Israel’s Risks Overshadowed by Growth in Mega Rounds and Cybersecurity
Despite Israel’s risks, the investment landscape remains robust and dynamic. One might expect the “Israeli factor” to have a stronger impact, but the data suggests otherwise. While some investors are hesitant, others are attracted by high-quality companies and appealing valuations and instead seek to increase their investments. ‘Rising stars’ in the startup landscape continue to secure funding, especially those in popular sectors, while early-stage and early-growth companies in less-trending verticals do face greater funding challenges. Recent investment activity, the rebound of the Finder Nasdaq Index (see below), and M&A activity highlight the resilience and uniqueness of Israeli tech, showcasing groundbreaking solutions and continued global relevance. Innovative technologies, attractive valuations, and global consolidation in the cyber sector contribute to maintaining Israel’s status as a global innovation hub, drawing investors seeking high-quality opportunities.
Rebound in Private Funding Driven by Mega Rounds
Private funding in H1 2024 saw a 31% increase compared to H2 2023, amounting to $5.1 billion raised across 322 rounds. Further estimates suggest this figure could reach $6.7 billion when accounting for unreported rounds and undisclosed amounts. Q2 was particularly strong, with funding rising from $1.8 billion in Q1 to $3.3 billion in Q2. Fourteen mega-rounds (those above $100 million) contributed $2.8 billion, representing 56% of total private funding, overshadowing weaker sectors and providing much-needed funding for many early-stage and mid-stage companies.
Cybersecurity’s Increasing Dominance
The Cybersecurity sector played a crucial role in the Israeli tech ecosystem, representing 52% of private funding in H1 2024. This prominence was highlighted by Wiz’s record $1 billion round. Additionally, Cybersecurity M&A exits totaled $1.5 billion across 9 deals, accounting for 35% of 2024 H1 exits.
Examining global trends in cybersecurity funding reveals a notable divergence between the US and Israel. In 2018, cybersecurity accounted for 20% of the funding in both ecosystems. Over the years, the share in the US declined to approximately 13%, while in Israel it grew to 25%. By H1 2024, cybersecurity funding in Israel had surged to just over 50%. These trends underscore the sector’s critical importance and attractiveness to investors.
However, it is difficult to separate this from the global context. The consolidation of solutions worldwide has led to an acquisition spree by both Palo Alto Networks and CrowdStrike, whose duration is uncertain. Notably, we have seen Cisco’s $28 billion takeover of cybersecurity and analytics company Splunk earlier this year, and discussions about Google potentially acquiring Wiz as part of its Cloud strategy. Additionally, we observe the significant ambitions, progress, and acquisitions of Wiz, SentinelOne, and Check Point. This global competition is felt strongly in our ecosystem because of our relative advantage in cybersecurity. However, if the ecosystem remains overly dependent on cybersecurity in the long term, it risks missing out on other significant trends and opportunities.
Global Funding Comparison
Israel’s private funding growth of 31% in H1 2024 outpaced other regions. The US saw a 28% increase, while Europe and Asia experienced declines of 6% and 18%, respectively. Israel’s significant Q2 surge was notably higher than the more gradual trends observed in the US, Europe, and Asia.
Surge in M&A Exit Activity Despite Low Number of Deals
M&A exits in H1 2024 surged to $4.1 billion despite fewer deals, a 70% increase from H2 2023. Aside from H2 2021, this marks the highest value since 2018 and continues the upward trend from H1 2023. Notable deals included two acquisitions each exceeding $1 billion. Looking at all M&A activity, total transactions reached $7.1 billion, matching the previous half.
Global Investor Participation is Pivotal
Global investors took a key role in H1, accounting for 46% of the 217 active investors in Israel. These investors participated in rounds accounting for 93% of all funding, a seven-year peak. Of note are leading global investors Insight Partners and NFX Capital, each of whom conducted seven rounds, while Sequoia and Greylock reopened local offices.
Finder Nasdaq Index Signals a 2024 Rebound in Private Funding
The new Finder Equal-Weight (EW) Index, based on Israeli tech companies traded on NASDAQ, has revealed significant trends correlating with Israel’s tech ecosystem private funding. Notably, the Finder Nasdaq Index may serve as a forward-looking indicator for Israel’s private funding approximately 6-12 months in advance, providing investors and stakeholders with an early warning system to anticipate and prepare for market shifts.
A closer look at changes to the index reveals significant divergence coinciding with the government’s introduction of the Judicial Reform, which led to a decline in the index, followed by further underperformance due to the outbreak of war in October 2023. This war-related underperformance narrowed, reaching parity with the NASDAQ EW index by March 2024. However, following S&P’s downgrade of Israel’s credit rating, the gap widened again, underscoring the geopolitical and economic challenges faced by Israeli tech companies.
Public Companies and PIPEs
PIPE (Private Investment in Public Equity) funding increased by 90% to $359 million, maintaining its status as a primary source of investment for public companies amidst a dry IPO market.
Sector Private Funding Analysis Reveals
– Cybersecurity: Reached its fourth all-time high.
– Agrifood and Climate Tech: Grew beyond 2020 levels.
– Fintech: Stabilized at 2018 levels.
– Health Tech: Continued its decline from 2021 highs.
– Business Software: Reached a seven-year low in funding while accounting for 25% of total M&A exits.
In summary, with 7,158 active startups and 217 active investors, private funding rebounded and M&A activity surged. Global investors continued to play a pivotal role. This growth underscores the confidence in Israeli tech innovation but should not obscure the challenges of raising capital and growing companies across funding stages.
H/T: Startup Nation Central
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