As Q3-2022 wraps up, we continue to see ongoing economic volatility across the globe which is impacting both the public and private markets and Israel is no different. The strong correlation between the public and private markets is also affecting the Israeli fundraising environment.
Private Markets Are Down, Following Public Markets Performance
Total investments decreased in Q3 by 36%, with a total of $2.8B. While this is a large number, this was to be expected as we explained in our H1-22 report, there is a lag of 2-3 months between public markets valuation changes and private markets reported investments. The capital committed in Q2 was reported in Q3 and therefore, reflects the impact of the public markets in Q2 on private markets. We expect that as long as the downturn continues, we will continue seeing the impact on private markets with this kind of lag.
As data is scarce in private markets and often is reported with a lag, signs of change in the dynamics of the market are sometimes challenging to identify. We sought to provide some data points from various angles to shine a light on leading indicators of this change, which we anticipated in our previous report.
Deal Count is Decreasing, Especially in Mega Rounds
Startups saw an 69% YoY drop in Mega deal (>$100M) count rounds in Q3-2022. This is significant yet expected, as Mega rounds tend to be most closely affected by the public market. Growth deal counts also saw a notable drop of 47% YoY.
Investment Pace is Slowing Down
The overall trend is also evident when looking at investment pace – The percentage of VC investments in Israeli startups dropped by 30% this quarter, with Israeli-VC investments dropping by 29% in Q3-22, very similar to the drop in investment by foreign investors which stands at 35% in Q3-22.
Uptick in Extension Rounds at Early Stage
We continue to see the challenging fundraising environment in Q3, with more early stage startups (seed and A) pursuing extension rounds. This uptick indicates a need for more capital by early startup founders, who were willing to raise money on the terms of their previous rounds, despite the growth they’ve experienced. Extension rounds are early indicators of a harsh fundraising environment. As the environment gets harsher, we may see additional indicators, such as more down rounds.
Growth stage companies, on the other hand, have sufficient funds following the fundraising environment last year. Therefore they are restructuring their budget and/or exploring the venture debt alternative to secure a longer runway and postpone the fundraising timing. As a result, we anticipate to see an uptick in growth rounds in 2023.
Despite the Somber Reality – Downturns Often Produce Waves of Innovation
While Q3-22 performance continued 2022’s downward trend, that’s not to say we can’t look forward to what’s to come. Think about the 2008 economic crisis and the wave of innovation that resulted. Game-changing companies across multiple industries were started, many of which are still meaningful to this day: Instagram, Groupon, AirBnB, Venmo, Asana, just to name a few. Many of these companies even created entirely new business models and categories of commerce.
We believe this is the time for companies to make bold considerations – focus on long term value creation rather than short-term fixes, diversify revenue streams, hone in on long term sustainable aligned business models, and seek accretive M&A.