Following a record-breaking 2021 for private tech investments, 2022 will be remembered globally as the year of the bubble burst and the return to fundamentals, and it was no different for the Israeli fundraising environment.

From Post-COVID High to Looming Recession

The macro-environment was extremely volatile in 2022. The decades-high inflation led to interest rate hikes, which impacted the performance of public markets. The tech industry, which enjoyed the prior record highs of 2021, took a strong hit, with multiples falling below pre-pandemic average.

Reflecting this, private tech investments globally fell from a record $733B in 2021 to $490B in 2022, a YoY drop of 33%. However, looking at 2021 as an outlier, the 3-year CAGR is still at a healthy 14%. Yet, from a quarterly perspective, we saw a decline from quarter to quarter, leading to a 3-year low in Q4-2022, with a drop of 65% when comparing Q4 ‘22 to Q4 ‘21.

Consequently, private companies found themselves reconsidering their fundraising plans, readjusting their spend to extend runways, and refocusing on efficiency, rather than fast growth. Investors, in turn, invested less capital in fewer deals at lower valuations and increased their threshold for investment.

Israel’s Funding Environment Facing the Impact, While Maintaining its Place as 5th Largest Tech Ecosystem

2022 saw a dramatic valuation correction in the public market which also impacted the Israeli tech companies listed on the US stock exchange.
Viola’s Israeli Tech Index (ITI) includes 31 of these companies with the goal of providing a standard way of comparing Israeli companies listed on US stock exchanges to main tech indices. Looking at 2022, ITI shows very similar performance to EMCLOUD – and yet sags significantly below the NASDAQ. Israeli companies that went public during the 2021 high, saw a steep 65% drop compared to December 2021.

Following the decline in public markets, we see a respective decline in capital committed in the Israeli private market, with a typical lag of a quarter. In fact, Israeli companies have faced a particularly severe decline – 40% compared to 33% globally (YoY), which also reflects the adjustment following the disproportionate growth in 2021. The decline experienced locally in Q3-22 turned sharper in Q4-22, with deal count even lower than at the height of the pandemic. The capital raised during Q4-22 was at $2.4B, a 74% drop compared to Q4-21.

Still, the 3 year CAGR is at 20% (compared to 14% globally), showing a steady growth, when looking at the previous year as an outlier.
Even with these numbers, Israel maintained its respectable place as the 5th strongest ecosystem in the world.


Only 15% of Foreign ‘First-Time’ Investors Invested Again in 2022, Leading to a 75% Drop in Mega Rounds

When it comes to performance across company stages, we consistently see later stages getting most of the impact. Mega stage deals showed the highest increase in 2021, followed by the sharpest dip (at 75%) in 2022, which was especially noticeable in H2. For growth stage companies, the impact took more time, with the brunt of it coming into fruition in H2, showing a 50% decrease in capital raised (at $1.8B compared to $3.6 in H1) and average deal size falling to $43M.

There are many contributing reasons, but a notable one is the foreign investors who were uber-active in leading late stage rounds in 2021, only to abandon ship in 2022. In fact, 40% of Growth and Mega rounds in 2021 were led by investors who’ve only invested one time in 2021. For 70% of them, this was their 1st ever investment in Israel. In 2022, only a mere 15% of them invested again locally.

In H2, we’ve seen the market volatility impact reaching Early-stage companies as well. This was reflected in a 37% drop in capital raised, as well as a significant decrease in deal count, falling from 600-700 deals to 450-500 deals in the last 2 quarters of the year.

Cyber and DevOps Dominate

When it comes to verticals, Cyber held strong with IT/DevOps following suit, and surpassing FinTech, Retail Tech and Healthcare. The turbulence FinTech is facing seems natural, when thinking about this vertical’s sensitivity to interest rate hikes.

A New Cohort of Unicorns Seeks Validation

2022 isn’t a year when 21 new unicorns can be taken for granted. And yet the new cohort of unicorns – which brings Israel’s total count to 85 – is facing some harsh realities. Following the volatile public market performance and considering their current revenues and offerings, we believe that only 50% of those unicorns can actually justify that coveted title. The other 50% will need to grow into their status, not a mere feat in this market. We also believe that we’ll be seeing very few unicorns emerge in the coming year – as the ones already minted will be struggling to hold on to the title, and newcomers will have a harder time hitting those benchmarks.

M&As – Searching for an Alternative Exit Route

In the absence of SPACs and IPOs, 2022 has seen an M&A comeback, and it’s not going away anytime soon. M&As have held strong with $18B in capital and 109 in dealcount this year. Notable deals include Viola’s portfolio company ironSource’s strategic merger with Unity (which was completed in November 2022).

What’s Next? A Look Toward 2023

A Light Hand on Dry Powder: Even in those turbulent times, disruption and innovation are not going anywhere. VCs still hold significant dry powder – $586B in 2022 – and while we are sure to see continued caution and risk-aversion, we expect to see an increase in equity fundraising in H2/2023.

From Equity to Debt: Debt financing will be more attractive this coming year, especially for late-stage companies. Debt avoids significant dilution, and allows to extend the runway without setting a valuation price. Still, similar to equity, the cost of debt increases and will become scarcer.

Exits Ahead: With deep-pocket potential buyers (be it strategic or private equity) in the market, M&A activity will continue to rise. Not only is the IPO window expected to stay closed for the foreseeable future, M&As also offer attractive multiples for buyouts and rollups, making them the main contender for exits in 2023.

Efficiency Rules: Growth will be taking a step back as a single leading indicator for valuations. A more blended set of metrics of both growth and profitability will be key in the near future. The rule of 40% will continue regaining its importance as a valuation indicator and validator. We’ll see a stronger focus on sustainable business models, putting aside growth for the sake of growth.

Deal Dynamics Reshuffle: In 2022 we saw deal dynamics starting to change between the different parties involved, investors and founders. 2023 will see this shift becoming more pronounced. The standards for raising money have changed dramatically on several axes – timing, required KPIs, negotiation power, etc. Raising funds on dreams alone will be more challenging and investors will look for more real traction in the form of revenue. In addition, revenue on its own will not be sufficient and some measures of efficiency will also be required. Governance will be more pronounced overall, with a higher attention to due diligence, and to reporting and audits. As equity becomes more expensive investors will command higher ownership for each invested dollar and founders will face higher dilution. All in all, we expect to see lower valuations, more structured deals and more down rounds.

These may be challenging times, and yet there are opportunities here for all stakeholders. We believe the Israeli Tech ecosystem has strong fundamentals to weather this storm and maintain its position as a global leader.