Decline in investors, negative sentiment over Gaza war ‘extremely concerning’ — study
Despite several large mega-funding deals over the past three months, the high-tech sector is struggling to raise money, according to research by RISE Israel
Sharon Wrobel is a tech reporter for The Times of Israel.
While fundraising by Israeli tech firms has returned to levels last seen in 2022 despite the months-long war with the Hamas terror group, the continuous drop in the number of active investors in the country, both Israeli and foreign, is “extremely concerning,” and poses a threat to the survival of the local ecosystem, the RISE Israel institute warned in a research report on Tuesday.
Israeli high-tech firms attracted $2.8 billion in capital over the past three months to the end of June, the highest amount since the end of 2022, after investments slumped as war broke out following the October 7 onslaught.
However, the lion’s share or 64% of the funds in the second quarter were invested in a mere six tech companies, distorting the picture of signs of a turnaround or recovery for Israel’s tech ecosystem, according to the report by RISE Israel, formerly known as Start-up Nation Policy Institute (SNPI).
American-Israeli cloud cybersecurity unicorn Wiz in May raised $965 million at a staggering valuation of $12 billion, accounting for 34% of total investments in the second quarter of the year.
“The main red flag is the growing dependence on a small number of outstanding companies that raise mega-rounds,” said RISE Israel CEO Uri Gabai. “It’s important to emphasize that there are still concerns, such as the decrease in the number of investors and the questions surrounding science and innovation ties with Europe.”
Excluding the six large mega-deals of more than $100 million, total investment amounted to about $1 billion during the past quarter. With the war raging for almost nine months and no end in sight, RISE Israel urged the government to “find ways to help good start-ups survive this period of uncertainty.”
“As the security situation prolongs, the high-tech sector will also stabilize at a lower level of activity compared to the past,” Gabai warned. “If the Israeli government wants to gradually return high-tech to pre-crisis activity levels, it needs to allocate larger budgets in this sector, especially in startups in their early stages.”
Fundraising by Israeli tech firms has declined almost every quarter since mid-2022 due to a global slowdown, which was exasperated at the start of 2023 by the contentious government plans to overhaul Israel’s judiciary system shying investors away. The capital drought for startups continued until the end of the year, as the Israeli army mobilized hundreds of thousands of reserve soldiers at the start of the Hamas war, some of whom founders of startups and remain in uniform after almost nine months.
The absence of personnel in the tech sector, the growth engine of the Israeli economy, has interrupted startups’ day-to-day operations, as well as their ability to attract foreign investors and raise funding.
The economy’s dependence on the high-tech sector has significantly grown in the past decades. The Israeli high-tech industry last year contributed 20% to local GDP, versus 6.2% in 1995, and made up 53% of total exports amounting to $73.5 billion, while generating “substantial” tax revenues for the country, according to recent data by the Israel Innovation Authority.
“The growing share of mega-investments may indicate that with the exception of a small number of ‘star companies’, the broader high-tech sector is facing difficulties raising money,” it was cautioned in the report.
As local startups are struggling to raise essential funds for their operations during the current challenging and uncertain war environment, a key concern raised in the report is the continued downward trend in the number of investors funneling funds into Israeli tech firms.
“Regardless of the reasons for this decline, the phenomenon is extremely concerning, as it may indicate a trend of distancing from Israel due to recent events,” the report warned. “The Israeli high-tech sector needs both the establishment of new startups and the opportunity for growth and expansion of more mature companies, requiring an active ecosystem of investment entities, both local and foreign.”
During the first half of 2024, there was a decrease of 18% in the number of active foreign investment bodies in Israel versus the same period last year, and a 10% decline compared to the six months prior, according to data presented in the RISE Israel report. As for Israeli investment bodies, the declines were 15% and 22% respectively. Active investment bodies, include venture capital funds (VC), corporate venture capital funds (CVC), institutional investors, and corporations, that made at least one investment during the relevant period.
“It is unclear how much of it stems from the global slowdown that started in that year, how much was influenced by the internal instability and the war that characterized 2023, as well as the worsening sentiment towards the State of Israel in various countries at the beginning of 2024,” it was noted in the report. “Additionally, it is plausible that at least part of the decline in activity of local entities is due to their own difficulties in raising capital.”
Outside of Israel, the anti-Israel sentiment amid the ongoing Gaza war is a growing phenomenon especially in the last quarter, raising fears that the international isolation that Israel is experiencing will also hurt the high-tech sector, researchers in the report pointed out.
Last month, French authorities attempted to ban Israeli defense firms from exhibiting at the prestigious Eurosatory 2024 trade show in Paris, and recent academic boycotts over the Gaza war may risk jeopardizing Israel’s participation in the EU’s largest research and innovation program.
“This is potentially just the tip of the iceberg,” the report warned. “The main problem, which may worsen, relates to the participation of Israeli entities in the Horizon Europe R&D program.”
Israel is one of 18 association countries in the €95.5 billion European program, along with other countries that are not full EU members, including the UK, Norway and Turkey. As an association country, Israel can participate in Europe’s R&D programs, and it has done so since 1996.
Since Israel joined the EU’s research program, the first non-European country to join it, a total of grants of about €3.15 billion were allocated to Israeli projects, including in academia, and to technology companies, according to RISE Israel data.
RISE Israel cited some “worrisome indications” about Israel’s participation in the program, including recent discussions at the EU Foreign Affairs Council about sanctions on Israel, and the increasing number of European universities breaking their ties with Israel.
“Participation in Horizon Europe provides significant funding for R&D, at a time when raising money by technology companies is extremely difficult, and when due to the Gaza war the government will not be able to increase its spending on R&D in the foreseeable future,” it was asserted in the report. “Any sanctions on Israel, whether de jure or de facto, will greatly hurt Israel’s innovation ecosystem, during a period of rapid global developments in technologies such as artificial intelligence.”
“It is imperative to maintain dialogues with European companies and academic institutions not about the war, where we are unlikely to convince them, but rather about Israel’s significant contributions in past European projects in promoting health, sustainability and welfare both in Europe and globally,” the policy and research institute said.
