Israel has fallen five spots to 10th place worldwide as a destination for startup funding, with the country’s tech ecosystem hit harder by the economic slowdown than those of global counterparts due partly to political uncertainty, according to a report on Monday by venture capital firm Viola.
Fundraising by Israeli tech firms in the first half of the year plunged 73% to $3.2 billion versus the $12 billion during the first half of 2022 and marked the lowest figure since at least 2018. Tech investments have continued to slump globally, albeit at a slower pace. In the first six months of the year, global funding activity dropped 50% to $168 billion from the $333 billion raised during the same period in 2022 and $348 billion in H1 of 2021.
“Until now, Israel managed to maintain its place as the 5th largest tech ecosystem in terms of funding, but due to the sharp decline in 2022-3, it dropped to 10th place, below South Korea, Singapore, France, Germany, and Canada,” according to Viola principals Tomer Meridor and Uri Lampert.
In the first half of the year, the US tech ecosystem attracted the most capital globally with $84 billion, followed by China with $23 billion and the UK with $9 billion, data compiled by Viola showed. In fourth place came South Korea, raising $6.4 billion, and in the fifth spot was India with $5.5 billion.
Israeli companies also saw a 80% year-on-year drop in “mega” deals — funding rounds of $100 million and over — in the first half of 2023, while early rounds declined by a more moderate 56% compared to a year ago. “Growth” rounds, or Series B and C investments of between $20 million and $50 million, also saw a decrease of 71% in the first six months of this year.
Notable investment transactions so far this year include funding rounds for US-Israeli cybersecurity startup Wiz, which raised $300 million at a staggering $10 billion valuation, and trading platform eToro, which secured $250 million at a $3.5 billion valuation.
The global slowdown in tech investments that started in the second half of 2022 was exacerbated by worldwide inflation, interest rates that were raised to rein in price growth, and weak stock markets. Meanwhile, the contested changes to the judiciary proposed by Israel’s government early this year have been triggering mass protests across the country for the past six months.
Tech executives and employees have been taking part in the protests amid concern that the plan undermines Israel’s system of checks and balances and threatens its democratic character, which in turn, it is feared, could drive away foreign investment.
The Viola report noted that the Israeli ecosystem had some “unique circumstances affecting it” this year. On the one hand “political unrest” around the proposed judicial overhaul was cited as a contributing factor to investors who are concerned about uncertainty.
“The Israeli tech ecosystem is working diligently to find a bi-partisan, wide consensus resolution,” Meridor and Lampert remarked.
On the other hand, historical analysis showed that prior to the global funding crisis, Israeli tech outfits raised more capital than their global peers. Investments in Israeli startups jumped a whopping 250% between the first half of 2018 and the first half of 2021, while global investments surged by 108% during the same comparative period.
Investments in Israel peaked in 2021 as local firms nabbed a record $25.6 billion in capital. Ahead of the global funding slowdown in the second half of 2022, Israeli startups continued to attract more funding during the first half of the year, the report said.
“With these amounts of investment, many Israeli startups have longer runways, hence less need of raising investment in H1 of 2023,” according to Meridor and Lampert.
This year also saw an uptick in extension rounds, where funding is kept open so that a given startup can secure more money at the same valuation. Extension rounds made up over a third of published founding rounds in the first half of the year, according to the report. Extension rounds, often an indicator of market trouble, can buy founders and executives some time to grow revenue and fundraise again at a later time under, hopefully, more favorable conditions.
“We believe that the actual amount of extension rounds is even higher,” wrote Meridor and Lampert. “Many startups chose not to publicize these extension rounds in order to avoid negative perceptions.”
Although the pace of M&A activity in Israel has been sluggish in the first half of this year, Viola sees a pipeline of deals lining up in the next 12 months. In the first half of the year, only 27 M&A deals with a total value of $1.8 billion were concluded. By comparison, the first half of 2022 saw 64 deals worth $4.9 billion.
“There is a strong interest from all sides: startups exploring liquidation, and strategic corporates and PEs seeking opportunities and trying to scoop up attractive targets and bolstered deals while they are attractive. We believe that a wave of M&As will arrive in the next 12 months.”
Founded in 2000, Viola has more than $5 billion in assets under management and has backed over 200 technology companies, including ironSource, Payoneer, Lightricks, Redis, Pagaya, and Verbit.