The Israeli innovation ecosystem is among the most vibrant in the world, with over 7300 tech startups and capital investment of $15.5B. Recognized as the Startup Nation, Israel is a global leader in innovative technology. Even after the challenging financial conditions of 2022, Israel is the ideal place for both public and private entities the world over to find innovative solutions to their critical challenges and business needs.
Start-Up Nation Finder is a discovery and engagement platform for connecting the Israeli innovation ecosystem with the world. The industry data collected by Finder enables precise analysis of market conditions, delivering live insights, trends, and takeaways from the ecosystem. Start-Up Nation Central leverages these vast amounts of data to produce reports with real-time industry insights for the benefit of all ecosystem members.
Every business quarter, Finder offers snapshot reports for major tech sectors in the Israeli ecosystem, providing valuable insights based on data analysis and expertise and giving a comprehensive overview of the latest trends and developments.
Keep reading for the main takeaways from our Q1 2023 Israeli Tech Sector Reports or access all of the full reports here.
Q1 2023 FINTECH
In 2023, the Fintech industry is facing new realities. The higher cost of capital jeopardizes business models that rely on cheap cash, meaning that consumer and business credit models are suffering from higher numbers of defaults and lower disposable income/spending.
Q1 of 2023 was de facto a flat QoQ in terms of number of deals and volume, adjusted for the $250M eToro deal. This represents an ~80% decrease from the peak of the market in H2 2022. While this sounds like a significant dip, it is consistent with global macroeconomic trends.
One of the strengths of the Israeli fintech ecosystem is its diversification across subsectors and the agility of founders to pursue new innovative domains. While the bar for success is higher and the market has become more selective, there is huge potential for fintech.
Gaps in legacy industries are ripe for disruption by leveraging financial services (vertical fintech/embedded finance) – and the era of AI-everywhere is starting to demonstrate a material impact across the financial innovation stack.
Q1 2023 CYBERSECURITY TECH
Assessing the performance of the Q1 2023 Israeli cybersecurity investment landscape is sobering, but the outlook remains hopeful. Following the extraordinary peak of 2021 and stark decline of 2022, investor interest in cybersecurity innovation this quarter remained high.
Malicious actors are increasingly sophisticated in their assaults, underlining the importance of prioritizing security. This quarter’s data shows that investors are still betting on groundbreaking cyber technology and want to see a consolidation of capabilities in one solution that resolves multiple problems.
Consolidation has also become an operative word on the M&A front. Since 2022, acquisitions have become a potential safety net for startups affected by the economic downturn. Decreased valuations make it difficult to raise follow-on rounds while startups that previously raised capital at high valuations without backing it up with ARR (Annually Recurring Revenue) and real customer traction are in trouble. Large vendors determined to expand their offerings are acquiring these struggling companies.
If Q1 is any indication, cybersecurity will remain a top-quartile investment sector.
Q1 2023 HEALTH TECH
Amid increasing global health challenges and financial slowdowns, the Health Tech sector is rapidly shifting. Workforce shortages, workload imbalances, burnout, the need for cost reduction, and healthcare equity are among the key challenges facing the health industry – with savvy founders poised to make an impact.
In 2022, the Health Tech sector raised $2B in funding, representing a relatively modest decline of 27% compared to 2021. While the sector comprises over 1,600 companies, it ranked fourth in terms of the amount invested by tech sector.
In Q1 2023, Israeli Health Tech investment declined with only $226M in equity invested across 33 rounds, a nearly 50% decrease from Q4 2022 and a 70% decrease compared to the first quarter of 2022.
Two clusters of companies stood out in terms of private capital raised, namely digital decision support and treatment therapeutic medical devices. Additionally, artificial intelligence technology is a growing and leading core innovation, accounting for over 58% of companies and 61% of deals.
We anticipate a continued increase in the use of artificial intelligence, big data, and machine learning technologies across all three subsectors – digital health, medical devices, and pharma.
Q1 2023 CLIMATE TECH
Following record-breaking venture activity in 2021 and the first half of 2022, global VC investments in Climate Tech cooled as part of a global macro slowdown. In 2023, the first quarter of the year showed a relative improvement in the overall sum of investments in Climate Tech compared to the last quarter of 2022 – primarily thanks to funds raised in the public markets.
Climate Tech winners in the first quarter come from a range of subsectors, including sustainable materials, solutions to food waste, and nuclear energy. Recognizing the opportunity, more new startups are developing deep-tech solutions to climate challenges.
We expect the sector to be relatively resilient to the global downturn compared to other sectors in part due to the urgency for climate solutions and the expectation that regulation and corporate commitments for decarbonization will necessitate the rapid rollout of these solutions.
Israel is a recognized leader in food & land use and sustainable water solutions. With the growing global focus on climate innovation, Israeli entrepreneurs are leveraging their skillset to innovate additional climate tech domains. Start-Up Nation Central supports the growth of the ecosystem by providing access to transparent and quality data on the sector and creating business opportunities for multinational corporations, investors, and government leaders to engage with the Israeli entrepreneurship community.
Q1 2023 ENTERPRISE TECH
The Enterprise IT and Data Infrastructure tech sector faces ongoing challenges. With a fragile global economy, protracted sales cycles, and spending constraints, Israeli companies are adapting to demonstrate value delivery to customers and prioritizing profitability.
While IPO and M&A activity has been muted so far in 2023, the market shift to measured growth and funding slowdown provides vast opportunities for acquirers.
Although the IPO pipeline is robust with the window effectively shut for several quarters, many companies may further delay going public until 2024 due to macroeconomic uncertainties and optimism that multiples will climb back above 5-year averages by next year.
Q1 2023 AGRICULTURE-FOOD TECH
The land of milk and honey continues to pioneer and innovate Agriculture-Food technologies and science, tackling the most critical global challenges.
Following an outstanding 2022 followed by a global macroeconomic slowdown, Q1 2023 for the Israeli Agriculture-Food sector has been challenging overall. In terms of investments, as well as average deal size, Q1 2023 has reached an all-time low, however, the number of investments has only decreased slightly – investor interest remains high, and company roadmap milestones are being met.
Food – Israeli food startups are continuously sprouting groundbreaking scientific advancements that enable supportive solutions for cultivated foods, novel ingredients, and packaging subsectors.
Agriculture – Autonomous and robotic solutions as well as data-based digital tools for both farmers and ecosystem stakeholders have gained the confidence of investors, proving that both the value offering and product market fit of these solutions are recognized.
When analyzing the emerging subsectors within the Agriculture-Food sector, and the supporting underlying technologies, we remain confident that the ecosystem is positioned to grow.
From livestock and crops, bee & pollination solutions, functional foods, novel ingredients, and alternative proteins, the Agriculture-Food Tech sector is reinventing traditional industries, and as such, is facing unique challenges. This is where Start-Up Nation Central steps in to support the ecosystem as a whole and especially the start-ups.
We connect more than 100 global entities to Israeli startups every year. In addition, we map monitor, and assist companies of all kinds and at all stages to facilitate market access.
Special thanks to our guest contributors
Omry Ben David, General Partner, Viola Ventures
Daniel Aronovitz, Principal, Insight Partners
Ofer Schreiber, Senior Partner, YL Ventures