Israeli tech exits slump 56% in 2023, deal flow drops to lowest level in a decade

In year of contentious judicial overhaul and war with Hamas, value of Israeli tech M&As and IPOs drops more than half to $7.5 billion, PwC report says

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

An illustrative photo of the Tel Aviv financial business district skyline. (Elijah Lovkoff via iStock by Getty Images)
An illustrative photo of the Tel Aviv financial business district skyline. (Elijah Lovkoff via iStock by Getty Images)

As Israel’s tech industry feels the impact of the ongoing war with the Hamas terror group, the number of “exits” — mergers and acquisitions or initial public offerings of shares — this year plunged to the lowest level in a decade.

The value of Israeli tech exits, including M&As and IPOs, this year slumped 56 percent to $7.5 billion from $16.9 billion a year earlier, according to the 2023 Israel High Tech Exit report by consultants PwC Israel released on Wednesday. At the same time, the number of deals dropped 38% to 45 from 72 last year, with the average value of the deals down 29% to $167 million from $235 million during the same comparative period.

2022 was already a tough year for Israel’s tech industry, as the uncertain specter of rising interest rates, a global stock market fall and tech layoffs led to a sharp slowdown in investments. As 2023 began, local political uncertainty around the contentious judicial overhaul pushed foreign investors into a wait-and-see position about dealmaking. Tech firms saw exits jump by a staggering 520% in 2021 to $82 billion in value, shattering all previous funding records.

Now with Israel almost two months into a war with Hamas, many local startups are struggling to attract essential funding, in particular from foreign investors, while major deals will likely not happen.

Thousands of tech workers and startup founders have been drafted to the army with more than 350,000 reservists called up after the shock Hamas assault on southern Israel on October 7, which killed 1,200 people, most of them civilians, and saw at least 240 abducted to Gaza. Israel swiftly declared war with the intention of toppling the terror group’s regime in Gaza and securing the release of the hostages.

The massive callup presents challenges in particular for early-stage startups, both in terms of attaining critical funding and in terms of their daily operations.

Israel attracts most of its tech investments from abroad. About 80% of venture capital investments in local high-tech startups were generated from foreign funds in the years 2021 and 2022.

Oddity, parent company of cosmetics brand Il Makiage debuts on Nasdaq, July 19, 2023. (Courtesy)

The Israeli economy’s dependence on the tech sector has significantly grown in the past decade. The industry contributes 18% to local GDP, versus less than 10% in the US and about 6% in the EU. About 14% of all employees work in the tech sector and in tech jobs in other sectors. The Israeli economy relies on tech products and exports, which make up about 50% of total exports, as well as on tech taxes.

“October 7 has changed everything,” said Yaron Weizenbluth, partner at PwC Israel. “In many respects, Israel and its tech industry entered this war when in a suboptimal position: the global economic downturn was already taking its toll… and there was also the local judicial crisis with its potentially devastating consequences, putting us at risk of rocking the very foundations of our society.”

Weizenbluth cautioned that while “no one knows yet how this [the war] will affect the civil, military and economic character of our country, it is likely to leave a lasting mark.

“At any rate, the unfolding events have the potential of dramatically shifting the story of our country going forward, including as the Startup Nation,” he said.

A breakdown of the tech data shows that from the start of the year to Dec. 3, dealmaking was driven by cybersecurity companies, which made up 19 out of a total 45 exits this year with a cumulative value of $3.8 billion, or 51% of the total deal value. Among the 12 deals with a value of more than $200 million, 10 were startups that are developing cybersecurity solutions.

In the months before the outbreak of the war and even weeks into the fighting, a flurry of Israeli-founded cybersecurity startups were being snapped up by global tech companies as well as local players as they look to meet the fast-growing security needs of businesses.

Check Point Software Technologies offices in Tel Aviv (Courtesy)

Palo Alto Networks, a Santa Clara, California-based cybersecurity firm founded by American-Israeli entrepreneur Nir Zuk, announced last month that it was buying Talon Cyber Security, less than a week after it acquired Israeli startup Dig Security at the end of October.

In August, cybersecurity firm Check Point Software Technologies Ltd. bought Israeli-founded startup Perimeter 81 for about $490 million. US cybersecurity company Rubrik snapped up Israel-based startup Laminar, a data security platform provider that helps businesses and organizations monitor and protect sensitive data stored in public clouds.

In March, Cisco Systems, a US maker of networking software and hardware, bought Israel’s Lightspin Technologies, a developer of cloud security software. Other deals include US tech giant IBM buying Israeli cybertechnology startup Polar Security, a developer of an automated data security platform to track and protect sensitive data across hybrid cloud-based systems.

“Over the years, cyber companies have had a rather sizable contribution to deal metrics relative to other segments,” Weizenbluth noted. “In 2023, the overall decline in the number of deals made this segment stand out even more, and it actually kept the market afloat.”

The IPO market this year dried up almost completely, with only three Israeli companies going public versus 13 in 2022. IPOs accounted for $2.5 billion of the exit total in 2023, sharply down from their $10.7 billion in value last year.

Earlier this year, Freightos, a Jerusalem-based smart freight booking and payment platform started trading on Nasdaq. In July, parent company of Israeli online cosmetics brand Il Makiage raised more than $423 million in its debut listing on Nasdaq.

Summing up 2023, Weizenbluth said that it is hard to put a finger on the primary factor that shaped the tech industry and deal market over the past year, citing the internal political upheaval and the Hamas war, and the fact that the number of deals were back at a low last recorded in 2013.

“However, when attempting to draw conclusions from past occurrences, it seems that this time we are in a different reality,” said Weizenbluth. “Unlike the ability of Israel to recover from past global crises relatively fast and in reasonably good shape, it feels different this time.

“The Israeli tech miracle that brought us to new highs is still fragile and must be guarded and protected,” he cautioned.

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