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Down rounds in Israeli tech hit nearly 20% in 2023

While in 2022, 90% of rounds saw an increase in company value, this figure dropped to 65% in 2023, with 19% of startups raising funding at a decreased valuation and 16% doing so at a similar valuation

Most of the data concerning 2023 in the high-tech sector focused on fundraising amounts and the number of rounds, while information on value levels in these funding rounds remained largely undisclosed. This secrecy stems from the fact that even in major fundraisings, the value of companies often either decreased or remained unchanged.
Data from S Cube of IBI Capital Group and the Mitar law firm seen by Calcalist, revealed that 35% of the completed fundraising rounds in 2023 were done at a valuation that was either the same or lower than the previous round. When factoring in the significant number of SAFE (Simple Agreement for Future Equity) fundraising rounds, which have gained popularity in the past year and often go unreported, the percentage of rounds without value increases may be closer to 50%. In such rounds, the company's value is not determined during the fundraising stage but rather in the subsequent round. Additionally, the proportion of rounds conducted at lower valuations than the previous round, known as down rounds, doubled to 19%. In 16% of the fundraising rounds, the value remained unchanged.
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(Photo: Benny Gam Zu Letova)
While in 2022, 90% of rounds saw an increase in company value, this figure dropped to 65% in 2023. Gidi Shalom Bendor, the founder and CEO of S Cube, noted that even companies not undergoing fundraising rounds experienced an average decrease of 30%-40% in their valuation during regular valuations, which are required for option allocation. He also mentioned that in fundraisings seemingly held at the same value as before, this is often only a legal definition, as investors frequently receive improved conditions such as additional options or interest on their invested amounts.
On a global scale, the performance of Israeli technology companies in terms of valuation was a positive surprise compared to American companies. While there was a 54% drop in the median value of companies in advanced fundraising stages in the USA, Israel experienced only a 24% decrease. Israel typically exhibits lower numbers over time, resulting in greater stability in value levels. The median capital raised in advanced stages in Israel in 2023 was $183 million, down from the record $250 million in 2022 and $237 million in 2021. Conversely, the USA saw its record high in 2021 at $445 million, declining to $433 million in 2022, and surprisingly, dropping further to $197 million in 2023, which was comparable to Israel's figure. In earlier stages, Israel even surpassed the USA in value levels, with round B fundraisings increasing by 73% to $105 million in 2023, while the USA saw a 66% decrease.
According to Bendor, the moderate decrease in value levels in Israel can be attributed to several factors. Firstly, Israel had lower numbers to start with, resulting in a smaller decline. Additionally, the sample size became significantly smaller over the past year due to a 40% decrease in capital raising, with only the best companies participating in the remaining deals. Companies in Israel also made a concerted effort to avoid lowering their valuation. Bendor explained that American investors, lacking emotional attachment, would readily decrease value, whereas Israeli companies strive to maintain their valuation. Bendor cautioned against companies' attempts to avoid a down round, stating that although this might temporarily mask weaknesses, it could hinder future growth and affect employee options.
Looking ahead to 2024, Bendor suggested that the US election year might prompt investors to reduce investment risk until after the elections in early November. However, historically, the stock market tends to perform better after elections, regardless of the outcome. Thus, while the current crisis may persist in 2024, improvements are anticipated later in the year.