Israeli tech sector slump fueled by economic uncertainty, data shows

Investments and financing rounds plummeted in first half of 2022, according to latest figures by the Start-Up Nation Policy Institute.

Coronavirus & Israeli Tech (photo credit: JERUSALEM POST)
Coronavirus & Israeli Tech
(photo credit: JERUSALEM POST)

After a record-breaking year, Israel’s tech sector is headed for a slowdown.

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Hundreds of Israeli workers were laid off in recent weeks and investments have dropped amid global economic uncertainty.

According to figures shared by the Start-Up Nation Policy Institute (SPNI) with The Media Line, some $10.4 billion was invested into Israeli start-ups in the first half of 2022, a significant decrease from the $13.2 billion invested during the same period a year prior.

Financing rounds are also on a downward slope. In the first half of 2022, start-ups went through 404 investment rounds, compared to 551 for the same period last year and 491 for the first half of 2020.

“By and large we’re definitely seeing a slowdown in economic activity,” Uri Gabai, CEO of the SNPI and former co-general manager of Start-Up Nation Central, told The Media Line. “I think it’s natural after 18 months of very vibrant activity in the global tech market, including the Israeli tech market, that [people] will sit and wait and see how this rolls out.”

“I think it’s natural after 18 months of very vibrant activity in the global tech market, including the Israeli tech market, that [people] will sit and wait and see how this rolls out.”

Uri Gabai
The Netflix logo is seen on their office in Hollywood, Los Angeles, California, US July 16, 2018.  (credit: REUTERS/LUCY NICHOLSON/FILE PHOTO)The Netflix logo is seen on their office in Hollywood, Los Angeles, California, US July 16, 2018. (credit: REUTERS/LUCY NICHOLSON/FILE PHOTO)

The phenomenon is not limited to Israel. Tech giants Netflix and Tesla have already slashed hundreds of workers, while Meta announced that it was implementing a hiring freeze for certain roles.

Since the Israeli ecosystem is highly connected to its American counterpart, the same negative trend has made its way across the ocean. If the economic situation deteriorates further in the US it will greatly impact the Israeli tech sector as well, Gabai warned.

“For now, we’ve been hit less hard,” he said. “We’re definitely seeing some companies freezing recruiting, but our theory is that it will evolve into companies reducing revenues. If we get into a recession, then B2C (business-to-consumer) companies will probably be more at risk; B2B (business to business) companies are usually more stable in that sense.”

The slump is still in its early phases so investors and tech firms will need to hold tight to determine exactly how serious it is.

“We know of a couple of dozen companies with layoffs and probably the same number that are freezing recruiting,” Gabai noted. “The uncertainty could turn into a lengthy slowdown and even a recession. Obviously, this would affect companies and individuals, but we’re not there yet.”

On the bright side, Gabai related that investors are continuing to flock to Israeli start-ups despite jittery markets. He also believes that any current setbacks are temporary.

“We should not forget the fundamentals: The world is going more and more into digital and online [arenas],” he asserted. “This was accelerated by the COVID-19 pandemic, and it will continue for the foreseeable future, which means that good tech products and services will always find good investment and talent that will want to move there.”

Layoffs snowballed

Layoffs in tech appear to have snowballed in recent weeks as well, according to data found on the Layoffs Project website, which tracks Israeli company layoffs and announcements.

In fact, in the past week alone 600 Israeli workers were made redundant in several tech firms, including Verbit, Bizzabo, eToro, Transmit Security, and Lightricks.

A report published earlier this week by Israel-based investment firm Greenfield Partners showed that Israeli tech companies raised $4.5 billion in the second quarter of 2022, marking a 31 percent decrease from the same period last year. Health tech and cybersecurity were the most heavily invested sectors this past quarter, while fintech and crypto fell significantly behind.

The Greenfield Partners report also stated that the downturn is “likely to be amplified in the quarters ahead as capital raised is a trailing indicator and many deals announced this quarter were likely priced in Q1 or earlier.”

Nimrod Cohen is the managing partner at TAU Ventures, which he co-founded with Tel Aviv University. TAU Ventures currently has 24 early-stage start-ups in its portfolio and Cohen himself has taken part in more than 60 investments into companies over his career.

“Things are going on around the world, starting with the global markets to the war in Europe and rising interest rates,” Cohen told The Media Line. “It affects everyone. It’s not as easy to raise money as it was a couple of months ago so it’s smart and obvious that companies will be more efficient.”

Despite this, Cohen argued that most laid-off tech workers manage to quickly get back on their feet again and find new jobs due to ongoing labor shortages.

While times may be difficult for some in the tech industry, the ecosystem has not yet reached a crisis point, he added.

“This is what it was like two years ago,” Cohen said. “I think everyone needs to be more focused and careful in the next few months.”

Like Gabai, he remains optimistic about the long-term future of the tech sector.

“The need for new technologies and innovation is not something that’s going to change,” Cohen said.