Israeli tech exits slump 54%, to lowest level since 2014, amid market downturn

Exits of Israeli tech companies, defined as mergers and acquisitions or initial public offerings of shares, plunged 54% in 2022 to their lowest level in eight years as global stock market volatility brought rising valuations down and the specter of an economic slowdown and a regime of higher financing costs hampered deal flow.

2022 saw 120 completed tech exits (including IPOs, M&As and buyouts) with a total value of $20.6 billion, down from 261 exits with a total value of $23.6 billion in 2021, the sharpest deal decline since 2014, according to the 2022 IVC Israeli Tech Review report put together by research center IVC and LeumiTech, a Leumi banking arm that specializes in banking for tech companies.

That’s after 2021 marked a record year for tech IPOs and M&As in Israel, as tech firms saw exits jump an astonishing 520 percent to an unprecedented $81.2 billion in value. But in 2022, as the market started to turn, valuations and shares traded publicly have been taking a battering amid rising inflation and interest rates, with the ongoing Russian war on Ukraine impacting supply chains and the global economy, and investors hunkering down.

“In order for Israeli high-tech to restart, a change is required,” said LeumiTech CEO Timor Arbel-Sadras. “Data shows that in 2022, the number of acquisitions was lower than in 2014. In addition, we are witnessing a sharp decline in the amounts invested in Series A Rounds.”

“These indicators are a call to action,” Arbel-Sadras added.

The number of tech firms going public through an IPO in 2022 plummeted to 13 with an aggregate valuation of $1.17 billion, a sharp drop from the 75 IPOs with a total valuation of $10 billion in 2021. Only four tech public offerings took place on the Tel Aviv Stock Exchange (TASE) in 2022, and nine in the US. That compares with the 48 IPOs carried out on the TASE in 2021, and the 23 in the US.

The ironSource management team in March 2021. (Courtesy)

“In 2022, a slowdown in the Israeli exit scene was on par with the decrease in the number of IPOs, and returned to the average historical numbers, compared to the exceptional 2021 figures,” it was noted in the report. “In the current environment, as mature companies struggle to raise more capital or to make a public offering, more M&As are expected in the second half of 2023.”

“We estimate that these acquisitions will be carried out by tech companies in more advanced stages and by private equity firms, while being efficiently financed by capital and debt combinations,” remarked Arbel-Sadras.

A breakdown of the tech exit data showed that last year, seven deals of over $500 million each accounted for almost 71% of the total exit amount, while two acquisitions together came to $10.2 billion and contributed 50% of the total proceeds in 2022. Among the prominent deals last year was Israeli advertising tech and app monetization firm ironSource merging with US gaming firm Unity Software in an all-stock deal valued at about $4.4 billion.

The deal came after ironSource went public in 2021 on the New York Stock Exchange via a merger with special purpose acquisition company (SPAC) Thoma Bravo Advantage at an implied equity valuation of $11 billion. It was considered the highest-ever valuation for an Israeli firm ahead of a public offering.

Other notable M&As are Intel’s acquisition of Israel’s Tower Semiconductor for $5.8 billion and the chipmaker’s deal to buy Israeli computing tech startup Granulate for about $650 million.

Tech funding slows

Israeli tech startups and companies raised close to $15 billion in capital during 2022 over 663 deals. The figure marked a 42% drop from the 2021 bonanza funding year, when Israeli companies nabbed $25.9 billion in private investments in total leading to high company valuations.

An illustration of a centaur businessman and a businessman riding a unicorn. (rudall30 via iStock by Getty Images)

Most of the decline happened in the second half of 2022 as investors in private companies slowed down their pace of investments amid rising interest rates, a global stock market fall, and tech layoffs. Raising money is much more difficult in a jittery market and companies are hoping to stretch the cash they have for a longer period to ensure their survival.

2022 also turned out to be a tough year for the global tech industry with about $445 billion in private venture funding, marking a 35% drop year over year from the $681 billion invested in 2021, which in itself was also a record year for global tech IPOs and M&As, according to Crunchbase data.

Unicorn growth takes a hit

Unicorns, which were the talk of the Israeli tech industry in 2021, with massive funding rounds driving up valuations, were the the “main victim of the shift in the financial regime,” in 2022, the IVC-LeumiTech report found, citing a decline in the number of mega-funding rounds of more than $100 million.

As a result, 2022 was also a year with fewer new additions of Israeli-founded unicorns, or privately held companies valued at over $1 billion. In the fourth quarter of 2022, two Israeli tech companies reached the valuation threshold of $1 billion, following one new unicorn in the third quarter, taking the total number of new unicorns to 23. That’s just above half of the record 42 new unicorns in 2021.

There are 98 Israeli-founded unicorns, with 23 of them born in 2022, down from the 42 new ones recorded in 2021 but still up from the 19 new ones in 2020, according to Tech Aviv, which tracks the industry. Forty of these unicorns, or some 41%, are based in Israel, with the rest in Silicon Valley, 24; in New York, 19; five in Boston; four in London; two in Los Angeles; and one each in Singapore, Chicago, Barcelona, and Dallas.

“We believe that in 2023 a balance will be found again between investors and companies in the Israeli high-tech ecosystem,” said IVC co-founder and CEO Guy Holzman. “It is only realistic to expect that this process will include unpleasant side effects, and the coming year will be a difficult year for many startup companies.

“However, without an additional major economic crisis or a significant change in the geopolitical map, IVC’s data supports the supposition that we will see a return to growth in capital flowing into the local high-tech ecosystem during the second half of this year,” Holzman projected.

Arbel-Sadras said that 2023 will be a year during which tech firms and investors “must realistically look into their future in the current climate and make responsible strategic decisions, at the appropriate timing.”

“We estimate that these acquisitions will be carried out by tech companies in more advanced stages and by PE firms, while being efficiently financed by capital and debt combinations,” Arbel-Sadras said. “We do hope to see Israeli companies enjoy these opportunities and not just foreigners.”

The IVC-LeumiTech report reviews capital raised by Israeli tech firms from Israeli and foreign venture capital funds as well as from other investors, such as investment companies, corporate investors, incubators and angels. The report is based on data from 564 investors, of which 96 were Israeli VC funds and 467 were other entities.