VC funds stay bullish on Israeli tech as ‘resiliency is off the charts’

After global and local events sideline investors, tech ecosystem will likely find ‘new normal’ in 2024, investors say — and the national challenges may even prove to be a tailwind

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

For Illustration: Investors, founders and entrepreneurs gather at annual VC trends conference in Tel Aviv, Dec. 28, 2023 (Talmid Tali)
For Illustration: Investors, founders and entrepreneurs gather at annual VC trends conference in Tel Aviv, Dec. 28, 2023 (Talmid Tali)

Local and international VC funds remain bullish on Israeli technology despite two crises that have compounded a funding squeeze in a sector that is the nation’s growth engine.

“The world knows that the impact that Israel has had over the last decades on global tech is very profound,” said Adam Valkin, a managing director at General Catalyst, a US-based venture capital firm that has invested “hundreds of millions of dollars” in Israeli founded companies over the past eight years, including fintech firms Melio, Rapyd and Lemonade and artificial intelligence healthcare company Aidoc. The VC fund has $25 billion in assets under management.

“Israel is a very important part of our global strategy, and will continue to be,” he said in a phone interview. “On a long-term basis, it’s hard not to be very optimistic about Israel tech.”

A similar sentiment was expressed by other VC fund heads and investors interviewed by The Times of Israel and those that participated at a tech confab, “Trends & Forecasts for 2024 – Israel’s VC Landspace,” in Tel Aviv last week. They spoke of the resilience of Israeli entrepreneurs in times of adversity, as they continued to run their businesses even as they sheltered from rockets, were called up to reserve duty, supported spouses and children in the army and mourned the dead from the October 7 Hamas massacre and the subsequent war in Gaza.

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 a judicial overhaul proposed by the right-wing government of Prime Minister Benjamin Netanyahu, followed by the outbreak of the war with Hamas, both of which have deterred investors.

After a global glut for tech in 2021, when the Israeli tech sector drew a whopping $25.6 billion in private investments, funding in the second half of 2022 slowed in line with a global trend, amid high interest rates and a global stock market dip that led to tech layoffs. This downward trend continued in 2023 but was exacerbated in Israel by the contentious judicial overhaul announced at the beginning of the year, amid investor concerns over a weakening of democratic checks and balances. Then came October 7. The Hamas-led murderous rampage saw thousands of terrorists burst into southern Israel from the Gaza Strip, killing some 1,200 people and abducting at least 240 others.

Adam Valkin, a managing director at General Catalyst, a US-based venture capital firm. (Courtesy)

The outbreak of the war led to the mobilization of some 350,000 army reservists. With founders, executives and employees called up to serve, the tech sector was down 10-15 percent of its workforce.

“We have over a dozen founding teams based out of Israel and every single person is dealing with something on a personal level,” said Ed Sim, founder and general partner at boldstart Ventures. “So yes, there’s an impact,” he said. “But the resiliency is off the charts.”

Since 2010, boldstart has led or co-led investments in 12 inception or idea-stage Israeli-founded tech firms, including Snyk and BigID, which later became cybersecurity unicorns valued at over $7 billion and $1 billion, respectively. Boldstart has invested over $150 million into these 12 companies.

Sim, who was placed ninth on the Forbes 2023 Midas Seed List, which ranks the top 25 seed investors worldwide, said he closed a new Israeli investment at the beginning of September, just a month before the start of the war with Hamas.

He said he recently talked with the founder of the September investment, who told him that the startup’s first two workers had been hired. Another founder, who had been called up for reserve duty, told Sim on his day off from the army that he had signed two deals, another four were in the pipeline and that the startup had hired a new customer service person in the US and was in the process of hiring another salesperson in the UK, Sim said. “I wish all my founders were as resilient as the Israeli founders,” he added.

Similarly, Davor Hebel, managing partner and head of London-based Eight Roads Ventures Europe, said his firm had produced a term sheet for a follow-on investment in one of its portfolio companies in Israel soon after the start of the war. There is another deal in progress, he said.

From left to right: Gigi Levy-Weiss, general partner at NFX; Liad Agmon, managing partner at Insight Partners; Hamutal Meridor, a partner at Vintage Investment; Yifat Oron, head of tech investments in Israel for Blackstone; and Daniel Shinar, managing partner at Claltech/Access Industries speak at a conference panel in Tel Aviv on Dec. 28, 2023. (Talmid Tali)

Hebel manages over $1 billion of funds focused on technology scale-up investments in Europe and Israel. Eight Roads has invested over $200 million in Israeli-founded firms over the past 10 years in 10 companies, including HiBob, a maker of HR solutions; AppsFlyer, a marketing analytics firm; and fintech firm Fireblocks. His portfolio companies are reporting between six and ten percent of workers on reserve duty, Hebel said, but the firms continue to operate according to their original budgets and plans.

“I think this is may be part of the appeal of the Israeli ecosystem: the resilience that has been built over the years,” he said.

The benefit of looking outward

The Israeli high-tech sector is the engine of the nation’s economy, accounting for 18% of the nation’s gross domestic product, 48% of exports and 11% of its workforce, according to Start-Up Nation Central (SNC). How it fares in this crisis will impact the Israeli economy. The Bank of Israel has already cut its forecast for GDP growth for 2023 and 2024, predicting a growth of just 2% for each of the years, from a July prewar forecast of 3% for each of the years.

What makes the tech sector more resilient than the rest of the Israeli economy, said Adam Fisher, a partner at Bessemer Venture Partners, in an interview, is the fact that its products are almost entirely geared for exports, and thus not affected by a dampened local demand. Because the firms are export-oriented, many of them, especially the larger ones, also have operational teams working in the US or Europe, and these teams can step in in times of crisis.

In addition, the Israeli tech sector is software-focused, meaning it can very quickly switch to remote, virtual work, like it did during the coronavirus pandemic. It does not need logistics or ports, as most of its products are cloud-based, and thus it is “unaffected from a physical perspective,” he said.

Bessemer is a San Francisco- and New York-based venture capital firm that has invested in more than 70 Israeli tech firms for a total of $1.5 billion in the last 15 years, he said. Firms it has invested in include Fiverr, Habana Labs, Melio, Wix and HiBob.

Ed Sim, founder and general partner at boldstart Ventures. (Courtesy)

“People… are doing more with less,” said Alan Feld, founder and managing partner at Vintage Investment Partners, referring to his VC and the employees of the portfolio companies his funds are invested in. Vintage is a Herzliya-based investment firm that has $3.8 billion in assets under management.

“One of the things you want to see as an investor is that a company can take the biggest challenge imaginable and still survive, because every business faces uncertainty,” Feld said.

Temporary slowdown in new capital inflows

At a Nov. 2 webinar organized by IATI, an umbrella organization of high tech and life science industries, PSG Equity’s Tel Aviv managing director, Ronen Nir, said that because uncertainty is high, there will likely be a temporary slowdown in new capital inflows to Israeli tech firms in the short run, with investors waiting to see if things will go back to normal. This will affect smaller startups more than the larger ones, which have in general raised enough funds from the post-coronavirus funding boom to tide them over during this crisis. In the longer term, he said, the economy will go back to the “new normal somewhere in 2024” and investments will follow.

At the “Trends & Forecasts for 2024” confab at the end of December in Tel Aviv, an annual event organized by tech accelerator Fusion and law firm Pearl Cohen Zedek Latzer Baratz, which was attended by investors, VC funds and tech executives, the message was that if Israeli firms continue to deliver, the industry will eventually recover. Policy makers must ensure a steady stream of new startups, which have been in decline since 2014. The industry needs more diversification, moving from being focused mainly on information and communication technology (ICT) to high-growth fields like climate tech, AI and health.

“We have wasted a whole year of the future of the industry,” said Gigi Levy-Weiss, a general partner at NFX. Israel must make sure 2024 is a turnaround year, he said.

Liad Agmon, a managing director at Insight Partners, said the global VC firm is still looking for investments in Israel even now, a sentiment echoed by Yifat Oron, a senior managing director and the head of growth and tech investments in Israel for Blackstone, which has $1 trillion in assets under management.

The fact that the conference was held as the war raged on for almost three months was a signal to the world that Israel’s tech world is chugging along, even if it was evident that things this year were different.

Uria Lin, a principal at Elron Ventures, attended the conference in his reserve army uniform and with his rifle. Guy Katsovich, a founding partner at Fusion and one of the organizers, talked about needing a hug occasionally because of the war. Others spoke of their children in the army, of crying, of the need to play a more active role in society. If ringing the bell on Nasdaq was once seen as a trademark of “Israeliness,” now it was crying at a military cemetery, said Levy-Weiss.

PSG Equity’s Ronen Nir said in the November webinar that the war could actually be a boon for Israeli innovation.

Security conflicts and wars, Nir said, are generally a “huge technological event,” which sees technologies developed to handle immediate battlefield needs pivoting to civilian applications later.

Based on experience, Nir said, “out of all this mess, and… bad times that we are going through… this will be probably the biggest tailwind that we have for the new wave of innovation in Israel.”

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