Israeli startup funding plummets 60%, yet M&A landscape thrives with cybersecurity focus

After diligent assessment, the "Trends and Forecasts" conference in Israel provides some unexpected conclusions about the Israeli tech market: Cybersecurity and M&A seem to be flourishing, while startup and VC fundraising have taken a massive blow.

In the ever-evolving realm of Israeli high-tech entrepreneurship, the cybersecurity sector has taken center stage, commanding a formidable 70% share of the mergers and acquisitions market. This revelation unfolded during the sixth annual "Trends and Forecasts" conference, which gathered 200 venture capitalists, angel investors, innovators, and serial entrepreneurs.

The conference offered a comprehensive assessment of the performance of Israeli high-tech companies amidst challenges such as high-interest rates, legal changes, and the ongoing war. Despite the formidable obstacles faced in 2023, the prevailing sentiment among participants remained cautiously optimistic for the upcoming year.

Fundraising volumes have stabilized, but investment has diminished

A comprehensive report highlighted a significant decline in the scale of VC fundraising. Only 10 new funds raised a total of $1.4 billion in the first three quarters of 2023, in stark contrast to the 51 funds that raised an aggregate amount of $4.5 billion in 2022.

However, fundraising volumes have stabilized, with $500 million in the first quarter of 2023, followed by $400 million in the second quarter and another $500 million in the third quarter. In comparison, 2022 saw fundraising totaling $2 billion in the first quarter, $1.3 billion in the second quarter, $700 million in the third quarter, and $500 million in the fourth quarter.

In a surprising development, unicorn company announcements have become increasingly rare, with only three companies achieving unicorn status in 2023: AI21 Labs, BioCatch, and Lendbuzz. This is a stark decrease from the 18 unicorns announced in 2022 and the 35 in 2021, reflecting a 91% decrease from the previous year.

While the exit market and public offering scene in Israel remain stagnant, mirroring trends in the US and Europe, the mergers and acquisitions market in Israel has undergone a remarkable acceleration. In the first three quarters of 2023, 27 transactions totaling $4 billion were announced, marking a 70% dominance by the cybersecurity industry due to consolidation.

During a panel discussion at the conference, industry leaders sought to forecast investors' activity for the upcoming year, considering the ongoing war. Guy Lachmann, Senior Partner at Pearl Cohen Hi-Tech Group remarked on the industry's resilience. “The year 2023 proved to be one of the most challenging periods in the industry's history, marked by numerous disruptions, challenges, and difficulties that surpassed any reasonable expectation," he said.

The conference concluded with Guy Katsovich underscoring the significance of the "Trends and Forecasts" event in fostering connections and networking among investors. “In challenging times like the present, uniting industry professionals serves as a force multiplier and is vital for improving overall industry performance,” he said.