Startups in Israel

2023

Venture capital investment in Israel collapsed after the outbreak of war

After the outbreak of hostilities between Palestine and Israel, the volume of venture investments in Israeli startups decreased by about three times. This is stated in the IVC study, the results of which were published on November 21, 2023.

According to the Financial Times, in September 2023, technology companies in Israel raised a total of about $1 billion in 232 transactions. However, in October of the same year, the total amount of venture capital investments collapsed to $325 million, and the number of transactions amounted to 120.

The volume of venture investments in Israeli startups has decreased three times

Some young companies [in Israel] were close to finalising deals and things seemed to be going well. And then the war started. Investors did not leave, they simply decided to wait and look at the further development of the situation, "says Hemi Perez, managing partner of the Israeli venture capital fund Pitango.

It is noted that even before the outbreak of hostilities, Israeli startups faced a drop in venture capital investments, which was the result of a decrease in activity after the COVID-19 pandemic. The situation worsened due to the difficult macroeconomic situation, rising interest rates and falling government estimates. All these factors led to a cooling of investment activity in the technology market. Israeli startups are experiencing other difficulties. The war led to approximately 15% of employees of high-tech companies, including senior managers and executives, being called up for military service.

At the same time, the lack of venture capital funds will strike at the image of Israel as a "nation of startups." The technology sector is an important driver of the economy: it accounts for approximately 15% of all jobs in the country - in hundreds of young companies and large multinationals.^[1]

How start-up mafia appear in Europe and Israel

Europe and Israel create an average of five technology startups per venture capital company, whose market value is estimated at $1 billion or more. Such data are provided in the Accel study, the results of which were released on May 24, 2023.

We are talking about the formation of the so-called startup mafia, when former employees of any one organization establish a large number of their own enterprises. An example is the streaming service Spotify, which has spawned 32 startups. The Delivery Hero platform for ordering and delivering food gave life to the same number of new firms. And employees of the advertising company Criteo have created 31 startups.

Start-ups to venture capital companies in Europe and Israel ratio is 5,000

It is estimated that 353 companies worth $1 billion or more are located in Europe and Israel. Former employees of 221 of these organizations have formed a total of 1,171 new technology startup firms as of May 2023. More than half (54%) of such businesses are based in the same city as the parent companies. Moreover, over 59% of firms created by startup mafia have already managed to attract venture financing: 45% of them received from $1 million to $10 million, and 30% - more than $10 million.

Tel Aviv is the largest startup factory: here 127 new firms were allocated from 33 companies with an estimated value of $1 billion or more. In Europe, the most startup mafias are registered in London: 185 firms are formed by immigrants from 27 organizations. In Berlin, former employees of 25 large companies established 165 new enterprises.

However, in general, as noted, the prospects for technology startups have worsened due to the current macroeconomic situation, rising interest rates and high inflation. It is estimated that in 2022 the value of the European technology industry decreased by more than $400 billion.^[2]

80% of new startups in Israel left the country

In early May 2023, it became known that the Israeli IT sector could be seriously affected in light of the policies of Prime Minister Benjamin Netanyahu, his government and the judicial reform he planned.

The essence of the initiative boils down to limiting the powers of the Israeli Supreme Court to block laws and decisions of the country's government. At the same time, the parliamentary majority will actually gain control over the process of choosing judges of the Supreme Court. According to the Kommersant newspaper, more than a dozen former Israeli attorneys general and government legal advisers, as well as many lawyers and judges, spoke out against the reform. At the same time, a wave of protests swept across the country: according to the opposition, the proposed changes undermine the democratic foundations of the state.

Israel's IT sector could be hit hard in light of Prime Minister Benjamin Netanyahu's policies

According to a study conducted by the Israel Innovation Authority, approximately 80% of local startups created in 2023 were registered outside the country. The impending judicial reform is reportedly undermining investor confidence and forcing high-tech firms to move abroad. Moreover, IT startups also intend to register their future intellectual property outside of Israel, which could deal a serious blow to the state's economy. The fact is that approximately 10% of the country's labor force is employed in the high-tech sector of Israel. Moreover, the IT segment provides a quarter of tax revenues.

Israel's Innovation Authority points to a significant gap between IT stocks trading in Tel Aviv and on the Nasdaq. While the Nasdaq rose 17% in 2023, the Israeli tech index fell 4%. If the gap widens further, "many Israeli high-tech companies will find it very difficult to attract investment, and they will be forced to close or move to other countries," the report said.^[3]

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