Israeli startups raised $7.8B since October 7, but relocation fears threaten future growth
Israeli startups raised $7.8B since October 7, but relocation fears threaten future growth
Impressive fundraising numbers are marred by the growing trend of startups moving abroad.
"You can run a sprint with extra weight, but not a marathon, and Israeli high-tech competes every day in an Olympic final," says Avi Hasson, the former chief scientist and now CEO of Startup Nation Central, summing up nearly a year of Israeli high-tech performance. "Israeli companies are carrying an extra 100 kilos compared to their U.S. counterparts, yet they’re still delivering results. However, the ongoing war, reserve mobilizations, flight cancellations, and government dysfunction create a negative sentiment about the future."
The organization published a report summarizing activity since October 2023, which, on one hand, shows surprisingly positive numbers in capital raising and exits. On the other hand, it reveals deep concern among company leaders and investors. According to the accompanying survey, most plan to address these concerns by shifting some of their operations outside of Israel or expanding internationally. This poses the greatest danger to the industry today—despite its outward resilience, many companies are moving their center of gravity away from Israel. "Investors are still putting money into Israeli companies, but part of their confidence lies in the enterprises' commitment to ensure business continuity and growth. The real issue is that if necessary, entrepreneurs will shift their operations abroad. Already, most new startups are incorporated as American companies," Hasson explains.
Flight cancellations to and from Israel are a significant factor disrupting the high-tech sector. Startup Nation Central, which once hosted numerous delegations of senior participants from around the world, has had to change its activities. "Recently, we brought a delegation of CISOs to Israel as tourists because the companies employing them refused to insure the trip. In other cases, we travel abroad to present companies, as potential investors are hesitant to come here," says Hasson, describing the grim situation in which Israel finds itself both ostracized internationally and physically isolated due to a reduction in airline service.
The concerns are clearly reflected in the survey among company managers. It underscores that the government must not be misled by numbers that appear to show stability. The war has forced 24% of companies to relocate part of their operations. A third of companies are considering moving some operations out of Israel in the next year. Only 31% of companies are confident they can raise capital next year, and 49% have already experienced investment cancellations. Unsurprisingly, tech companies in the north of Israel are faring worse, with nearly 40% considering relocating, and 69% expressing doubt about raising sufficient funds in the coming year. Despite the general understanding that high-tech is Israel's growth engine, the industry has little expectation of government support—over 80% of companies and 74% of investors express doubt about the government’s ability to help.
Despite the pessimism, the figures from October 7th, 2023, to the end of August are surprisingly positive. Total fundraising reached $7.8 billion, close to the $8.2 billion raised in the corresponding period. The average round size hit $21 million, a record since 2021, while the median round size of $8.5 million set a new all-time high. However, these figures reflect a bias toward larger, more mature companies with global operations that are less identified as Israeli and less exposed to local risk, compared to younger and smaller companies.
In exits, stability was maintained, with $11.6 billion in deals, including the $2 billion sale of Own to Salesforce, not yet reflected in the report. In the corresponding period, exits (sales and IPOs) totaled $10.6 billion. The "Israeli factor" was not noticeable in these trends, which mirrored those in the U.S. Both Israel and the U.S. saw a decline in capital raising after October 2023. In Israel, funding initially fell to 66% by February 2024 (with October 2023 as the baseline of 100%), while in the U.S., the decrease was a more moderate 87%. Both countries saw a recovery by May, with Israel reaching 152% of its October 2023 funding level, and the U.S. at a similar 158%. Non-cyber startups continue to struggle with fundraising, and the IPO market in the U.S. has yet to reopen, despite rising stock indices.
Companies and investors maintain relative optimism about business activity. 54% of companies are confident in their ability to grow next year, and 37% of investors expect an increase in mergers and acquisitions (M&A), while only 20% predict a decline in M&A activity. SNC notes that cyber and corporate software companies are more optimistic about fundraising and growth than companies in other sectors. The survey, conducted in August among 230 companies at various stages of development and 49 investment entities, included 60 companies from northern Israel, of which only 45% are fully operational, and 41% have had to relocate. Among these companies, just 10% of managers believe the government will take steps to restore economic activity in the region.
