Funding To VC-Backed Startups In Israel Plummeted In Q4 Amid Turmoil

Venture funding to Israel-based startups in Q4 2023 hit its lowest point since early 2017, as just more than a half-billion dollars was invested in private companies with tensions and violence rising in the region.

Startups in Israel raised about $516 million in a paltry 42 deals, per Crunchbase data. That is the lowest dollar total since Israeli startups raised only $463 million in Q1 2017. The total is down about 69% from the previous quarter, which saw $1.6 billion roll to Israel-based startups, and 54% from Q4 2022.

For the year, 2023 funding in Israel declined nearly 52% from the previous year, totaling only $4.3 billion in 369 deals — down from $8.9 billion in 677 deals in 2022. Last year’s dollar total was the country’s lowest since 2018.

The fourth quarter obviously coincided with the Hamas attacks on Israel and the Israeli response.

“The economic performance of 2023 remains inseparable from October 7th, which shook us to our core,” said Nadav Zafrir, co-founder and managing partner at Israel-based incubator and investment firm Team8. “But it is precisely this core that has enabled us to weather multiple colossal challenges in the past, and we are confident that we will emerge stronger from the current crisis.”

Small rounds

A quick glance at the biggest rounds in Q4 give a good indication as to why the dollar amount for the quarter was so low. The largest rounds of the quarter went to:

AI startup AI21 Labs, which locked up an additional $53 million for its Series C announced in August;
Cybersecurity startup Gutsy, which raised a $51 million seed round; and
AI startup Cortica, which landed a $40 million Series D.

Those three rounds combined are less than Q3’s largest round raised by an Israeli startup — AI21 Labs’ original $155 million Series C from investors that include Google and Nvidia.

In fact, a half-dozen startups in the region raised $100 million or more in rounds in Q3 of last year whereas no startup came close to that number in Q4.

Investing during uncertainty

Of course, those numbers are not shocking considering the October attacks by Hamas changed nearly everything in the country.

Despite the fighting, investors in the region say they continue to see positive signs in both the country’s robust startup ecosystem, and investors’ attitudes toward the area.

“One of the most remarkable phenomena we witnessed (after the attacks) was the rallying of foreign investors, customers and partners who continued to support, fund and even acquire Israeli cybersecurity startups since October, despite the turmoil,” said Ofer Schreiber, senior partner and head of the Israel office for cyber venture firm YL Ventures. “These global industry leaders have a long history of working with the Israeli ecosystem and have expressed their confidence in its longevity and sustainability.”

Gili Raanan, founder and partner at Israel-based Cyberstarts, said even as the country goes to war, startups have adopted agile approaches to ensure business continuity, with minimal to no disruption to their operations.

“In my view, Israeli companies are emerging from 2023 stronger, building sustainable businesses adept at navigating unforeseen challenges,” he said. “Foreign investors recognize these positive developments, and I’m confident they will continue acknowledging Israel as the innovative hub that it is.”

Raanan said he anticipates M&A activity to grow alongside increased fundraising as global markets gradually recover.

“While significant IPOs might be premature in 2024, I’m optimistic about Israeli companies gearing up for this significant milestone in the lead-up to 2025,” he added.

Investors are hopeful the worst may be behind them.

“2023 may be the conclusion of a downward trend in tech investments,” Zafrir said. “We seem to have stabilized at pre-2020 levels and are optimistic that it might mark the beginning of a healthy ascent.”