New startups at risk as tech investment ‘backs out’ in March, report shows

New startups at risk as tech investment ‘backs out’ in March, report shows

Seed companies suffer ‘major setback’ due to COVID-19 crisis – raising $16 million in 21 deals in the quarter, down 70% in capital volume from 2019 quarterly averages, IVC says

Illustrative (via iStock)
Illustrative (via iStock)

The coronavirus will lead to a decline in new startups in Israel as smaller companies, the first to suffer from the consequences of the pandemic, face a funding crunch, IVC Research Center and attorneys ZAG S&W said in a report released on Sunday.

There were only four capital raising deals made since February, data in the report showed. Seed companies suffered a “major setback” due to the COVID-19 crisis – raising $16 million in 21 deals in the quarter, down 28% in number and 70% in capital volume from the quarterly averages of 2019, the report said.

Larger companies — growth firms — managed to continue to show fundraising abilities, mainly because nine companies raised over $50 million each in the quarter, raising $1.37 billion in total. Of these, Via Transportation, a ride-sharing startup, held the largest fundraising round, with a $400 million deal.

Because the first two months of the quarter were strong, showing mostly regular activity with figures at the same levels as previous, strong months, and because of the large funding rounds during the first quarter 2020, Israeli high-tech companies raised $2.74 billion in 139 deals, up 76% up in capital volume from the first quarter a year earlier.

But in March, things ground to an almost halt.

“Two weeks into the month of March, the market stopped all at once. Most investors at various stages of negotiations simply backed out,” said Shmulik Zysman, founding partner of ZAG-S&W. “When it rains, everyone gets wet — even the best. It is clear by now that the high-tech industry, along with others, will not manage to avoid the effects” of the coronavirus.

The impact of the pandemic led to a “substantial decrease” in deal making throughout the month of March, in which just 17 VC-backed deals were registered, down almost 50% from the numbers observed in the other months of this year, the data showed.

“The strength of Israeli high-tech will be tested in 2020,” said Guy Holtzman, the CEO of IVC Research Center in a statement.

In the first quarter of 2020, seed financing rounds showed a drastic decrease to 24 deals, compared with the quarterly averages of 32 seed rounds in the years since 2013. With the advent of the crisis further into the first quarter, capital raising in seed rounds has almost completely ceased, with a minimal two deals in both February and March, the report said.

“It is already clear that the aggregate amount of transactions in the second quarter of 2020 will be significantly lower than what we have become accustomed to in the past few years,” Zysman said, and “recovery will not be easy.”

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