Happy New Year! 2022 is behind us now and the end of year reports are trickling in. 2022 was a year of two tales in Israeli tech – the first half, when it seemed that it was ‘business as usual’ and the second half, when it was clear it’s everything but usual. That’s of course part of a global trend. On a global level, venture financing of private companies dropped 33% year over year, from a record $733B in 2021 to $490B in 2022.
2022 in Israeli tech and venture
As Vintage Venture Partners put it in a recent presentation shared in Tel Aviv, 2022 started off well but fell of a cliff in the second half (the slides were shared on Twitter by Amitai Ziv from Tech 12)
While 7,838 tech jobs were lost across 120 companies in 2022, according to an analysis by Tech12, the demand for engineers remained high with 13,100 open engineering roles.
Israeli venture funding dropped 40% compared to 2021, from $28.7 billion to $17.1 billion according to the 2022 Israel high tech ecosystem report by Viola Ventures.
It’s worth noting that the numbers are still preliminary. A report by Greenfield Partners puts the total fundraising of Israeli startups at $15.16 billion (by 394 companies).
In 2022, a total of 72 M&A deals were closed, compared to 171 in 2021, a 58% drop. Total deal value this year was $16.9 billion, about a fifth of the same figure last year, with $82.5 billion, according to the Israeli high tech exit report 2022 by PWC.
The ten biggest exits of the year included a mix of IPOs and acquisitions
There are 85 Israeli unicorns, but only about 50% them justify a billion Dollar valuation, according to Viola’s report. As growth investments (and valuations) go down, unicorns might struggle to survive, according to Globes.
Israeli public tech companies saw market cap decline of 65% in 2022
In terms of sectors, in 2022 cycber, fintech and devops remained the most active investment sectors in Israel
Sector funding distribution according to Greenfield Partners
In addition to investments, the Israeli tech sector found itself getting more politically involved as the new government led by Prime Minister Netanyahu (who holds the PM for the sixth time) was sworn in.
Executives and VCs in the Israeli tech sector wrote public letters, tech leaders came out publicly against discrimination of any kind and voiced their concerns publicly, such as Bessemer’s Adam Fisher ‘Business in the Opposition’ post.
2023: hope for the best but prepare for the worst
In a time when the best fundraising advice is to ‘avoid raising in 2023 if you can’, I wanted to summarise where we are and what to expect in 2023. I relayed some of this in my recent Calcalist interview, part of the publication’s 2022 VC survey.
Looking at a sample of 34 funds who participated in the survey on the state of Israeli tech in 2022, the consensus is that 2021 was an anomaly, as one VC put it, in 2021 we were all winners, but equally, most agree that tough times are ahead.
A longer fundraising cycle: in recent years, the fund cycle contracted. Rather than a 5 year investment period, many funds were fully deployed/committed in the course of two years (and sometimes less). Large LPs are signalling the need to slow down, and funds realise it may take longer to fundraise. As a result, I expect to see slower pace of investing across stages.
Lower valuations, especially in later stage. The recent valuations analysis by Carta shows the valuation benchmarks across industry (note that the valuations are for the US market, so discretion is advised).
As Fred Wilson put in in his post ‘What will happen in 2023’
“I believe that ‘new normal’ is more or less where we were in 2015 where seed rounds were done around $10mm, A rounds were done around $15mm to $25mm, B rounds were done around $25mm to $50mm, and growth rounds had a cap at 10x revenues.”
Down rounds, especially for growth stage companies, and bridge rounds galore
We started to see down rounds taking place especially in growth stage. As I mentioned in my previous posts on founders’ tough choices, especially for unicorns, we can expect more pain ahead as the IPO window is currently closed and funding is scarce. But I agree with Techcrunch on this one, we need to de-stigmatize down rounds as they may be the bitter pull to swallow to survive 2023.
There are also of course reasons to be optimistic, despite the market news. In ‘the case for US venture capital outperformance‘ by Equiam you can see why 2023 might be an incredible vintage for investors. In a market of companies born in a recession, we are likely to see founders focus more on unit economics. Tourist capital is likely to go away, and valuations will become more sustainable as investors and founders will align on strategy to assure future up-rounds. I hope we will start seeing the bright line in the horizon from the second half of 2023.
Needless to say that for us, at Remagine Ventures, the fundamentals didn’t change. We are still open for business and looking to back pre-seed founders building category defining startups. So while the pace might be slower and the valuations lower, rounds are still getting done and startup founders are focusing on their fundamentals: building with the customer in mind and focusing on their structural advantage: speed.
Overall, 2023 is likely to be a bumpy year for tech, and we should all channel our inner ’23 mode and continue executing.