Tel Aviv.

Unreported funding rounds propel Israeli high-tech investment to almost $10 billion in 2023

According to a report by Startup Nation Central, the expectations for M&As and IPOs in 2024 are encouraging, and the leading sectors - AI, cybersecurity, and defense technologies - are expected to continue the upward trend

A spark of cautious optimism—that's how Startup Nation Central summarizes 2023 and is looking ahead to 2024 in its newly published annual report. "The findings of the report testify to the resilience of the technological ecosystem despite the shaky year. Alongside uncertainties in Israel and the decline in investments in Israeli tech, the picture seen from the report is that Israel maintains its position as a global innovation center that includes a dynamic entrepreneurial culture, firm involvement of global players, and unique human capital. All of these preserve the status of high-tech as Israel's economic anchor," SNC points out.
The numbers provided for 2023 by SNC, which connects local startups with financial and strategic investors from abroad, are slightly higher than what appeared in corresponding reports. However, this characterizes the organization over the years as it also considers, in the annual numbers, the transactions that have yet to be officially closed or reported. According to SNC's numbers, the total investment in Israeli startups amounted to $9.9 billion, a 50% decrease compared to 2022 and well below the record of $30 billion. However, this is still only a return to the level of 2019, which was not a bad year for Israeli high-tech on the eve of the outbreak of the Coronavirus pandemic.
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According to the report, fundraisings of $7.9 billion have already been reported, but from the information available to the organization, fundraisings of an additional $2 billion will be later attributed to 2023. It is widely believed that many companies avoided reporting on funding rounds that have already been closed due to the situation in Israel, and some of the rounds that are closed in principle are not signed because of the difficulty of flying abroad or because of entrepreneurs serving in the IDF reserves.
The report shows that despite the war, capital raising activity for Israeli high-tech maintained its level throughout the year, at approximately $2 billion per quarter.
Even if 2023 is a kind of lost year for Israeli high-tech, which was busy protesting against the judicial coup in its first nine months and has been at war for the last three months, it is more important than ever to understand the sentiment of investors today. The Israeli ecosystem depends on foreign funding bodies, which are responsible for most of the investments here, and the fear is that they will hesitate to invest in Israel in light of the shaky 2023. This is where SNC provides the main optimistic news: "Looking forward to next year, we see that 88% of international corporations plan to maintain or increase their presence in Israel, a fact that indicates faith in the ecosystem. However, there is a split in investor sentiment, with 52% of them anticipating a decrease in investments for 2024. Despite this, the expectations for mergers and acquisitions and IPOs are encouraging, and the leading sectors - artificial intelligence, cybersecurity, and defense technologies - are expected to continue the upward trend." This statement is based on a survey conducted by SNC last November among more than 100 investment entities and companies active in the Israeli high-tech industry.
Along with the promise to maintain their physical presence in Israel, 67% of the respondents among international corporations stated that they will sign new deals in Israel this year, half of which highlighted mergers and acquisitions, and half of them partnerships. Among multinational companies with a research and development center in Israel, the vast majority do not plan a change in their workforce here; 21% plan a significant expansion, and only 12% are considering a reduction in activity in Israel. However, 37% of the respondents estimate that private capital raisings will decrease moderately in 2024, and 15% believe that they will decrease significantly. Only 8% expect that there will be a significant increase in capital raising in 2024 compared to 2023.
The report confirms what has been said throughout the past year behind closed doors: surprisingly, it was the local VC funds that dramatically reduced investments while foreign bodies continued to invest. As evidence, the share of fundraising rounds led by foreign investors actually rose from 30% to 44%. Insight Partners, which was the most active foreign fund over the past few years, gave way to Lightspeed and Samsung Next. Among the Israeli funds, the most active were Avi Eyal's Entrée Capital followed by OurCrowd and Pitango.
Despite the feeling in Israel that the high-tech industry consists mainly of cyber and fintech companies, according to the SNC report, the largest number of startups in Israel actually belongs to the healthtech industry. Currently, 1,623 companies in the medical field are registered in the organization's database, compared to 458 cyber, a similar number of fintech companies, and 1,047 startups that deal with corporate software and computing infrastructure. Additionally, there are 923 companies engaged in climate-tech and another 673 in agtech. However, the funding is distributed almost inversely to the number of companies: the cyber sector received $1.9 billion last year, with an average round of $27.1 million, while in healthtech, the average round was only $12.7 million.