Israel startups raise record $2.74 billion in Q3, but early-stage funding dives

Israeli high-tech companies raised $2.74 billion in 151 funding deals in the third quarter of the year, setting a quarterly record despite the coronavirus pandemic, data by IVC Research Center and Zag S&W shows. The data shows that investment in startups in seed stage crashed by 47% in the first three quarters of the year, compared to the same period a year earlier, as investors shun risk.

In the third quarter of the year the amount raised by Israeli firms was 24% higher than the amount raised in the same quarter a year ago, $2.21 billion, and 26% higher than the amount raised in the second quarter of this year, the data showed. In the second quarter of the year, the amount of funding dipped to $2.17 billion, from $2.62 billion in the first quarter of 2020, but was still higher than the amount raised in the second quarter of 2019, $1.98 billion.

During the first nine months of the year (Q1–Q3/2020), capital-raising amounts nearly surpassed the entire capital amount raised in the whole of 2019, IVC and Zag S&W said in a statement.

Most of the funds raised in the third quarter of the year, 86%, came from VC firms, with both Israeli and foreign investors making more investments in the second and third quarter of this year than on average over the last five years. Most of these investments went to their existing portfolio companies, the report said.

“While the data for Q2/20 hinted at a possible slowdown, the third quarter proved the exceptional strength of the Israeli high-tech industry,” said Shmulik Zysman, the managing partner at ZAG-S&W, in the statement. “The covid-19 pandemic is still here, but so is the high-tech industry. Total investment in Q3/20 was the highest ever.”

Israel has enforced a second lockdown in a bid to combat a second wave of the coronavirus pandemic. The nation’s economy is forecast to decline by 5.9% this year, according to an October International Monetary Fund report. This compares to a decline of 5.8% forecast this year for advanced economies and a 4.4% contraction globally.

In the third quarter of the year, the life sciences sector accounted for one in four deals, Zag S&W’s Zysman said.

Even so, investors are risk averse, preferring to invest in later stage ventures, and avoiding companies at early stages of development and growth, he said.

Even with the shortfall in early stage investments, he said, Israeli’s tech sector “will be a key factor in the recovery of the Israeli economy.”

Later-round investments for the first nine months of the year totaled $3.2 billion — a 34% rise compared to the total capital raised in later rounds over the whole of 2019, when $2.39 billion was raised in later rounds.

Just $92 million was raised in 95 seed deals, so far this year, compared to $172 million raised in the first nine months of 2019, and $234 million raised in seed deals in the full year 2019.

“The traditional seed investors preferred to stay away from the risky asset classes for the moment,” the report said, including angel investors, VC funds and accelerator programs.

“There is still more than enough money at the Israeli dedicated venture capital funds, but their appetite for risks has declined,” said Marianna Shapira, research director at IVC Research Center.

The data also showed an increase in the number of private investors investing in public entities. The number of so-called PIPE (private investments in public entities) deals rose in the second and third quarter of this year, especially in healthcare and tech firms. Some $1.66 billion was raised in 17 PIPE deals during Q3, the report said.

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Written by Aakash Malu


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