After two years of a high-tech boom, involving glittering parties, huge IPOs on Wall Street and crazy celebrations of increased salaries – reality has crept back: Two studies published in early January indicate that the surge we witnessed in high-tech in the last two years was replaced in the second half of 2022 by a downward trend with no end in sight, and it seems that the decline is not going to stop soon either.
The reports – one by "Startup Nation Central" (SNC) together with the SNPI research institute, and the other by LeumiTech together with the Israeli research company IVC – examined the state of high-tech in Israel, according to the funding that flowed into it, the "exit sales" in which companies were bought by others, or the shares that were issued on the stock exchange.
The most significant decrease indicated by the reports is in the scope of investments in high-tech. According to the SNC report, total investments in high-tech, which reached $27.6 billion in 2021, decreased by 44% to $ 15.5 billion in 2022.
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The report deals with investments by venture capital funds (VC) that invest money from private investors, companies, or other funding sources in start-up companies. Start-ups live or die by virtue of the decisions made by the funds. The decline indicated by the reports is even more severe if you take into account the fact that two-thirds of the money raised in 2022 was done so in the first half of the year, which was, in fact, a continuation of 2021, a year with an unprecedented record in activity in the high-tech industry.
In the second half of 2022, the volume of investments already decreased by about 50% – from $10 billion in the first half of the year to $5 billion in the second half, reverting to the volume of investments at the beginning of the current decade.
A Hopeless Situation
The reports reveal that in addition to the decrease in the volume of investments, the rates of investment transactions (funding rounds), exits (mergers and acquisitions), and public offerings on the stock exchange also dropped.
According to the SNC report, the number of investment transactions decreased by 25% - from 1,103 rounds in 2021 to 826 rounds in 2022. The number of exits decreased, according to IVC, by 44%; from 158 transactions in 2021 to 89 transactions in 2022. The financial volume of the exits decreased by 33%; from 7.8 to 5.3 billion dollars. The number of issuances returned to the levels of the previous decade, and in 2022 had 18 issuances compared to 76 issuances in 2021.
The SNC report also examined the situation in specific sectors of Israeli high-tech and found that the sharpest decline was experienced in cyber. According to the report, investments in cyber companies fell by 60%.
On a positive note, the reports indicate a 22% increase in investments in new companies – from $1.3 billion to $1.6 billion. Does this indicate a collapse? No. The CEO of Start-Up Nation Central, Avi Hasson, explained that a perspective over several years, "shows that the irregular year in Israeli hi-tech was actually 2021, and not 2022. The unrealistic jump in investments in 2021 only corrected itself."
Even so, according to Hasson, we are not expected to see investment volumes rise again in the near future. He believes that the declines and the background of macroeconomic processes in the world, mainly the rise in interest rates, are signaling a "difficulty in raising capital funds, which may affect capital available for investments in 2024 and 2025 because the funds will not be able to show successful exits." In other words, Israeli start-ups may face a stalemate in the next two years, which will put their existence in jeopardy.
The industry is expressing concern that as the crisis deteriorates, the wave of dismissals may intensify and reach even positions that until now have benefited from immunity against layoffs. Developers, for example; "In 2021 employees were commending the situation, but everyone knew that it had to be amended. Salaries skyrocketed and even if you were paying out high salaries, there was no one to hire," says attorney Guy Lachman, partner and co-director of the high-tech group at the Pearl Cohen Law Offices.
According to Lachman, "this trend has changed and now the employers are in control. This allows them to do all kinds of things, such as dismiss employees, reexamine salaries, limit projects and units, or focus on sales."
John Medved, founder, and CEO of the investment platform OurCrowd, one of the largest investors in 2022, also believes that the wave of layoffs is not coming to an end: "I forecast more layoffs and "belt-tightening," but it is still difficult to envisage whether the atmosphere will continue to be negative throughout most of the year."
According to Eyal Lifshitz, CEO of the "Peregrine" fund, which specializes in investing in life science companies, "Each company has to decide where to concentrate its efforts so that the money will last longer, and there are, of course, also layoffs – not only in supportive positions."
"Show Your Support When Needed"
What must the government and the business sector in Israel do now, to ensure that the decline in investments does not deteriorate even further into the closing of companies and widespread waves of layoffs? Hasson explains that "the current crisis underscores the need to create diversity in leading technological sectors in the Israeli high-tech economy and the necessary development of economic 'legs' and other sectors that can contribute significant economic and technological value to Israel and the entire world."
According to Hasson, the pending crisis is also the right time to talk about government support and guidance: "Government intervention should be given when the economic cycle is declining and that is precisely when support is needed."
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