2023 started badly for Israeli high-tech and it may get worse
2023 started badly for Israeli high-tech and it may get worse
Despite the desire of industry executives to see light at the end of the tunnel, the next two quarters at least are expected to continue the downward trend
The year 2022 was a year of disillusionment for Israeli high-tech, a year in which investments in local high-tech companies dropped from a record of $26 billion to about $15 billion. But despite the warning signs at the end of 2022, no one imagined how bad things would get in the first quarter of 2023.
The $1.7 billion raised is not only the lowest figure since 2019, but it is mainly a misleading number as over $660 million went to only three companies - Via, eToro and Wiz. Excluding these three unicorns, there was only around $1 billion raised by about 110 companies, a low not seen since 2014.
The data for the first quarter are based on findings from two research institutes: The Start-Up Nation Policy Institute (SNPI), and IVC Data and Insights in collaboration with LeumiTech. Both reports agree that such a quarter has not been seen in high-tech in many years, and that the fall from 2021 is huge. Moreover, despite the desire of industry executives to see light at the end of the tunnel, the next two quarters at least are expected to exhibit low numbers. The authors of the SNPI report claim that the reason for the decline is due to a combination of the global recession alongside the local unrest related to the judicial coup. However, it is important to note that there are other reasons that affected the results of the first quarter of the year, and they are mainly the fear of many funds to invest money and begin to empty their coffers.
Many funds know that it will be very difficult for them to raise new funds in the current climate. Most of the institutional bodies stopped investments in new funds, especially those that do not yet have proven results. That is why many funds prefer to sit on the fence and invest only in selected companies or in companies in which they have continued investments.
Alongside the funds sitting on the fence, there is another worrisome trend: the decline in investments by foreign funds in startup companies. Until 2022, foreign venture capital funds were the most influential group in financing Israeli high-tech activities. With the increase in the value of the companies starting in 2018 and the Coronavirus epidemic, these funds increased their participation in follow-on rounds, according to the needs of the portfolio companies. This trend changed during 2022, and in the first quarter of 2023 the most active foreign venture capital funds significantly increased their participation in first investments. This means that these funds are concentrating more on good occasional deals, and are moving away from deals with portfolio companies that have previously raised at a high value, staying away from investing big money in follow-on rounds.
A side effect of the last quarter and the quarters that will follow is the continuous deterioration in entrepreneurship that will lead to the closure of early-stage startups. This may be accompanied by the departure of talent and companies from Israel. If the trend of workers and high-tech companies leaving abroad increases, it will be an irreversible loss of quality personnel who lead the Israeli economy with significantly higher labor productivity than the rest of the economy.
The authors of the report fear that new startups established after 2022 or those that raised Seed rounds starting in 2022 will be significantly affected by the decrease in investments in recent quarters. As long as the two trends that threaten Israeli high-tech continue - the global recession and the uncertainty resulting from the judicial overhaul - these companies will have difficulty raising follow-on rounds.
According to the IVC and LeumiTech report summarizing the first quarter of 2023, the early fundraising rounds (Pre-Seed, Seed, A) totaled $531 million in the first quarter of this year, a 62% decrease compared to the capital raised in these types of rounds in the first quarter of 2022. The change in trend, first identified in the fourth quarter of 2022, is contrary to the trend we have seen for most of 2022, where the early rounds looked more attractive to investors. Seed investments fell more than the rest, having lost 40% in the amount of capital raised compared to the fourth quarter of 2022.
Timor Arbel-Sadars, CEO of LeumiTech, told Calcalist: "This year began with a significant slowdown in investments, both in the number of transactions in the market and in their volume. In addition to this, we see that 38%, a significant share of the investments in the quarter, reached a very limited number of companies. It is evident that investors and funds are still hesitating in making investments as well as in undertaking merger and acquisition transactions. This is apparently to examine how the global economy will develop and whether there will be a change in the value of the companies in a way that better reflects the current situation. We anticipate that in the second half of the year we will begin to see a renewal of activity and stabilization that will lead to renewed growth in the longer term."
According to Nicole Priel, Partner & Managing Director at Ibex Investors, "the data that the report describes are not surprising. The main causes of this situation are a general slowdown in the global economy, the political instability in Israel, and the collapse of the SVB and Credit Suisse investment banks, which further unsettled investors. Therefore, we expect that the coming quarters will remain relatively weak in terms of investment activity in Israel, but there is still room for optimism since such situations represent an excellent opportunity for investors. I believe that those who have the courage and resources to invest today will benefit greatly on the other side of the crisis, and as for the high-tech industry, the State of Israel produces the best minds in the world, and we, as a firm and as individuals, believe that it will continue to create opportunities for investors in the future as well.
"Even in terms of exits, the industry's situation is at a low point, when in the entire last quarter there were exits of only a billion dollars. According to IVC, 23 exits of Israeli high-tech companies took place in the first quarter of 2023 and amounted to $1.087 billion. The mergers and acquisitions transactions were led by four transactions of over $100 million each, which were responsible for 85% of the total exits in the past quarter. Only two initial public offerings took place in the first quarter, which raised $18 million. Exits are the fuel of the high-tech industry and without significant exits, money will not flow back to the funds and entrepreneurs who see the fruits of their labor. Small exits or the closure of companies may be a prominent phenomenon in the coming year, when many companies will be forced to choose a sale for a lower amount than their value in funding rounds rather than closing."
