"The state of fintech in Israel is depressing - All the entrepreneurs have switched their risk tolerance to 'OFF'”
"The state of fintech in Israel is depressing - All the entrepreneurs have switched their risk tolerance to 'OFF'”
Yonatan Mandelbaum, a Principal at TLV Partners, noted that even within the limited number of fintech startups that emerged in 2023, "I haven't seen anything that's genuinely new, interesting, or groundbreaking. Mostly, what we are seeing are companies that are essentially copycatting existing ones"
After several consecutive years of growth in the local fintech industry, has the "fintech winter" also arrived in Israel this year? Yonatan Mandelbaum, a Principal at the venture capital fund TLV Partners, which specializes in investments in this field, suggests that the situation does indeed appear gloomy. According to his estimation, there has been a 70% decrease, and possibly even more, in the number of new fintech companies that the fund has encountered since the beginning of the year. "If in 2021 we invested in five fintech companies, and in 2022 in three new companies, this year we have yet to invest in any new companies in the field."
"Beyond the dramatic decrease that is evident in both the official statistics and our data at the fund, regrettably, among the few companies I have observed this year, I haven't seen anything that's genuinely new, interesting, or groundbreaking. Mostly, what we are seeing are companies that are essentially copycatting existing ones. It's bewildering because for the past 7-8 years, we have consistently seen the emergence of 2-3 fintech unicorns annually in Israel. This is quite a depressing situation. I believe that many fintech entrepreneurs, who tend to be more risk-averse, have switched their risk tolerance to 'OFF'," states Mandelbaum.
According to data from Start-Up Nation Central (SNC) for the first half of 2023, private investments in fintech in Israel have plummeted by over 50%. During this period, only $545 million were invested in the sector, in stark contrast to $2.6 billion in the entirety of 2022 and $6 billion in 2021. The Israel Innovation Authority's data highlights that investments in the realm of financial technologies constituted 16% of all high-tech investments in 2021. Israel's fintech field stands as one of the largest and most advanced in the world, encompassing technological solutions for financial services such as banking, insurance, investments, payments, and more.
The global fintech industry has long been grappling with what's known as the "fintech winter," a term that characterizes a substantial decline in investments within the field. This phenomenon arises due to global financial shifts marked by high inflation rates, increases in interest rates, declines in company valuations, and waves of layoffs within the financial technology sector. Furthermore, in the last year or two, the sector has also faced stringent regulatory measures, primarily stemming from skepticism towards the crypto market. These regulations also directly impact sub-sectors within the financial technology realm.
Mandelbaum points out that the situation in Israel is particularly extreme compared to the rest of the world due to the unique nature of Israeli fintech entrepreneurs. "There is a clear trend: fintech entrepreneurs here tend to be older than the average age of other high-tech entrepreneurs," he explains. "The age gap might not be substantial, perhaps 7-10 years or even less, but it's a discernible distinction. I am yet to encounter a single fintech entrepreneur who immediately founded a startup in the field upon completing their military service. This makes sense since fintech entrepreneurs typically need to accumulate experience—either in other companies within the field or even in financial institutions themselves—before venturing into entrepreneurship."
Mandelbaum clarifies that it's not that experience isn't valuable in establishing a startup in fields like cyber or DevOps, but this experience is often gained during military service. "In other sectors, entrepreneurs might lack a business background, yet they possess substantial applied and practical experience. On the contrary, fintech entrepreneurs usually have families, children, and sometimes even mortgages, given their older age. This is why they are often more hesitant. Now, they observe the general industry landscape and the public market, and they harbor a certain level of trepidation about leaving their stable jobs to embark on a venture laden with risk," he comments.
"Moreover, on top of the global financial crisis, Israel is grappling with internal turmoil stemming from the government’s promotion of the judicial coup. Since 2018, we have seen hundreds of new companies every year—not solely within fintech, as we are a generalist fund. There isn't a decrease in quantity this year, but the quality has notably diminished. While we might have encountered around 5% of interesting startups in the past, this year we're encountering perhaps 1% of companies that truly intrigue us. Within fintech, the situation is even more dire—the quality has significantly deteriorated," Mandelbaum emphasizes.
In July of this year, TLV Partners successfully raised $250 million for its fifth fund, earmarked for early-stage investments. To date, the fund has amassed assets of over a billion dollars. Over its eight years of existence, TLV Partners has raised a total of seven funds, five of which are for early-stage investments and two for subsequent investments in portfolio companies.
Despite the ongoing crisis, Mandelbaum remains optimistic about investments within the broader high-tech sector and specifically within fintech. "The market is currently dead, which is crazy. This includes both Seed funding and Series A rounds. While I can't precisely predict how much longer this situation will persist—whether it's months, six months, a year, or even two years—I am confident that we will witness a resurgence within these rounds. And when this resurgence transpires, they will emerge even stronger. Overall, I anticipate a highly active fourth quarter in terms of funding rounds. Numerous startups that secured Seed funding and are strategizing for Series A investments recognized earlier this year that raising funds could prove challenging and decided to wait until after summer 2023 in the hope of raising capital.
"It's imperative for them to secure funding, given their precarious financial positions—typically having enough funds to last for a mere 4 to 8 months. Numerous promising companies find themselves in this situation. From the investors' perspective, the timing is opportune. After the tumultuous months that marked the beginning of the year, investors are now eager to engage in deals. There's a sense that a genuine celebration is on the horizon, especially come September. Furthermore, we are witnessing a tangible recovery in global markets. Many funds and startups spent the summer meticulously preparing the groundwork, presentations, introductions, and strategies for VCs for the upcoming rounds. September 1st is just around the corner—so let’s go and raise capital," Mandelbaum concluded.
