Startup funding drops 62% YoY in Q2, but 11% increase from Q1 provides reason for optimism
Startup funding drops 62% YoY in Q2, but 11% increase from Q1 provides reason for optimism
Looking at the first half of the year compared to the corresponding half in 2022, there was a 24% decrease in funding volume among Israeli startups and a 17% decrease in the number of rounds, bringing the industry back to the pace of the first half of 2019
The IVC and LeumiTech Israeli Tech Review for the second quarter of 2023 presents a complex and ambiguous picture regarding the current state of the Israeli high-tech industry. The most surprising data reveal signs of a recovery in raising capital for startup companies, particularly in later stages, while a decrease was observed in the early stages. Additionally, a look at all funding rounds indicates that Israeli investors have reduced their investment rate more sharply compared to foreign investors. Moreover, it appears that the rate of new startups established in the first half of 2023 is not lower than that of the previous year, and the projected annual number is expected to reach 500 companies.
However, contrary to expectations that 2023 would be a year of mergers and acquisitions due to startups running out of financing, the numbers actually reveal a six-year low in this sector. Furthermore, there are no surprises in two areas: the almost complete absence of new unicorns and the lack of technology company IPOs.
At first glance, the report presents a gloomy picture. In the second quarter of 2023, there was a 62% drop compared to 2022, and an even sharper drop of 71% compared to the corresponding quarter in 2021.
Looking at the first half of the year compared to the corresponding half in 2022, there was a 24% decrease in funding volume and a 17% decrease in the number of rounds, bringing the industry back to the pace of the first half of 2019. However, from a quarterly perspective, the first signs of recovery are beginning to emerge. In the second quarter of the year, startup companies raised $1.93 billion in 114 transactions, reflecting an 11% increase compared to the first quarter of 2023. An analysis of monthly recruitments shows that the low point was reached in January 2023, and since then, the Israeli recruitment market has been on the rise, following a similar trend to the Nasdaq index.
In contrast to previous quarters, there has been a slight increase in larger funding rounds, with raisings of over $50 million accounting for 51% of the total amount raised. The aggregate volume of mega rounds larger than $100 million remained similar to the previous quarter, reaching $600 million, but the number of transactions increased from 3 to 5. Most of the significant recruitments in the second quarter were in companies operating in the enterprise software market, including Pinecone and 8fig, as well as cyber companies Cyera and Cybereason, and biotech company Upstream Bio.
However, the pace of investments is still relatively low compared to recent years and has returned to 2019 levels. In the first half of the year, only two new Israeli unicorns were born, a number similar to the second half of 2022, which is far from the double-digit birth rate that characterized the Israeli ecosystem at the beginning of 2021.
One interesting data point in the report reveals that Israeli venture capital funds reduced their investment rate by 36%, compared to foreign investors who reduced their investments by 19%. In a quarterly summary, the number of foreign investors investing in Israeli startups in the second quarter was higher than in the first quarter. However, among Israeli funds, the trend is the opposite. One explanation for this gap is the difficulties Israeli venture capital funds have faced in raising new money due to the global crisis and the political situation. American funds still have significantly larger sums at their disposal, although they too encounter challenges in raising new money, primarily from institutional bodies.
The current report challenges one of the prevailing assumptions in the high-tech industry, which suggested that Seed funding was not affected because most of the damage was concentrated in later rounds. However, alongside the almost complete stagnation in major rounds, there was also a sharp drop in Seed rounds. In the first half of the year, early-stage recruitments plunged by 43%, with only 160 transactions compared to the corresponding half in 2022, marking a five-year low. On the other hand, in mid-rounds such as Series B, there was a 15% increase compared to the first half of 2021 and a 42% jump compared to the quarterly average in the second half of 2022.
The major downturn in the first half of 2023 is primarily evident in mergers and acquisitions transactions, which experienced a 48% drop in the number of deals compared to the corresponding period. The financial value of companies that completed an exit also collapsed by 79%, resulting in only $2.3 billion received in 43 exits, marking a six-year low. However, recent signals from the mergers and acquisitions market indicate a certain awakening, driven by the understanding among buyers that value levels have reached a low point and the internalization by shareholders and company founders of their true valuations.
