Is political unrest taking a toll on Israeli startups?

VC investment has declined further in Israel than it has globally, report finds

Now that the first half of 2023 is officially behind us, we are going to get a flurry of data on VC investment around the world. This will allow us to paint a global picture and zoom in on countries where specific factors might be at play.

Today, we are looking at Israel by way of a new report from Israeli VC firm Viola. It offers data on how much capital Israeli startups raised in H1 and how that compares to previous years. But its authors also venture a few hypotheses on the reasons behind this decline.

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Both on my mind and on Viola’s, of course, is the political crisis Israel finds itself in since the beginning of 2023.

After the Netanyahu government announced its intent to overhaul the country’s judicial system and balance of powers, a series of anti-government protests have continued across the country.

Israel’s tech ecosystem didn’t stay out of the political unrest; entrepreneurs and investors have become key players behind anti-government protests. And more generally, concerns have emerged on the damage that could be done to the country’s economy, of which the tech sector accounts for a significant part.

With this in mind, let’s look at the data compiled by Viola to see how VC investment into Israel fared this year so far — unfavorably — and what might explain its decline.

It’s not looking good

With a provisional tally of $3.2 billion for the first half of the year, funding activity in Israel dropped by 73% compared to the same period in 2022, IVC data shows.

Subscribe to TechCrunch+PitchBook data interpreted by Viola reveals a 50% year-on-year decline globally, meaning that Israel fared worse than the rest of the world. And $3.2 billion is also less than Israeli tallies in years prior to 2022.

Unsurprisingly, Israeli startups raised less in the first six months of this year than in the same period of 2021 ($13 billion). In the country, like elsewhere, 2021 was an outlier. But H1 2023 also falls short of H1 2020’s $5.7 billion total. It also fails to meet pre-pandemic levels; in H1 2018 and H1 2019, Israeli startups collectively raised $3.7 billion and $4.7 billion, respectively.

Breaking down the data by stage reveals that the latest and largest rounds are the most affected. The amount of capital that Israeli startups raised through mega-rounds fell by 80% compared to the first half of 2022; growth rounds amounted to 71% less year-on-year; and early-stage rounds saw a 56% decline.

Again, this picture isn’t unique; globally, the latest stages have also been the most affected by public market woes trickling down to private valuations stage by stage. However, Viola points out that the 31 companies it tracks in its Israeli Tech Index are performing in line with their U.S. peers in terms of market cap. Why, then, are Israeli startups seeing a more intense funding slowdown than elsewhere?

Understanding the slowdown

Viola’s report includes several hypotheses as to why investment diminished more in Israel than in other countries last semester. Some reasons, it turns out, pre-date 2023.

“​​During Q1 and Q2 of 2022, Israeli startups have consistently raised more than their global peers,” the authors of Viola’s report note. Similarly, TechCrunch+ reported that Israel experienced fewer negative outcomes from the slowdown than other geographies in the first half of 2022.

A better 2022 leaves Israeli startups in a more favorable situation than others. Per Viola’s interpretation, maybe they aren’t braving the current fundraising environment because they don’t need to. “Israeli startups raised larger rounds, resulting in longer runways compared to [their] global peers,” according to the report.

In addition, a better 2022 also makes any decline seem sharper. In Viola’s words: “A higher tide leads to a lower ebb.” Viola also notes that the data might be missing some unannounced extension rounds, since startups don’t love to brag about flat valuations; however, this would affect all startups equally, not just Israeli ones.

This leaves us with the last factor that Viola mentions: political unrest.

It is not just local players getting involved. “Foreign investors are cautious in the face of uncertainty,” the report notes. In another slide, the authors write that the 80% drop in mega-round capital is mostly due to the fact that foreign investors who were “uber-active in 2021” abandoned ship in 2023; while this is a global change in behavior from crossover funds, it is hard to think that political context didn’t at least play a small role, too.

Why, then, does Viola see reasons for optimism we can agree with? The political crisis is certainly not over, but the so-called Startup Nation has shown its resilience before, and some of its characteristics could result in tailwinds in the second half of 2023.

“AI everything,” climate tech and digital transformation are three hot investment areas where Viola thinks Israel is “well-positioned to shine.” Case in point:, an AI-enabled weather intelligence platform. Previously known as ClimaCell, it raised one of last semester’s largest funding rounds in the country — an $87 million Series E — and we wouldn’t be surprised if more similar deals followed in the second half of the year.