The Israeli tech industry has been operating under crisis conditions since May 2022. Since then, we have experienced interest rate hikes, investor flight, mass layoffs, the judicial overhaul program that has shaken the industry, and now a war that has left many of its employees unable to do their jobs and has led stability-loving investors to turn their backs on it.
There are still some glimmers of hope. The global macroeconomic environment is improving and interest rates are starting to fall, which should soon bring more liquidity to the sector. Here are five state-of-the-art remarks from IVC-Leumi Tech’s report and today’s year-end presentation to 300 investors by Vintage Investment Partners at a conference hosted by the equity firm -risk Fusion LA and the Pearl Cohen law firm.
1. Collapse stopped, for now
The global downward trend in startup investments and funds raised by venture capital firms has stopped and the numbers have stabilized in recent months at levels reminiscent of 2017 and 2018. Even the war n did not significantly affect startup fundraising, which was down 15% from the previous quarter, although down 56% from the corresponding quarter of 2022.
If we compare the annual evolution of funds raised in Israel during the first three quarters of 2023 with the corresponding figures for Europe and the United States, we see a more extreme drop: 60% in Israel, compared to 47%. in Europe and 39% in the United States. Part of this decline is due to political factors, but part is explained by the small size of the local market and the fact that Israeli industry grew faster during the Covid pandemic and was overexposed to markets such as fintech, cybersecurity and enterprise software.
2. Fashionable late
Israeli investors and entrepreneurs typically lag a quarter or two quarters behind their American counterparts in responding to economic fluctuations, but the war appears to have widened that gap. Fundraising involving falling company valuations, mass layoffs and closures of large companies are still very rare in Israel, unlike what has happened in Europe and the United States. Many hoped to be able to reach 2024 without such measures, while others postpone them until the end of the war, or at least the end of its intensive phase.
Partners at some venture capital firms are also procrastinating and not raising new funds. Others have slowed down the fundraising process, so as not to suffer the disappointment of discovering that investors are not ready to invest again. All this led to the astonishing figure in the IVC report: despite the war, there has been a slight increase in early-stage fundraising by Israeli companies, but the investors are mostly foreign, those who have stopped sitting on the fence and are back to investing. The Israelis, who kept their hands deep in their pockets all last year, are still waiting. Meanwhile, the number of companies founded in Israel has reached its lowest level in twenty years, just 400.
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3. Cyber outings “saved Israel”
When it comes to mergers and acquisitions of portfolio companies, Israel’s position appears better than that of technology industries in the United States and Europe. The overall value of releases in Israel surpassed $4 billion in 2023, making it even better than 2022 and equal to 2020, according to Vintage. This can be explained in particular by the high concentration of young cybersecurity companies in Israel, which were sold for very high sums this year. The sales of Dig Security and Talon Cyber Security alone generated $1 billion for their shareholders.
The five largest technology companies – Amazon, Google, Microsoft, Meta and Apple – have stopped making major acquisitions, including in Israel, and the hope in the sector is for a streak of good financial results and improvements global macroeconomic conditions will return them to normal. this track. Mergers and acquisitions have become the exit of choice for investors, since the stock market is still closed; software company Klaviyo’s IPO in the third quarter was not a lasting success and company valuations fell steadily. Therefore, selling a business as soon as possible, even if it has just started making sales, is imperative for its survival.
The world is recovering, but not where Israel has an advantage
« We have no advantage in artificial intelligence. It’s not like telecommunications and cyber, where the Israelis have a clear advantage, partly due to experience gained in the army, » he said. said Liad Agmon of Insight Partners at the Fusion LA-Pearl Cohen conference. « Israel does not have in-depth research in this area. A cohort of PhD students and academic experts has not been trained here, so the challenge in this area is great and not enough is happening here so May the world wake up in time. »
Three “unicorns” – private technology companies worth more than $1 billion – have emerged in Israel this year. One of them is AI21 Labs, the generative AI company founded by Professor Amnon Shashua, which has held two fundraising rounds due to excess investor demand. The company draws on research conducted at the Hebrew University of Jerusalem and employs many Ph.D.s. One can easily imagine that if competing companies emerged in Israel, they would successfully raise capital and expand.
5. Reasons to be optimistic
Despite the war and still high interest rates, optimism reigns in the sector. The expectation of lower interest rates next year, rising stock markets and increased investment in the United States and Europe have brought some color back to the cheeks of investors and entrepreneurs. Indications of a looming wave of immigration to Israel – investor Gigi Levy-Weiss speaks of hundreds of thousands – raise hopes that Israel will see a new influx of engineers and other experts, and perhaps even the return of some parties to countries like the United States, Canada and France.
Published by Globes, Israel Business News – fr.globes.co.il – December 28, 2023.
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