The Rebound of Israel's VC Sector: Thriving Amidst Adversity

OVERVIEW 

Israel’s entire world was flipped upside down on October 7, 2023. It was a tragic day, marking the highest loss of Israeli and Jewish lives since the Holocaust, and its impact is still deeply felt today. I want to explore how the events of October 7th and the ensuing war immediately affected Israel's economy, with a particular focus on the venture capital sector. This article provides a comprehensive analysis of the venture capital ecosystem, covering the period from Q4 2023, when the war began, through the rebound in H1 2024, and offering a future outlook for H2 2024.

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GLIMPSE INTO THE PAST

In Q4 2023, according to Crunchbase data, Israeli startups raised approximately $516 million across a modest 42 deals. This marks the lowest total amount in venture funding since Q1 2017—when Israeli startups raised $463 million. The funding amount represents a 69% decrease from the previous quarter, which saw $1.6 billion invested in Israeli startups, and a 54% drop compared to Q4 2022. 

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However, these numbers are not surprising, given the unpredictable nature of the ongoing war, which had only just begun at the time. Additionally, many startup founders were being called up for reserve duties, and the uncertainty made it difficult for investors and entrepreneurs alike to know what to expect in the coming months. 

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In spite of everything, after the attacks, we witnessed something remarkable. There was a large rally of foreign investors, partners, and customers who continued to support, fund, and even acquire Israeli cybersecurity startups, despite the lack of certainty. While it wasn't enough to bring the sector back in line with Q3 figures, it did foster optimism about growth in 2024—and that's exactly what happened.

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H1 2024

In the first half of 2024, private funding soared to an impressive $5.1 billion, marking a 31% increase compared to the second half of 2023. This growth was particularly evident in the first quarter of 2024, which alone saw funding reach $1.8 billion—a staggering 260% increase from the fourth quarter of 2023 and a 38% rise compared to Q1 2023, prior to the war. Moreover, Q2 2024 saw a remarkable $3.3 billion in funding, marking the highest quarterly total since Q2 2022. The most commonly invested in sectors in H1 2024 were Cybersecurity, Business Software, Fintech & Insurtech, Health Tech, and Climate Tech.

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The cybersecurity sector played a significant role in this resurgence, accounting for 52% of private funding in the first half of 2024. Furthermore, H1 2024 witnessed 14 mega rounds (funding rounds over $100 million), up from just 8 mega rounds in the second half of 2023.

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Additionally, global investors took a key role in H1, accounting for 46% of the 217 active investors in Israel.

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FUTURE OUTLOOK- WHY TO INVEST NOW

Now is the time to invest in Israeli startups. We are already witnessing an upward trend in VC investing in comparison to 2023, and this momentum is expected to carry through the second half of 2024. This should not come as a surprise, as the ecosystem has demonstrated incredible resilience and vitality, attracting global companies to establish or expand their presence in Israel. Both domestic and international investors are actively pursuing opportunities in early and late-stage ventures, and we are confident that this dynamic growth and unwavering resilience will continue into the second half of the year. This continued growth is expected to drive a strong emphasis on the cybersecurity and AI sectors, which are set to play a pivotal role in shaping the future landscape of innovation.

‍Cybersecurity and AI: Investing in Israel's cybersecurity and AI sectors presents a compelling opportunity for venture capitalists due to the nation's unique combination of technological expertise, geopolitical significance, and a thriving innovation ecosystem. Israel has long been recognized as a global leader in cybersecurity, supported by its robust tech infrastructure and a highly skilled workforce, many of whom have gained deep technical experience through military service. The country's expertise in cybersecurity, artificial intelligence, machine learning, and data science positions it at the forefront of developing innovative solutions that address modern security challenges. The ongoing global focus on digital transformation and the increasing prevalence of cyber threats from Iran and its proxies throughout this ongoing war underscore the critical importance of advanced cybersecurity and AI technologies. Furthermore, Israel's strong local market, supported by government agencies and corporations eager to adopt cutting-edge technologies, provides a solid foundation for startups to scale and gain credibility, facilitating entry into international markets like the U.S. and Europe. With substantial opportunities in both public and private sectors, investing in Israel's cybersecurity and AI industries promises not only significant financial returns but also the chance to be part of the next wave of technological innovation in an increasingly digital world.