The high tech Israel Startup Nation seems to be hitting a bump in the road. Investments are down, planned IPOs have either been delayed or scrapped altogether and new investment rounds are also being delayed.
This is not so surprising since worldwide inflation is up for a number of reasons, not the least of which is the rising price of oil. This means gas prices are up and so the costs of shipping by land sea and air of all raw materials and finished products to their final destinations has gone up too. And this means prices are up for goods and services across the board.
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The high price of oil is just one of the problems caused by the Russian invasion of Ukraine. Western were also sanctions imposed on Russian oligarchs personally and Russian held foreign currency reserves have been frozen around the world. So the wealthiest Russians right now have no money to invest or spend anywhere. And any time there is such a world crisis the markets panic and world economies brace for a general crisis.
And that is exactly what has been happening. In order to rein in inflation the U.S. Federal Reserve raised interest rates to cut down on the money available in the market. But high interest rates mean investors look to bonds over stocks for an investment. They also mean that it costs more to expand and so companies avoid any expenses since debt comes with higher rates of interest.
The world economies today are intertwined and so there is no way that Israel can avoid the effects of the ongoing crisis. Foreign investors with their foreign hard currencies are essential for Israeli startups to grow. When they decide it’s time to save their money and wait on new investments it hurts Israel Startup Nation too. Stock markets dropping worldwide also hurts Israeli firms that plan to go public.
Here are a few examples of such recent problems.
Just the other day eToro, the Israeli startup that offers its clients a trading platform, scrapped its planned IPO and will instead try to raise another $1 billion in new funding. The company now expects to have just a $5 – 6 billion valuation, wheras, it originally anticipated more than a $10 billion valuation from its IPO.
Also in June, StreamElements, an Israeli startup that offers interactive tools to help companies manage communities and create revenue for streaming content creators, went through a contraction despite having recently raised a lot of money in funding. The company reportedly sent dozens of its employees termination notices.
In May, Israeli AI startup BeyondMinds informed its 65 workers that the company was closing. This came after an attempt to sell the company fell through.
As for investment in new startups in Israel, Greenfield Partners released a study showing that the volume of investments in Israeli high-tech in the second quarter of 2022 reflected a continuing downward trend.
The number of transactions dropped significantly since the beginning of the year, with fewer unicorns.
The volume of investments in Israeli high-tech fell by 31% compared to the transactions in the second quarter, which amounted to $ 4.5 billion, compared to $ 6.6 billion in the second quarter of 2021, according to the summary report of the second quarter of 2022 prepared by the Greenfield Partners investment fund. It also shows that the number of recruitments decreased, which stood at 104 transactions in the second quarter of this year, compared with 132 in the first quarter and 135 in the second quarter of 2021.
According to Shay Greenfeld, Founding Partner of the Greenfield Fund, “The data for the second quarter of 2022 reflect the continuing trend of declining investment in startups, given the macro environment and declines in public markets. The decrease in the volume of capital raising is accompanied by the development of alternative raising channels such as convertible notes, or SAFE, and the expansion of investment rounds by domestic investors.”
“Against the background of uncertainty in the markets,” he added, “we see companies that are working harder during this period to ensure sufficient cash flow for a period of 18-24 months and are working to raise additional resources.”
Additional data emerging from the report are a 50% decrease in the number of growth rounds, comparing capital raising between $ 50 million and $ 100 million, which fell from 26 transactions in the second quarter last year to 13 in the second quarter of this year. The analysis of activity within the second quarter shows a decrease towards the end of the quarter of 32% in the volume of transactions in June compared with May. In addition, the number of mergers and acquisitions related to Israeli companies increases, and in each of the months of April and May, 3 transactions were reported, compared with 11 transactions in June.
So, what can be done? Well, nothing really. Israel must wait and see what comes next in the Ukraine crisis and if the price of oil will go back down. Recessions and bear markets are a fact of life along with death and taxes. Sometimes you just have to wait for winter to end, only in these cases there is no set date on which that will happen.