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Israeli Venture Capital Faced Major Downturn in First Half of 2024

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The Judean Staff
Finance

The first half of 2024 has painted a sobering picture for Israeli venture capital, marking a period of unprecedented contraction in the sector. According to the recently released IVC - Gornitzky - KPMG Investors Report, the funds raised and investor activities have plummeted to levels not seen in years, continuing a troubling downward trend that began last year.

A Freefall in Fundraising

The data is stark: only ten new Israeli venture capital funds managed to raise capital in the first six months of 2024, collectively amassing a mere $544 million. This represents a precipitous drop from the $1.6 billion raised by 27 funds in the entirety of 2023. The contraction is not just significant; it’s catastrophic, signaling a retreat of investor confidence and a shrinking pool of available capital.

What’s even more alarming is the concentration of this limited capital. Two major players, Red Dot Capital Partners and Vintage Growth Fund, were responsible for a staggering 73% of all funds raised during this period, each securing $200 million. This concentration suggests a narrowing of investor focus, with smaller or newer funds struggling to attract the attention and capital they once could.

Institutional Investors Pull Back

The report further highlights a dramatic decline in the involvement of Israeli institutional investors. In the first half of 2024, these investors participated in just 13 investment rounds, totaling a paltry $40 million. This is a sharp contrast to the same period in 2023, where institutional investors were involved in 40 rounds, collectively worth $158 million. This significant drop-off underscores a broader trend of risk aversion in the face of ongoing economic and geopolitical instability.

OurCrowd Shines Amidst the Gloom

Amidst the pervasive downturn, one fund has managed to defy the odds: OurCrowd. Managing nearly $2.5 billion in capital, OurCrowd led the market with 16 new investments in the first half of 2024. Remarkably, this matches the total number of investments the fund made in all of 2023, demonstrating a rare beacon of resilience in an otherwise bleak landscape.

Other large funds, however, have not fared as well. IN Ventures, with $250 million under management, made only four investments, while Pitango, Israel's largest venture capital fund with nearly $3 billion in capital, executed just three deals. Similarly, Hetz Ventures Management, Hanaco Ventures, Cardumen, and Aleph each managed only three investments, despite managing substantial capital.

Foreign Funds Follow Suit

The contraction has not been limited to domestic players. The report reveals a significant slowdown among foreign venture capital funds that have traditionally been active in Israel. Samsung Next, for example, made just three investments in Israeli startups in the first half of 2024, a steep decline from the 13 investments it made throughout 2023. Conversely, some funds like NFX have managed to maintain stability, with five investments in the first half of the year compared to six in all of 2023. Notably, Andreessen Horowitz and Lightspeed bucked the trend by actually increasing their activity in the Israeli market.

The AI Gold Rush

In terms of sectoral investment trends, companies specializing in generative AI have emerged as the most attractive to investors, securing 26 deals in the first half of the year. This focus on AI reflects a global surge in interest in the technology. Meanwhile, fintech and cybersecurity sectors followed as the second and third most invested areas. However, other sectors, particularly automotive and deep tech, have seen a significant decline in investor interest, reflecting a shift in focus towards emerging technologies.

A Glimmer of Hope

Despite the gloomy outlook, the report indicates that not all is lost. There remains a substantial reservoir of "dry powder," or unallocated capital, ready for investment. As of the first half of 2024, this figure stands at over $10 billion, with $2.4 billion earmarked specifically for new ventures. This suggests that while the market is currently sluggish, there is still potential for a rebound if the right opportunities present themselves.

Conclusion: A Cautious Future

Ben Klein, CEO of IVC, encapsulated the current sentiment well, stating, "Due to the ongoing war and instability, we did not expect 2024 to be a normal year. The analysis of investor activity in the first half of 2024 reflects a challenging period for Israeli venture capital funds." He acknowledged the decline in total capital raised but also pointed out the market's underlying resilience. "We anticipate that in the near future, investors will prefer to focus on their portfolio companies and will selectively choose new companies."

The message is clear: while the Israeli venture capital market faces significant challenges, it is far from defeated. The next steps for the industry will likely involve a more cautious, selective approach to investment, with a focus on sustaining and growing existing portfolio companies until the broader environment stabilizes.

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