Investment in Israeli tech firms slumps 56%, hit by political upheaval and Hamas war

2023 saw the number of deals plunge 44% year-on-year, while foreign investors’ share in funding Israeli startups increased in wartime, IVC-Leumitech data shows

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

For illustration: High-tech development centers in Herzliya, October 30, 2020. (Gili Yaari/Flash90)
For illustration: High-tech development centers in Herzliya, October 30, 2020. (Gili Yaari/Flash90)

Fundraising by Israeli tech startups and companies plunged 56 percent this year, compared with the same period in 2022, as the sector grappled with political uncertainty around the judicial overhaul and the outbreak of the war with the Hamas terror group.

Local startups raised a total of $6.9 billion in 2023, similar to the levels recorded in 2018 and 2019, according to annual preliminary data put together by research center IVC and Leumitech, a Leumi banking arm that specializes in banking for tech companies. The number of deals slumped 44% year-on-year, with 392 funding transactions recorded over the course of 2023, marking the lowest figure since at least 2015, the data showed.

Full annual data of the Israeli tech sector is expected to be released in January.

The tech sector attracted more than $15 billion in capital last year and, during a bonanza funding year in 2021, nabbing $25.6 billion in private investments in total leading to high company valuations. However, in the second half of 2022, investments in tech companies slowed amid rising interest rates, a global stock market fall and tech layoffs.

Adding to this, in 2023 local political uncertainty around the contentious judicial overhaul announced at the beginning of the year pushed investors in general, and foreign investors in particular, into a wait-and-see position about dealmaking. In this jittery market, the downward trend in investment started to show initial signs of stabilization in the second and third quarters of the year, according to the IVC-Leumitech data report.

However, the Hamas-led October 7 massacre put an end to that, after thousands of terrorists burst from the Gaza Strip into southern Israel carrying out a murderous rampage of unprecedented intensity and breadth, killing some 1,200 people and abducting at least 240 people, many of whom remain hostage in Gaza.

Israeli reserve soldiers seen during military training in the Golan Heights, northern Israel, October 30, 2023. (David Cohen/Flash90)

Since then, Israel launched an ongoing military campaign aimed at destroying Hamas and removing it from power in Gaza, while also attempting to free the hostages. To fortify the military effort, the Israeli army called up around 350,000 reserve soldiers, among them many founders, executives and employees working in the local tech sector.

In the last quarter of the year, as the war continued to rage, fundraising by Israeli startups fell 15% to $1.45 billion compared with the previous quarter before the start of the fighting, data compiled in the IVC-Leumitech report showed. The number of deals slowed, with 75 transactions recorded during the last three months of the year, a decline of 17% versus the previous quarter.

At the same time, the Gaza war did not appear to deter foreign investors from continuing to back local tech companies. Foreign investors’ share in funding Israeli tech companies in the fourth quarter increased at a relative rate, following the trend from the beginning of the year, according to the IVC-Leumitech report. Against this, the participation of local investors in funding deals declined during the same period. The local tech sector relies heavily on foreign capital, largely American.

“The year 2023 was challenging for the Israeli economy in general, and local high-tech in particular,” said IVC CEO Ben Klein. “Despite the complexity, foreign investors’ participation level is a clear sign of the attractiveness of Israeli high-tech companies, even in difficult times.”

Moreover, the data pointed to a continued positive development for startups raising seed funding, which started in the second quarter. Local startups attracted $220 million from seed funding rounds in the fourth quarter, an increase of 46% compared with the $150 million raised during the third quarter of the year, but the figure is still down 26% year-on-year.

“The fourth quarter data show a relatively moderate decrease of 15% and a clear increase in the investment figures in the seed stages, which are an indication of the high durability of the Israeli high-tech industry and an important reminder of the role this sector in the Israeli economy has especially these days,” commented Leumitech CEO Mia Eisen-Tzafrir.

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