Tel Aviv, January 10th, 2023: Start-Up Nation Central, together with the SNPI think tank, published its 2022 annual summary of the Israeli high tech industry based on analysis of data from the Start-Up Nation Finder innovation business knowledge platform.
Main takeaways from the report:
– Funding brought forward compared to previous years
– Time between seed and A round investments cut in half
– Israel’s cyber sector suffers a serious decline in investment
The total volume of investment in 2022 plummeted by almost one-half – from an unprecedented USD 27 billion in 2021 to some USD 15.5 billion in the past year. This phenomenon is not unique to Israel; for the sake of comparison, investments in Silicon Valley high tech companies declined by 40%. The overall number of funding rounds in 2022 also declined to 826 compared to 1,103 rounds in the previous year.
However, looking at data for the year as a whole does not tell the full story. By looking more closely, we can see the initial signs of a global slowdown. In light of 2022’s financial market downturn, the decline in total investments for most types of funding rounds is not surprising; what is surprising is the seed investments recorded an increase in 2022.
Seed investment in Israeli startups in 2022 increased by 22% compared to 2021, or from USD 1.3 to 1.6 billion. These figures are especially surprising when we take into account the decrease in the number of startups (which we reported in previous reports) that would presumably have led to a decline in the total value of seed round investment.
Two factors contributed to the rise in seed rounds. The first is the shift from late-stage investment to earlier stages. Investors who traditionally invested only in later stage companies are investing at earlier stages in company life cycles. This avoids the need for fund raising in ‘down round’ later.
The second factor contributing to the rise in the number of seed rounds is the increase in the number of investors per round. Between 2019 and 2022, the average number of investors in each round at this stage almost doubled. The most significant increase occurred in 2022 when on average one additional investor was added to each round compared to 2021, bringing the rate to 3.5 participants per round.
Start-Up Nation Central’s CEO, Avi Hasson: “A multi-year perspective shows that 2021 and not 2022 was the exceptional year in the Israeli high tech industry. The unrealistic quantum leap in investments, market cap, and transaction multiples in 2021 corrected itself in 2022, and alongside global macroeconomic trends, there was a markedly significant decline in investments, particularly in the second half-year of 2022. Nevertheless, the investments, exits, and high levels of demand continue, but in a more prudent and measured manner. This in itself is a positive, long-term phenomenon. However, we do forecast some difficulty in VC funding that might have an impact on the available capital for investments in 2024 and 2025. The Israeli high tech industry entered the current crisis with more cash raised in 2021, together with a degree of maturity that is reflected in examining the real markets and not only the financial markets. The current crisis underscores the need to create variety in the technology sectors that lead the Israeli high tech industry and to develop sturdy economic ‘legs’ together with additional sectors that can produce significant economic and technological value for Israel and the world. Start-Up Nation Central will continue to promote Israeli high-tech both at home and abroad, creating and forging relationships between Israeli entrepreneurs and foreign governments, multinational corporations, and investors”.
How did the decrease in funding rounds affect Israeli companies?
The global and local decline in funding is linked to global macroeconomic shocks, in particular rising interest rates. This is a broad, prominent, and much-publicized trend, but another less-visible trend has also emerged: statistical analysis of “traditional” investment rounds in the Israeli high tech industry indicates that even correcting for the effect of the global markets, 2022 would have ended with a decline in investments regardless.
This insight emerges from analyzing the timespan between seed and A rounds in the Israeli high tech industry. Based on past data, we conclude that only 40% of Israeli companies that raised a seed round succeeded in raising A-round funding. Startups that do raise A-round funding take an average of three years to reach this milestone.
This analysis shows that in the three half-years, starting in 2021, the rate of A-round funding was higher than forecasted.
Essentially, companies that were expected to raise investment funding during the second half of 2022, advanced the round to the high-growth period of 2021 and the first half of 2022. Thus, the time between rounds was shortened.
Sectors: Cyber suffered the biggest decline, Agri-Food Tech remained stable
Additional analysis of Start-Up Nation Finder 2022 data focused on companies in five key sectors: Cyber, Fintech, ClimateTech, AgriFood-Tech, and Life Sciences and Health. In comparison to 2021, a decline was recorded across all but the AgriFood-Tech sector, both in the number of funding rounds and the overall investment amount. There was a 24% average decrease in the number of funding rounds and a 40% decrease in the overall investment amount. Only the AgriFood-Tech sector displayed a degree of stability with an increase in the number of funding rounds and the overall number of transactions stable compared to 2021.
Multi-year analysis of overall funding shows that the total amount of funding in the Cyber sector declined by more than 60% between 2021 and 2022, while there was a comparable decline of 42% in the entire ecosystem during this same period. Nonetheless, the number of funding rounds – which may actually be a more significant figure – remained stable in comparison to 2021.
Publicly traded companies – decline in value not due to performance
Given the decline in the value of publicly traded companies, which was more pronounced among high tech companies, we examined whether this decline was linked to company performance in addition to the macroeconomic situation. Our analysis indicates that while an absolute majority of Israeli publicly traded companies recorded a decline in their market cap in 2022, most companies actually experienced an increase in revenues between the last quarter of 2021 and the third quarter of 2022.
The most prominent local and foreign investors of 2022
2022 data shows that the most active locally-based investors in Israel were the OurCrowd and Viola VC funds, that invested in 84 and 47 startups, respectively. They are followed by Pitango, which invested in 21 startups.
The leading foreign VCs operating in the Israeli ecosystem are Insight Partners, funding 40 startups, and the giant investment firm, Tiger Global Management – which only began operating in Israel in 2019 – investing in 26 startups last year. During its first years of activity in Israel, Tiger focused on more mature companies ready for IPO or unicorn valuation. In 2022, its investment strategy shifted to earlier stage companies: 13 A-round deals and three seed-round deals. For the sake of comparison, in 2021 the fund made 75% of its investments in Israel in C+ rounds, and the rest in B rounds.