ISRAEL AT WAR - DAY 140

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First investments by the most active VC funds in Israeli tech slump 90% in Q1

Amid global slowdown and local political upheaval, VC funds made only three initial investments in Israeli startups in the first quarter of 2023, IVC-Gornitzky report shows

Sharon Wrobel is a tech reporter for The Times of Israel.

A view of high-rise buildings near Ayalon Highway in Tel Aviv, December 9, 2020 (Miriam Alster/Flash90)
A view of high-rise buildings near Ayalon Highway in Tel Aviv, December 9, 2020 (Miriam Alster/Flash90)

The number of first investments by the 10 most active venture capital funds in Israeli technology firms in the first quarter of this year dropped to the lowest level since at least 2015 as the global tech crisis coupled with local political uncertainty has brought dealmaking to an almost complete halt, according to a new report.

The 10 most active VC investors, which in 2022, accounted for 58% of total funds raised, made only three initial investments – when a VC fund adds a company for the first time to its investment portfolio – in the first three months of the year versus 30 during the same period in 2022, according to data published by IVC Research and law firm Gornitzky GNY on Wednesday.

“The global crisis in technology investments in 2023 is expected to have a number of effects, some of which are already visible,” said Shlomo Landress, partner and head of the technology practice at Gornitzky GNY. “This is not the first such slowdown the technology industry has experienced. However, the ongoing internal political clash has raised great concern about the ability of the Israeli technology sector to bounce back from the current downturn as effectively as it did in the past.”

“Fund managers are finding it more difficult to secure a closing of their fund as evidenced by Insight Partners’ recent slashing of its fundraising target,” Landress said.

US private equity and venture capital firm Insight Partners announced earlier this month that it is cutting the target for the size of its latest fund to $15 billion from $20 billion as it sees a slowdown in investments and technology valuations have been going down. Insight Partners, which has more than $75 billion in assets under management and has invested in more than 750 companies globally, was the most active fund in Israel in 2022 with 29 first investments.

The financial environment and a slowing global economy saw tech shares take a battering in global markets in the second half of 2022, pushing company valuations down both in the public and private sectors. The market downturn has seen thousands of workers laid off, triggering funding pullbacks and creating a bear market for new tech offerings.

File: Workers from the tech sector protest against the government’s planned judicial overhaul, in Tel Aviv, on March 9, 2023 (Tomer Neuberg/Flash90)

In total, in 2022, investments in startups in Israel dropped by almost half compared to the previous year, amounting to $15.9 billion. The negative trend in the Israeli high-tech industry has intensified in recent months amid growing uncertainty surrounding the government’s proposed judicial overhaul and a slowdown in foreign investment.

For the VC industry, 2022 still marked the second-best year with 56 Israeli VC firms raising $4.5 billion, a 15% decline from the $5.6 billion record of 2021, the report showed.

In 2023, Landress says “startups will need to show not only promise but also a clear path towards revenues and profitability in order to attract investors.”

“As valuations decrease and financing becomes more difficult to obtain, opportunities for acquisitions will surface,” he continued.

In 2022, Insight Partners remained the most active fund as in the previous year. Tiger Global, a New York-based investment firm focused on software and financial tech came in second, after taking part in 23 deals. Israel-headquartered global venture firm OurCrowd, with 17 first investments, was the third most active fund last year.

The 10 most active investors in 2022 focused on early seed and Series A financing rounds mainly investing in cybersecurity and fintech firms.

“2022 and 2023 mark a challenging period for the Israeli venture capital community,” said IVC CEO Guy Holtzman. “After years of prosperity, the change in the global economy dictates different practices for funds and companies in order to maximize returns.”

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