the first quarter of 2023, $2.1 billion was raised, down 27% from the first quarter of 2022, which was already considered a crisis period. The number of companies raising money fell to 171, a low figure not seen since the third quarter of 2017.
In addition, the funds raised by Israeli companies on stock exchanges remained stable. 54 Israeli companies raised $1.9 billion on Wall Street in 2023, a dramatic fall from $3.2 billion in 2022 by higher than the average raised between 2017 and 2019.
Insight Partners is no longer the biggest foreign investor in Israel
The report charts the changes in the major investors in Israeli tech companies over the past year, which was one of the most challenging for venture capital funds. Jon Medved's global venture investment platform OurCrowd significantly reduced the number of investment rounds in which it participated from 84 in 2022 to just 21 in 2023. Entrée Capital, founded by Avi Eyal, became the outstanding Israeli investor of 2023, rising from 16 investments in 2022 to 21 investments last year.
Shlomo Dovrat and Avi Zeevi's Viola Ventures, which is currently raising a growth fund, reduced its number of investments from 47 in 2022 to 18 last year. Pitango fell from 21 to 20 investments and Vertex disappeared from the list of top active investors, and was replaced by Team8 and Jibe with 16 and 11 investments respectively, and the Aleph, Glilot, Grove and TLV funds, which each made nine investments in 2023.
Among foreign funds there was a dramatic decline in the amount of investments made by Insight partners in Israeli companies. Insight, which during the Covid pandemic became the biggest foreign investor in Israeli companies, and brought many companies to unicorn status, participated in only 11 new financing rounds in 2023, compared with 40 in 2022. Insight has been raising a new fund, so that it has also decreased its investment activities outside of Israel.
Meanwhile, Tiger Global has completely disappeared from Start-Up Nation Central's list of prominent investors in Israel, after making 26 investments in 2022. Gigi Levy-Weiss's NFX fund and other Us investors fell from 20 investments in 2022 to just seven investments last year. Bessemer fell from 16 investments to five and Lightspeed fell from 15 to 12, making it the second biggest active foreign investor in Israel last year, after Samsung Next, which participated in 13 financing rounds.
Despite the war, the level of participation by Israeli investors in investments in Israeli companies fell last year. The proportion of financing rounds without Israeli investors increased from 30.2% to 43.8%, due to the plight of Israeli funds, who found it more difficult than US investors to raise new capital. Many funds preferred to "sit on the fence" and not make new investments, so as not to struggle raise another fund, which they preferred to postpone to 2024, expecting that global macro data would improve.
"We have not yet seen in Israel the impact of the decline in the valuation of private companies, the 'down rounds,'" Hasson tells Globes. "There is no escape, and this will probably happen this year. There is a lot of money in the pockets of Israeli funds, which made very few investments last year. They are afraid to run out of money and raise a follow-on fund, so we can say that the local industry is at least two quarters behind the industry in the US. And as happened there, I believe we will see more investments in the coming year, and we will see a wave of innovation in content worlds, some of which relate to the war, such as defense technologies and medical rehabilitation."
Cautious optimism
Overall, Start-Up Nation Central expresses cautious optimism. The study notes a relatively high durability of seed stage investments, the first financing round for a company after it is founded, which shows the interest of investors in companies at the start of their journey, even though a lot of money was directed by angels and private investors to donations during the war. There is also stability in the financing of publicly-traded Israeli companies abroad, "A figure that indicates continued confidence on the part of investors and a market capable of surviving financial ups and downs. The health technology sector, which doubled public funding compared with last year, is an event that indicates the recovery of the sector and the interest of investors." The study also sees strengthening of the confidence of foreign investors in Israel with the fall in participation of local investors, and there were signs of recovery in mergers and acquisitions activity in the fourth quarter, due in part to the sale of two cybersecurity companies for $1 billion.
"In order to continue attracting investors, we must prove business continuity," says Hasson, "because in the end, Israel's story is its talent. If we succeed in proving that Israeli industry continues to develop and produce, with tens of thousands of reservists being released and thousands more immigrating to Israel from the US and Canada to participate in the local workforce - there is room for optimism."
On the other hand, Hasson also recognizes dangers: "The government is still 'not on board'," he says. "It needs not only to talk but also to allocate budgets that are needed to help the field, especially when talking about the periphery. Will the researchers from the research institutes in the periphery - Migal in Kiryat Shmona, for example - be able to return to their laboratories? And what will happen to the companies that are in the incubators and innovation centers in Kinneret, Tel Hai, in the Faculty of Medicine in Tzfat? Our academic infrastructure is also not sufficient, and to lead in AI it is impossible to be satisfied with just unit 8200, this time laboratories and research budgets are also needed. Unfortunately, AI budgets allocated by the government do not reach academia."
Published by Globes, Israel business news - en.globes.co.il - on January 15, 2024.
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