A new report on global venture capital investment volume shows that H1 2020 investments in startups reached $129 billion (this includes all stages as well as CVC activity). It’s a 6.5% decline from H1 2019 ($138 billion), but the impact on VC funding is less than originally projected. It appears that VCs got comfortable doing deals over Zoom.
On a regional basis H1 2020 VC investment activity shows varied impact:
“VC investors did not shy away from either first or
Israel tech fundning report Q2 2020, IVC
follow-on investments, bringing the number of VC deals to a record in Q2/2020″
What might explain the record breaking deal activity in Israel?
It’s unclear whether Israel managed to buck a global downward trend, or wether the investment volume was driven by overly optimistic investors and high levels of dry powder in the market. Let’s examine some of the pros and cons of the current state of the Israeli tech sector
Pros
- Innovation never stopped in Israel – several sectors are seeing increased activity as a result of Covid-19 including health, enterprise software for remote work, cyber security, e-commerce etc. Israel attracts over 25% of global investment in cyber for example and health investments in Israel rose to 70 in the past six months.
- More talent is getting into the tech sector – a new report by IATI and KamaTech showed that the number of Haredi (Jewish Orthodox) employed in the tech sector grew by 52% in the period between 2014 and 2018. The total number of Haredi tech employees reached 9,700 in 2018 representing approximately 3% of the tech labor force. 71% of those (6,900) were women. Talent crunch is one of the biggest pain points for Israeli startup, and while more work needs to take place to grow the inclusiveness and diversity of the sector, this is a positive trend.
- Foreign investments remained strong in Q2 2020, reaching 52% of the total investment volume
Cons
- Slowdown in exits – Despite an increase in the average exit value from $98M in H1 2019 to $112M in H1 2020, the number of exits in H1 2020 dropped significantly both in number (by 32% from 76 to 52) and in value (by 22% down to $5.82 billion from $7.47 billion in H1 2019) compared to H1/2019. Projections are for additional slow down in exits in H2 2020 as the expectation is that only cash rich corporate will be able to afford to acquire companies in times of uncertainty.
- Covid-19 fallout – it’s too early to predict the economic impact of Covid-19 on the tech industry and wider economy as a whole. Given Israel has a small local market, startups aim to go global from day one, and many target the American market. As consumer confidence and enterprise spending slow down in the US, it has a lagging effect on Israeli startups. Many large tech companies froze hiring and conducted layoffs, including Amdocs, which plans to let go 1,000 employees, or Intel CEO’s recent cryptic announcement about outsourcing manufacturing. Much of their recovery depends on the US market and potentially on government support.
So far the Israeli tech sector has been resilient, and as a seed investor I’m optimistic about the Israeli market’s potential to not only survive in this crisis, but thrive. “It’s time to build“, said Marc Andreessen in April, and perhaps more than ever, we’re going to need tech and innovation to overcome tomorrow’s challenges.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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