Israel drops five places to 10th among the world's best-funded tech ecosystems
Due to the sharp decline in 2022-3, Israel dropped below South Korea, Singapore, France, Germany and Canada, according to a report by VC firm Viola
Venture capital firm Viola's half-yearly report for the January-June 2023 period has revealed that Israeli startup companies raised $3.2 billion in the first half of the year, a 75% drop compared to the same period last year. Global fundraising decreased by 50% to $168 billion.
According to Viola, while brand new rounds were rarer than usual, extension rounds reigned supreme this year, representing over a third of H1’s published rounds. Viola went on to state that it believed that the actual amount of extension rounds is even higher as many startups chose not to publicize these extension rounds in order to avoid negative perception.
Due to the economic environment, many other rounds are formed as SAFE rounds, which are not reported as an investment round, and not included in the total number of investments. Therefore, Viola believes that the actual total amount of investment is more positive than what reported numbers can lead us to think.
According to Viola's data, the rate of extension rounds among all funding reached a record 34% in the first half of the year. Traditionally, these rounds account for only 15%-20% of all recruitments. An extension round essentially functions as new funding made under the same conditions as the previous round, usually involving existing investors in the company.
Regardless of unreported funding rounds, Viola's data demonstrate that Israel has been more severely impacted than other countries in the current crisis. This is reflected in Israel's drop from fifth to 10th place worldwide in terms of investments in startups. Countries like India, France, Germany, and Canada have surpassed Israel in terms of the billions invested in their tech companies in the first half of this year.
Viola believes that alongside the judicial coup, which has negatively affected investment rates in Israel, other factors have contributed to the significant decline compared to other countries. The main reason is the substantial increase in investments in Israel between 2018 and 2021 compared to other countries. While the global average saw a 108% increase, investments in Israel surged by 250% during the first half of 2018 to the first half of 2021. As a result, many companies now have substantial cash reserves, thanks to numerous mega-rounds raising hundreds of millions of dollars. This allows them to continue operating without additional fundraising after some efficiency measures, thereby reducing the need for fundraising in Israel.
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Another figure in Viola's report reinforces the assessment that not all the damage to high-tech activity in Israel is due to the legal reform, providing hope for recovery in line with the rest of the world. The figure refers to the performance of stocks of Israeli software companies, which show full correlation with global cloud industry shares based on various tests conducted over the last 18 months, the last half-year, and the last three months. Israeli shares experienced losses of 32% and 31% over the 18-month and three-month periods, respectively. However, they recorded a positive return of the same rate in the first half of 2023. Viola's Israeli stock index includes shares of 31 Israeli software companies traded on Nasdaq, and the comparison was made against the EMCLOUD index, which was developed by the American venture capital fund Bessemer Venture Partners in collaboration with the Nasdaq stock exchange and includes companies such as Zoom, Salesforce, PayPal, and Crowdstrike.
The first half of 2023 was also weak in terms of mergers and acquisitions, but Viola predicts a significant wave of transactions in the Israeli ecosystem over the next 12 months. Many startup investors are already seeking to liquidate their investments, while private equity funds recognize that value levels are becoming attractive. In the first half of the year, only 27 acquisitions with a total value of $1.8 billion were concluded. By comparison, the first half of 2022 saw 64 deals worth $4.9 billion signed, not including the sale of Tower to Intel, which has yet to be finalized. As time passes, uncertainties regarding the completion of the sale increase.
