Fundraising by Israeli startups expected to decline during 2022

According to a report by the Tel Aviv-based Greenfield Partners, during the first quarter of 2022, a total of 132 Israeli startup companies in various stages raised $5.95 billion in funding. The figure marks a slight increase compared to the corresponding period in 2021 ($5.90 billion), but a significant drop compared to the previous quarter ($8.88 billion).

The report shows that $2.35 billion through 42 deals was raised during January 2022, $1.27 billion through 38 deals was raised in February and $3.23 billion through 52 deals was raised last month. Most of the deals (69) were valued at less than $25 million while 19 raised more than $100 million each.

During that period, 10 new Israeli companies joined the prestigious club of unicorns (valued at $1 billion or more). They include AI leader BigPanda ($190 million), fintech company Capitolis ($110 million), data warehouse Firebolt ($100 million), cybersecurity company Island ($115 million), cybersecurity company Pentera ($150 million), Placer.ai ($100 million), RapidAPI ($150 million), battery technology startup StoreDot (unknown), gaming startup Tripledot Studios ($116 million) and building tech firm Veev ($400 million).

Israeli tech companies raised a record of $25.4 billion in 2021, according to the Tel Aviv-based Start-Up Nation Central, which has yet to publish statistics for the first quarter of 2022. Estie Rosen, global PR director at Start-Up Nation Central, which promotes Israel's technology ecosystem, told Al-Monitor she is not concerned by the drop during the first quarter. "2022 will not be like 2021 in terms of fundraising, but the Israeli high-tech sector is here to stay," Rosen said, adding she expects "some correction" in the market after the record year.

According to Rosen, the Israeli cybersecurity, fintech and IT enterprises solutions will continue to attract interest from investors. The figures back this notion. During the first three months of 2022, nearly 29%, or $1.7 billion, was raised by cybersecurity startups; 16%, or $942 million, by data/AI/ML startups and 13%, or $754 million, by fintech and insurance tech. Meanwhile, 8.5%, or $506 million, was raised by real estate and contracting firms, while just over 8% was raised by health tech startups.

Guy Preminger, partner and technology leader at PwC Israel, describes the drop in fundraising as "natural" after the peak last year. He thus expects the decline to continue along 2022. While he emphasized that the Israeli high-tech sector is "powerful and successful," Preminger connects the fall in investments to global developments. "Investors are now more cautious due to the global situation with rapid inflation and rising interest rates. [Venture capital firms] are looking to the longer term with some concern due to the expected rising interest rates, and therefore at this stage prefer to slow down," he explained to Al-Monitor.

Ofer Shoshan, venture partner at the investment platform OurCrowd, added another reason for the slowdown: "Since the outset of the current year and especially the Ukraine invasion, we observe a drop in investments. Specifically, startups in the early stages are those facing the most difficulties in raising funds. Startups in the fields of cybersecurity, defense and energy are those which attract most of the interest."

Shoshan emphasized that the decrease in investments should not affect Israeli startups. "During last year, numerous companies boosted their cash reserves and hence will be able to go through the next two to three years even in an inflationary market. Most of these companies are already well-established with a stable stream of revenues and sales."

According to Preminger, the fundamentals of the Israeli high-tech sector ensure its future in the long term. He speaks about three components that place the Israeli high-tech sector on top of the global industry: talent, speed of response and spirit. "You can find talented engineers in other locations around the globe, but you can’t find the special spirit of creativity and innovation created here. The combination of all these three factors will always generate interest among investors," he said.