Israeli tech investors spooked by Covid-19 and young startups suffer the consequences

The investment in early-stage Israeli startups has dropped to a low not seen in many years according to a new report released on Wednesday analyzing the local tech sector in the third quarter of 2020. The sector raised $2.74 billion in 151 deals, up 26% from the previous quarter, but that was largely the result of an uptrend of later round investments which enjoyed growth in the first three quarters of the year due mostly to 20 deals, each amounting to over $50 million. VC investors are preferring to stay away from riskier investments in early-stage companies and are putting their money in mature companies.

The report is likely just the tip of the iceberg of the trend that has already been exhibited by The Israel Innovation Authority's fast track grants program for early growth startups. The government’s tech investment arm was allocated in August an additional NIS 390 million ($114 million) on top of its usual budget to increase the investments in struggling startups. Companies at the seed stage are in even greater trouble. Most of them are at a stage in which they are bursting with energy, have an idea and maybe even a prototype that they developed with the little resources they have, and they are desperate for initial funding of between hundreds of thousands and several millions of dollars. Until now, many of them managed to find the right angels and seed investors that provided quick relief and investments.

The Covid-19 pandemic has seriously hurt these investors, not from a health standpoint but from a fear factor. These investors likely did what many have done during this period and put their money in safe haven investments. A time in which uncertainty is the only certainty in the markets isn’t suitable for taking risks. It is important to note that there are still many companies being founded and raising funds, but the amount has decreased significantly.

This drop isn't an anomaly and is probably a trend that will continue for a few more quarters. The ramifications are obvious, the number of startups being founded in Israel will fall significantly. The foundation of Israel's tech sector is the revolving circle of life in which companies are founded, developed, and sold or go public. Many also close along the way and new ones rise in their place. Should this circle stop, that would be the worse sign of Covid-19's real blow to the local tech sector.

There are many solutions for this, such as government investment or initiatives by accelerators and incubators. But that won't be sufficient should entrepreneurs not feel like it is worth their while to undertake the risky journey. The new report signals to new entrepreneurs that only a few of them will even be able to get through the initial crucial stage of founding a company. The only entrepreneurs who can calmly begin the journey are ones that can fund their new companies' initial stages themselves— entrepreneurs who already have an exit under their belt and can afford to operate for many months without a salary.