Looking at the Israeli Tech ecosystem trends for H1-2022, one thing is clear: 2022 marks a significant change. We’re seeing the impact of the public market volatility on the global private market as well as on the Israeli startup ecosystem.

Back to Consistent Growth, but Not 2021 Numbers

There’s no escaping the fact that funding volume has decreased from 2021. Capital raised in the Israeli tech ecosystem in H1-22 reached $9.4B. This signifies a 27% drop from H1-21, but still maintains Israel’s healthy long-term funding growth, boasting a strong growth pace of 26% over a 5-year period.

In looking at global funding activity (also flattening in H1-22), Israeli funding trends are in alignment: Global funding slowed dramatically, dropping 14% from H1-21 to H1-22 .


Although small in population – Israel keeps its global ranking

We can also see that Israel has maintained its ranking as the 5th largest tech ecosystem worldwide and is still ripe with unicorns. Coming in at 2nd globally, Israel sprouted twice the number of new unicorns growing in China (27 new unicorns in H1-22).

These numbers are in line with the notion that while the global and Israeli markets are experiencing a relative downturn, numbers are still higher than those of 2020.


Public Market’s Effect on Private Market

Both US and Israeli public companies took a hit with a 55% drop in market cap over H1 of 2022. Though public and private markets seem disconnected at times, there’s no escaping the fact that they are intertwined.

In the last few months, reported private capital investment was growing while public indices and valuations plummeted. Nevertheless, the spread between the markets is contracting as the impact of changes in public markets materialized in the private markets.

Overall, when analyzing the data, we see a lag of 2-3 months between public markets valuation changes and private markets reported investments. This lag can be explained by several factors, such as the time elapsed between investment commitment and round announcement, dry powder levels of VC firms, deal dynamics, etc. As such it takes time between public market changes to materialize in private market reported investment data.


Mega Rounds are Dropping; Early Stage Show Initial Signs of Impact

When looking at the long-term overview, we see positive trends across each stage: Mega marking a 57% CAGR since 2019, Growth marking 31%, and Early at 11%.

However, 2021 is still markedly an outlier, especially when it comes to Mega rounds, which dropped by 35% in funding value. With investors shying away from later-stage funding bets, the number of Mega rounds has also dropped from 38 to 26 in 6 months. However, this is expected given how close companies at this stage are to the public market. We do expect this trend to continue within Mega round funding as we move into Q3.

Growth stage funding is also experiencing a slowdown, though a milder one, with growth round deal counts dropping from 74 to 72 in H1-22. Going into H2, we anticipate to continue seeing the impact of the downturn which we are already sensing in the market.

While Early stage funding activity decreased from H1-21’s $3.4B to $2.9B in H1-22, deal count activity is growing. Initial signs of change can be seen in the decrease in round sizes. We expect to see more significant impact in the next quarters, with an increased deal count at lower round sizes for Early stage companies.

Foreign Investors are Investing in Earlier Rounds

Leading USA venture capital firms are continuing to consistently and increasingly invest in the Israeli ecosystem since 2020. Though the number of deals decreased from 52 in H2 of 2021 to 40, it is still significantly higher than H1 0f 2020’s 19 deals.

However, the more interesting trend is that these foreign investors are moving away from the pre-IPO Mega rounds and towards the Early stage rounds, where the number of deals led by top US funds grew from 14 to 21.

Cyber and IT/DevOps are Stars as the Market is Craving Stability

Taking a look at investment breakdowns by domains, we see Cyber security keeps its lead, with 24% of the funding in H1-22. Fintech is experiencing a slight slowdown, (primarily due to the significant drop in Growth and Mega rounds). This may also be connected to the many fintech IPOs the last year have brought about.

The rising star of H1-22 is undoubtedly IT/DevOps and data infrastructure – attracting 13% of capital invested in the local ecosystem, with an increasing volume of Mega-round funding.

Towards an M&A Market

As public markets continue to freeze, the M&A market is getting stronger this year. Notable M&As we’ve seen so far this year were , Tower acquired by Intel ($5.8B), Zimperium acquired by Liberty ($525M), Granulate and Intel ($650M), Siemplify and Google ($500M) as well as Cellwize and Qualcomm ($350M).

We expect M&A activity to continue and even accelerate, driving liquidity in the near future. 

Looking forward:

As we gear towards the second half of 2022, we believe the changes we see will create an opportunity for the ecosystem at large. to go back to basics. Founders and investors alike will benefit from a renewed focus on real product market fit, healthy growth, and valuations that are tied to business performance.

History shows that the best tech companies are created in such periods. We believe that we will continue seeing innovation driven by the digital transformation, and that Israel is well-equipped to lead in these times of volatility.


Want to hear more about the Israeli Tech Ecosystem? Click here