Startup Nation Central:
One Year of Israeli Innovation in War
September 12, 2024
Written by Aaron Gefen, Senior Business Data Analyst and Einat Ben Ari, Head of Data and Insights
Foreword from Avi Hasson, CEO Startup Nation Central
Israel's tech sector continues to show resilience and to attract global investments despite ongoing challenges. However, its future growth depends on regional stability and responsible government policies.
Since October 2023, Israeli tech has defied expectations, performing exceptionally well despite mounting challenges. However, in light of uncertainty due to the prolonged conflict and the current Israeli government's economic policy – which is widely perceived as destructive – the tech sector’s resilience will not be sustainable. The absence of long-term government planning around budget policy, academic research infrastructure, and future growth drivers threatens the sector’s role as Israel’s economic engine. The government must behave responsibly to secure the continued success of the sector.
Our investment data and survey results show that while the tech ecosystem continues to attract investments and generate activity despite the uncertainty, there’s a consensus within the industry: confidence in the government’s ability to rehabilitate and foster the sector is alarmingly low despite the commendable and swift actions taken by the Israeli Innovation Authority. This instability is causing many Israeli companies to reconsider their next steps in securing business growth.
To sustain the current momentum and maintain the trust of foreign investors, the government must act and demonstrate its commitment to developing the tech sector. This is vital for safeguarding Israel’s economy for the benefit of all its citizens.
Regardless of current challenges, Israel continues to draw investors seeking bold, determined solutions to global challenges. With attractive valuations and immense growth potential, the Israeli tech ecosystem remains resilient—no matter the circumstances.
Avi Hasson, CEO, Startup Nation Central
Overview
This report provides an in-depth analysis of the impact of the October 7 war on Israel’s tech and innovation ecosystem, examining both macro and micro-level dynamics. The report begins with a top-down analysis of key financial indicators, including private funding trends, M&A activity, and comparisons with the US tech ecosystem.
It then delves into a bottom-up assessment derived from two comprehensive surveys: one targeting partners and managing directors of investment funds and companies, and the other focused on founders and CEOs of tech companies ranging from pre-funding startups to scale-ups and public companies. These surveys explore the direct impact of the conflict on businesses, as well as the current sentiment and future outlook within the sector.
By integrating data from our business intelligence platform, Finder, with survey insights, this report offers a holistic view of the challenges and resilience within Israel’s tech sector during this period of conflict. The findings are intended to inform a broad audience, including investors, entrepreneurs, corporate customers, as well as the government, which can and should play a more significant role in ensuring that this driving sector of the Israeli economy not only avoids derailment but also helps drive the country’s economy upwards.
Ecosystem Analysis
- Resilient Private Funding:
Despite the war and a global decline in tech funding, Israel’s tech sector demonstrated resilience by raising $7.8 billion across 577 rounds, a slight decrease from the $8.2 billion raised during the same period last year. This performance indicates robust investor confidence in the long-term potential of Israel’s innovation landscape. - Cybersecurity and Scale-ups Strong Despite Ecosystem Challenges:
The overall strength of Israel’s tech ecosystem is largely fueled by the robust performance of the cybersecurity sector and thriving scale-up companies. However, investment and business growth challenges faced by other sectors, particularly early-stage companies, highlight a significant disparity in the ecosystem’s resilience. - Robust M&A Activity:
Mergers and acquisitions reached $9.6 billion, slightly down from $10.6 billion for the same timeframe the previous year, and driven predominantly by the business software and cybersecurity sectors. These M&A deals reflect the strength of critical sectors and underscore the trust and confidence of leading global players in the Israeli ecosystem’s ability to deliver and thrive. - On Par with the U.S. Ecosystem:
Israel’s tech economy closely mirrors U.S. trends, despite regional geopolitical complexities. The fact that Israel consistently remains on par with the U.S. indicates the country sustains economic growth even in the face of adversity.
Survey Analysis
- Investment Uncertainty and Cancellations:
Despite a positive private funding trend in the first half of 2024, Israel’s tech sector faces future funding uncertainty, with 49% of companies reporting some investment cancellations and only 31% feel confident about raising funds next year. Investors share this cautious outlook, with 48% expecting a decline in investment activity over the next year, compared to just 31% who anticipate an increase. Similarly, the U.S. venture capital market remains constrained despite moderate improvements, as investors lean toward insider-led rounds and remain uncertain about broader recovery (PitchBook Dec 2023, PitchBook June 2024)
- Challenges Due to The War; Business Continuity Maintained:
Due to the war 24% of companies reported they had to relocate some of their operations. Additionally, 44% reported some shortages in human capital. Looking ahead, about a third of companies are considering moving some of their operations outside of Israel to mitigate risks.
- Optimism for Growth and M&A Prospects:
Despite funding uncertainties, 54% of companies remain confident in their ability to grow in the coming year, showcasing the resilience and optimism within the sector. Additionally, M&A expectations suggest strong confidence in the Israeli tech ecosystem, with 37% of investors anticipating an increase in M&A activity, compared to only 20% who expect a decline. This positive outlook on growth and M&A underscores the continued strength and appeal of Israel’s innovation landscape amidst broader challenges.
- Positive Sentiment on Ecosystem Resilience:
Building on the optimism for growth and M&A prospects, 56% of companies express confidence in the ecosystem’s resilience and global standing. This positive sentiment is further reinforced by 72% of investors who believe in the ecosystem’s ability to withstand and thrive amidst adversity.
- Regional Disparities:
Tech companies in northern Israel are facing significant challenges, with nearly 40% considering relocation due to the ongoing conflict, and 69% expressing concerns about their ability to secure adequate funding in the coming year. This underscores the uneven impact of the conflict on different regions within Israel, highlighting a particularly strained environment for northern companies. - Low Confidence in Government Recovery Efforts:
Confidence in the government’s ability to lead recovery efforts is low, with over 80% of companies expressing doubt. This sentiment is even more pronounced in northern Israel, where over 90% of companies share this concern. Investors also express similar apprehensions about the government’s role in the recovery process.
Yariv Lotan, VP of Product, Data, and Insights, Startup Nation Central
Ecosystem Analysis
Despite the war in Israel, private funding remains in line with the prior year
Since October, the Israeli tech ecosystem accumulated a total of $7.8 billion in private funding across 577 rounds. This small decline (4%) from $8.2B the matching dates the year before – despite the conflict and global downturn in tech funding –represents the resilience of Israel’s tech sector.
The average investment amount was $21M, the highest since 2021, and the median amount $8.5M- an all-time high. Leading sectors were health tech & life sciences with 123 rounds, business software with 101 rounds, and cybersecurity with 92 rounds.
Israel and US trends in private funding are directionally aligned
Comparing private funding trends in Israel and in the US since October 2023 shows that the two countries have similar patterns, however when funding in the U.S. increases, Israel’s funding rises even more, and when U.S. funding declines, Israel’s decreases more significantly.
After October 2023, both Israel and the U.S. saw a decline in private funding, with Israel experiencing a sharper drop to 66% of October 2023 levels by February 2024, while the US saw a more moderate decline to 83%. However, by May 2024, both countries had rebounded significantly, with Israel reaching 152% and the U.S. 128% of their October 2023 levels.
Towards July, both countries again experienced a reduction in private funding.
Share of mega rounds out of all private funding increased
The Israeli tech ecosystem saw 18 mega rounds (above $100 million) from October 2023 compared to 19 mega rounds for the same period the previous year. These mega rounds accounted for 46% of total private funding compared to 37% the year before. This high ratio of mega rounds to all rounds indicates that more established companies are a greater economic contributor than seed and early stage investments.
Wiz stands out with a nearly $1 billion round, representing 13% of all private funding. Notably, nine of these mega rounds were in the cybersecurity sector.
* Rounds with $100M or more. There are 4 more funding rounds with exactly $100M.
Israeli tech M&A activity rebounds after an initial slowdown
Since the beginning of the war, Israeli tech M&A activity reached $9.6 billion across 73 events, slightly down from $10.6 billion across 108 events for the same timeframe the previous year. Despite an initial slowdown, the market rebounded in the latter half of 2023, particularly with exits. Notably, two large M&A deals—Resident by Ashley Home and WalkMe by SAP—totaled $2.5 billion.
M&A activity is dominated by the business software, cybersecurity, and health tech sectors
The business software sector led with $3.4 billion in M&A activity, including major deals such as WalkMe’s acquisition by SAP, Run:AI’s acquisition by Nvidia for $700 million, and Priority Software’s acquisition by Blackstone for $400 million.
Cybersecurity followed closely with $3.3 billion, dominated by exits, while the health tech sector saw significant activity with three mega deals totaling over $1.2 billion.
Survey Analysis
In mid-August 2024, Startup Nation Central conducted a comprehensive survey to understand the current sentiments, challenges, and outlook of Israel’s high-tech ecosystem as we approach one year since October 7th. This survey was essential to capturing the perspectives of both high-tech companies and investors, providing valuable insights into how the sector is navigating these turbulent times. A total of 230 high-tech companies, sourced from our Finder database, and 49 active investors participated in the survey.
1. Due to the war, companies experienced human capital shortage, investment cancellations, and had to relocate some of their operations.
- Due to the war, 24% of companies had to shift some of their operations within or outside of Israel to adapt to the ongoing challenges.
- To further mitigate risks 32% of companies are considering relocating some of their operations abroad.
- 44% of companies have faced moderate to significant shortages in human capital.
- 36% of companies experienced over 25% investment cancellations.
2. Looking forward, the sentiment among the companies is mixed with some concerns around the ability to raise funds and grow:
- 54% of the companies are confident in their ability to grow in the upcoming year. Business software and cybersecurity companies are more confident in their ability to grow (72% and 65% respectively), while health tech and agrifood tech companies are less confident (45% and 40% respectively).
- Only 31% of companies are feeling confident in their ability to raise funds in the upcoming year.
3. Investors sentiment is also mixed with a more positive outlook on M&As:
- 51% of investors project investments to remain stable or increase, which is relatively consistent with the last survey conducted 9 months ago.
- IPO projections also remained consistent, while M&A projections became more optimistic, with 55% and 81% of investors excepting IPOs and M&As (respectively) to remain stable or increase.
4. There is low confidence in the government’s ability to lead the recovery:
- 82% of companies reported not receiving any support due to the war.
- 80% of all companies and 74% of investors are concerned about the government’s ability to lead recovery efforts.
5. Despite the challenges there is confidence in the Israeli ecosystem’s resilience:
- 56% of companies and 72% of investors are confident in the ecosystem’s ability to deliver despite the challenging circumstance.
- 82% of investors believe the global image of the Israeli ecosystem’s resilience is still positive or neutral.
6. Companies based in the north are facing bigger challenges:
A sub-survey sent only to about 60 tech companies based in the north (close to the borders) with specific questions has shown that only 45% are fully operational. 41% had to relocate their operations. 20% of those that relocated will not return and 70% still do not know. Only 43% report that they received government support and the confidence in the government’s ability to lead economic recovery stands at less than 10%.
Tech companies close to the fighting were already sparse before October 7th and are now facing challenges much more severe than in the center. For many of them the prospect of survival is unclear. As the tech industry is an important driver for economic growth and prosperity the impact of the war on it will have a tremendous effect on the region as a whole and its ability to recover.
Methodology
- The report is based on the Startup Nation Finder database.
- Except for US metrics which are based on Pitchbook.
- The data is a snapshot as of August 28th, 2024.
- Figures might further revise in the future as the activity continues to be revealed.
- The definition and criteria for companies and investors can be found in the Startup Nation Finder Glossary under the terms “Companies” and “Investors”, respectively.
- Aggregative metrics may include rounds that are not visible in Finder, per the request of the profile owners.
Funding Type definitions:
- Private Funding includes the following round types: Pre Seed, Seed, A, B, C, D, E, F, G Rounds, Convertible Debt, SAFE, Equity Crowdfunding, and Undisclosed rounds.
- Funding for Public companies includes the following event types: IPO (including IPO via SPAC or Reverse Merger), Non-Initial Public Offering, PIPE.
- The following events are excluded: Crowdfunding, Debt Financing, Secondary, and Grants.
The survey, conducted in August 2024, included 230 companies and 49 investors, reflecting a broad range of sizes, locations, portfolio sizes and experiences. Most companies are small startups, with a majority located in the Center District. The investor group also varied widely, with diverse levels of experience and portfolio sizes, ensuring the survey provides a comprehensive view of Israel’s tech sector’s current state and future expectations.