As the third quarter of 2022 came to a close, it was reported that there was a sharp drop in investment activity in Israeli start-up companies. Investments are even lower than the peak of Israeli investment activity during COVID. This bleak picture emerges from the summary of the third quarter of capital-raising activities conducted by the Viola venture capital fund regarding Israeli high-tech.
Investments in start-up companies in the third quarter of 2022 amounted to $2.8 billion, a 36% drop compared to the previous quarter, which also reflected a decrease compared to the first quarter of the year. The activity in the third quarter reflects an increase in a negative trend, with the previous quarter experiencing a 25% decrease in investments.
The volume of investments in the third quarter of this year is even lower than that of the third quarter of 2020 when the investments amounted to 3.1 billion dollars while most nation's were locked down and economies stalling due to the reaction governments had to the Coronavirus.
Contracting VC market for #startups in #Israel Q3/22
— Christoph Nowak (@Chris___Nowak) October 12, 2022
Deal count down esp for mega rounds
Uptick in early-phase extension rounds #ViolaGrouphttps://t.co/JGadNlQ3fZ pic.twitter.com/2foFhUjSrq
This summary of Israeli capital in the high-tech industry is part of a global trend and is due to the fact that the IPO window is virtually closed, which dramatically reduces the public’s desire for late-stage transactions that are based on plans to exit through an IPO.
In the absence of a thirst to invest in the more mature companies, money from venture capital funds flows mainly to the small companies that have a long time before having to think about an IPO on the one hand, and on the other hand, their capital needs are lower. Although investments in the early stages also have seen a decrease this quarter, it was measured at a far more moderate 13% compared to the same quarter last year.
In the meantime, the Israeli tech market is behaving similarly to the local real estate market. Investors and companies prefer to avoid transactions so as not to be forced to acknowledge the reality of a lower price. This is the reason why there is a sharp drop in the number of transactions, but no major price drops are seen. Israel's real estate market is viewed by many as over-inflated. However, this was the case ten years ago as well and since then the market has only increased.
The value of corporate-backed startup deals slumped in Q3, but a few areas like energy and telecoms bucked the trend, as did geographies like Israel. #cvc #corporateventurehttps://t.co/OeHsaeOuXJ
— Global Corporate Venturing (@GCVenturing) October 11, 2022
Jon Sakoda, a founder of an American-based venture capital fund called “Decibel”, published an analysis that reveals that the venture capital industry is sitting on an unprecedented amount of 290 billion dollars available for investment, with nearly half of the amount intended for new investments.
This money, known in the industry as "gunpowder" investments, is supposed to lead to an explosion of investments in 2023 based on the assumption that the funds have no choice but to invest. Potentially these gunpowder investments could help the Israeli high-tech market bounce back to what has become a norm in recent years.
