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Investment in Israeli startups in the third quarter of 2022 dropped significantly, as the industry prepares for a global recession.
According to a report prepared by Israeli investment firm Viola, total investments decreased in the third quarter of the year by 36%, reaching a total of $2.8 billion. This figure is even lower than what was raised in the third quarter of 2020, at the height of the Covid-19 pandemic, when Israeli startups brought in $3.1 billion.
The drop in investment year-on-year (YoY) was over 50%. Startups saw a 69% YoY drop in mega deals of over $100 million, with growth deals also suffering a notable drop of 47% YoY. These figures can largely be explained by the impact of the public markets in Q2 on private markets and match the trends seen in the U.S. and Europe.
The drop in investment in early-stage companies (Pre-Seed, Seed, Series A) wasn’t as significant, only falling by 13% YoY. According to Viola, more early-stage startups are pursuing extension rounds. This uptick of around 50% indicates a need for more capital by early startup founders, who were willing to raise money on the terms of their previous rounds, despite the growth they’ve experienced.
Eran Westman, General Partner at Viola Growth, notes that the increase in extension rounds is bad news for the industry and that the next step will be more downrounds. According to Westman, the fourth quarter may be even worse than the third one.
There is still a gap with many entrepreneurs not yet ready to accept their real valuation and currently cutting costs in order to try and grow with their current funds to avoid having to reduce their valuation. But I believe that in 2023 there will be more growth rounds because companies will have to raise funds and there will be a convergence between their needs and the valuations.
One of the positive points in the report revealed that unlike in previous crises, foreign VCs investing in Israel didn’t cut their funding completely at the first sign of trouble. The drop in investment by foreign VCs was similar to that of Israeli investors, 35% compared to 29%, respectively.
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