Investment in Israeli tech startups plunged by almost half in 2022, data shows

Israel’s tech sector looks back on 2022 as the start of a recession, with funding raised by startups nearly halving, dropping to $15.5 billion, with cybersecurity firms the most, according to a report released by Start on Tuesday. It took a big hit, boosting seed investment in local startups. – Up Nation Central (SNC), a nonprofit that tracks Israel’s tech industry.

Investments last year fell by 43% compared to 2021. 2021 will be a bountiful year, with Israeli companies attracting a staggering $27 billion in total private capital, boosting deal valuations. Over the same comparison period, the number of overall investment rounds fell by about a third, to 826 in 2022, down from 1,103 he had the year before.

The record flow of funds raised in 2021 continued into the first few months of last year, boosting valuations of companies and sometimes leading to overvaluation of companies not looking to turn a profit. Markets began to reverse in the middle of the year, with rising inflation and interest rates, Russia’s ongoing war on Ukraine affecting supply chains and the global economy, and investors going into hiding as valuations and publicly traded fell. Stocks that were traded fell.

“2022 is really a two-year combination. Looking at the first half, we see more flavors of 2021 and a more bullish market. Going into the second half of 2022, we can already see the slowdown starting. ,” said Avi Hasson, CEO of Start-Up Nation Central. Israeli era. “Unrealistic leaps in investment, market capitalization and trading multiples in 2021 have been corrected in 2022, alongside global macroeconomic trends.”

Market downturn lays off thousands of tech workers, slumps funding, sharply depreciates publicly traded tech companies, creates bear market for new products, ends ‘wild party’, doomsday There is a general feeling of being clouded over. Economy.

“In the United States, the technology market had the highest number of layoffs. Just under 100,000 people were laid off in the tech industry, and Israel’s numbers are nowhere near that,” Hasson said. “In Israel, we have seen companies slow growth or cut 10% from his 5% of employees. It’s for.”

Effective September 1, 2021, Avi Hasson, former Chief of the Israel Innovation Authority, has been appointed CEO of Start-Up Nation Central. (Vered Farkash)

In recent months, Intel Israel, the country’s largest private-sector tech company, laid off dozens of employees. Home seltzer SodaStream, the maker of his machines, laid off 120 employees. Isracard will cut its 250 employees, or his 12% of its workforce, as Israel’s largest credit card company has embarked on a plan to streamline costs and operations. U.S. jet engine maker Pratt & Whitney has forced 900 workers to lose their jobs after they seized compressor blade manufacturing at Blade Technology Ltd. (BTL) in Nahariya for more than 40 years.

“With very few exceptions, I haven’t yet seen a company that is taking a deep look at their business, say, cutting by 30%. There is no choice,” warned Hasson.

In the second half of 2022, the number of equity investment deals with tech companies fell from 519 in the first half to 313.

“Looking at the trendlines, instead of 2022 being a bad year or a worse year than expected, it was 2021, a big anomaly for every metric we could look at,” Hasson said. “If you drop 2021 and draw a growth line from 2015 to 2022, it looks okay that more than $15 billion was invested in Israeli startups last year.”

The downward trend in investment isn’t unique to Israel, according to the SNC report, and is in line with what’s happening in Silicon Valley, where investment in tech companies has fallen by 40%.

Investing in seeds defies trends

Early-stage or seed startups with increased investment experienced the biggest positive trend as the downturn in the financial markets led to a decline in total investment in most types of investment rounds in Israel in 2022. Seed investment in Israeli startups increased by 22% from $1.32 billion in 2021 to $1.62 billion in 2022.

Example: February 18, 2019, at the offices of Jerusalem Venture Partners, a technology investment firm in Jerusalem (Hadas Parush/Flash90)

According to the SNC report, investors who previously only invested in late-stage companies have shifted their investments from late-stage to seed funding, mainly because valuations in late-stage company rounds have been so high. It turns out that

As in previous years, Israel’s tech sector, which attracted the majority of capital in 2022, is software-based and includes primarily enterprise software, security technology (including cyber), fintech, life sciences and health technology. was

The hardest-hit sector, and one that will see the biggest decline in investment in 2022, was cybersecurity. Investment in cybersecurity start-ups plunged 60% to $2.7 billion in 2022 from $6.6 billion the year before, compared to a 43% year-on-year decline for the tech industry as a whole. That said, the number of funding rounds has remained stable compared to his 2021, according to an SNC report analysis.

By 2022, 20 Israeli cybersecurity companies have exited. The best deal was when British investment fund Liberty Strategic Capital acquired Zimperium, a mobile security solutions company founded in Israel, for $525 million. The second-biggest deal was SoftBank-backed Claroty’s acquisition of Israeli cyber company Medigate for his $400 million, and the third was Cider Security, a U.S.-based cybersecurity firm that bought Cider Security for $300 million. It was a Palo Alto Networks deal. As of late 2022, Israel has 676 active cybersecurity companies.

“2021 really showed investor appetite, and cyber was by far the frontrunner,” said Hasson. .

The number of investment and funding rounds across all tech sectors covered in the report will decline in 2022, with the exception of the agriculture and food tech sectors, which saw the number of deals increase to 87 from 84 in 2021. but the total investment remained stable between the two. Year.

“This suggests that the agriculture and food tech sector has been more resilient to external factors such as economic downturns,” the SNC report said. It has grown rapidly in recent years, with 624 active startups.”

The most active VC foreign investor in Israeli companies in 2022 was New York-based private equity and investment firm that participated in 40 rounds in 2022, up from 49 in 2021, according to a SNC report. It was Insight Partners, a company.

Tiger Global, which just launched operations in Israel in 2019, was the second most active, investing in 26 start-ups. During the first few years of his activity in Israel, Tiger focused on more mature companies ready for his IPO or unicorn valuation. In 2022, the company’s investment strategy shifted to early-stage companies, which included 13 A round funding deals and 3 seed round deals. In 2021, the fund made 75% of his investment in Israel in the C+ round, with the rest he made in the B round.

The most active Israeli VC firm is OurCrowd, which invested in 84 different startups in 2022, followed by Viola (all funds) with 47 rounds, and Pitango, which invested in 21 different startups.

IPO and M&A activities

2022 will see a return to the “normal” number of 10-20 initial public offerings (IPOs) per year that characterize the Israeli high-tech industry. ) will take place in 2021, according to the SNC report. Last year, only 14 of his Israeli companies were listed through SPAC, compared to 22 of his IPOs registered in 2020.

The number of mergers and acquisitions in 2022 fell 45% year-on-year, and the value of deals fell 40%. A total of 89 tech companies were sold for a total of $5.3 billion. M&A activity dried up in his second half of 2022, with the total deal value ranking his fourth lowest recorded by the SNC database.

One of the most prominent deals of 2022 was US semiconductor giant Intel’s acquisition of Israeli computing tech startup Granulate for $650 million, making it just five Israeli acquisitions by chip multinationals. It was the 7th time in a year. Another, formerly known as Credorax, is Israeli fintech startup Finaro, which was acquired by integrated payments and commerce technology company Shift4 for $575 million.

Thinking about what will happen in 2023, Hasson sees slowing economic activity, continued investment and exit, but in a much more “prudent and prudent way”. Difficulties in raising VC funding that may affect capital available for investment.

“We’re going to see a significant drop in exits, but this will be much less than before, and that in itself will impact the fund’s ability to raise capital,” Hasson said. “While everyone is slowing down in terms of their investment base, funds will struggle to raise capital, which means we will see companies undercapitalized in 2024.”

“The good news is that the Israeli tech industry is entering this situation with full pockets, as both companies and funds have raised more cash in 2020 and 2021 to enter the current crisis. So you can weather the storm for the first six to 12 months,” he continued. “But at some point next year, the startups will need more funding. When that happens, there will be fewer rounds and more consolidation. It’s very convenient for everyone to delay, so please don’t make rating adjustments unless it’s necessary.”

A down round is when a private company raises capital at a lower price or lower valuation than the previous funding round. Last month, US-based cybersecurity startup Snyk, founded by an Israeli entrepreneur, raised his $196.5 million in funding from investors. The company is valued at his $7.4 billion, and a previous funding round valued him at $8.5 billion.

“Many dry powder and private equity funds with full pockets will find very interesting opportunities in the market as liquidity, M&S and IPOs become less real,” Hasson said. “We also expect to see more secondary deals in which VCs sell stake in companies to private equity funds.”

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