Two new industry reports paint the picture of the Israeli tech ecosystem in 2023. The picture that emerges is one of a major decline in venture activity (consistent, but a bit stronger than the declines in US and Europe), but on the other hand, we’re starting to see the signs of stability in the rate of decline.
According to the preliminary Q3 2023 report by IVC (a revised version should come out mid October), Israeli tech companies raised $1.67 billion in the third quarter of 2023 in 85 deals. The volume of investment reflects a 14% decrease from Q2 2023, and a 38% decrease compared to Q2 2022. The number of transactions is down as well, 41% less than 2022.
A bright spot is emerging in early-stage funding, signaling renewed investor risk appetite and startup momentum. Seed funding increased in the third quarter, the first rise after five straight quarters of decline. The number of seed rounds dipped from the previous quarter, but is expected to show an upward turn once final data comes in. The revival of seed funding is an encouraging sign of a return to startup growth after a period of caution. More investors are again willing to bet on young companies, providing the capital for the next wave of innovation. If the seed funding resurgence continues, it could mark a turning point for the startup ecosystem.
The second report, by Startup Nation Central (SNC) Policy Institute paints a similar picture but points a picture at the governments proposed judicial reform as the cause for reduced foreign investor activity (down 40% year over year up to Q3 2023). Historically, foreign investors represent the bulk of the capital invested in Israeli high tech.
Another interesting stat coming out of the SNC report, backed with data from Pitchbook, finds that the rate of decline in Israeli tech investments has been sharper than that of the US and Europe, after coming down from the peak in 2021.
Generative AI is a beacon of hope
In this grim scenario, Artificial Intelligence, and more specifically Generative AI, emerges as the global industry’s lifebuoy, attracting investments and elevating valuations of entities across the spectrum. The rise in the number of funding rounds for AI startups in Q2 and Q3 is a testament to this trend, with Israel being no exception. A recent study by Capital Economics suggests that the US will lead the AI revolution, with the Asian Tigers, UK, Israel, and parts of the Nordics also well-placed to benefit.
Just last week, our team at Remagine Ventures published the updated Israeli Generative AI startup landscape and found that the number of Israeli generative AI companies more than doubled in the past six months and that funding to date has reached $2.3 billion. The actual amount might be higher as companies choose to stay in stealth for longer.
Looking forward and conclusions
To keep its reputation as ‘Startup Nation’ Israeli entrepreneur need to overcome global trends of rising inflation, but also self inflected wounds caused by its local government. The proposed judicial reforms caused some short-term uncertainty. But Israel’s fundamental strengths – world-class tech talent, cutting-edge R&D, entrepreneurial culture – remain unmatched. Investors know this. With a compromise on judicial reform, I would expect (and hope) investor confidence to bounce back.