How COVID-19 changed the Israeli VC investment landscape

Check sizes have gone up in early-stage deals and have gone down in later-stage deals.

WERE YOU able to be alone and enjoy your own company? (photo credit: Courtesy)
WERE YOU able to be alone and enjoy your own company?
(photo credit: Courtesy)
As entrepreneurs, and also as investors, we have all wondered how COVID-19 will affect the Israeli investment landscape. We started to see some predictions around March 2020, and now we can begin to see actual changes taking place.
A close look at the data paints an unexpected picture. While the total number of deals in Israel has decreased as expected, a closer look reveals that the trend shows a decrease in the number of early stage deals and an increase in later stage deals, while there is a reverse trend in terms of check sizes. Check sizes have gone up in early-stage deals and have gone down in later-stage deals.
Method
Utilizing Crunchbase, we analyzed “Seed to Series B” VC deals in Israel from mid-March 2020 to mid-June 2020, and then compared the data with data from the same period in 2019. This resulted in some interesting observations.
Total number of rounds in Israel has been hit, but not has hard as in the US
As expected, in the past three months, the total number of VC investment rounds in Israeli “Seed to Series B” deals has been reduced by 36%, down from 71 deals in the same time in the previous year to 45 deals in the past three months. This is a smaller decrease than in the US, where the number of deals has been reduced by 54%, from 1,784 to 815 deals. Looking at how these numbers differ across round type, Seed rounds have been impacted the most. Seed rounds in Israel in the last 90 days have been reduced by 71% (12 vs. 41 deals).
Three months ago, the expectation was that pre-revenue companies would actually become more attractive as they have a two-year grace period before hitting the market, making them somewhat “recession proof.” Their burn rate is also more manageable. However, it appears that investors see things differently, and are actually reducing the number of seed-stage deals. Having said that, VCs are arming these few early-stage deals with more capital to face the long winter ahead (here’s to you Game of Thrones fans).
Check sizes have increased in early-stage deals
Series B check sizes have dropped by 34% while seed and Series A check sizes have increased by 41% and 29% respectively. My understanding is that later-stage companies are expected to do more with less, they must focus more on generating revenues, improving their unit economics, and rely less on investors. On the other hand, Series A and seed companies are still more reliant on their investors to pull through the COVID-19 epidemic period. I also see investors doubling down on promising early-stage portfolio companies to help them thrive in the COVID-19 era while the competition is in a sort of “survival mode” coma.
Artificial Intelligence start-ups seem to be getting the most amount of funding within Seed-stage funding.
Looking at funding rounds in the Artificial Intelligence domain, we see an increase of 195.5% in AI check sizes within the seed stage, from $1.4m. in 2019 to a $4.3m. check size in a 2020 seed stage AI startup.
• See Greeneye Technology, which raised a $7m. seed from JVP in May 2020 to disrupt the agriculture pest control industry utilizing AI.
• See Convizit’s $5m. seed round led by Pitango in March 2020 to disrupt the user behavior industry utilizing advanced AI.
As a big fan of AI technologies, these figures do not surprise me at all. AI is relevant to all industries, from medical to automotive, fintech and agriculture. AI will most likely have the biggest impact on our lives in the next five to 10 years.
(Source for all: VCforU analysis based on Crunchbase data)
Summary, and my own 20/20 (2020?) hindsight
While there is great concern amongst entrepreneurs today, it is evident that start-ups will still get funded. The best start-ups will always get funded, regardless of the financial cycle. It seems that they will attract even larger checks than before.
It is also evident to me that COVID-19 will enforce new prioritization in all aspects of our lives, including start-up funding. As a former biotech researcher who worked in a life-sciences VC outside Israel, I look back with my comfortable 20/20 (2020?) COVID-19 hindsight and ponder whether this outbreak will ignite a new life sciences funding boost in Israel. Over the past 10 to 15 years, there has been a massive decline in traditional biotech/ pharma VC funding in Israel. Today, the major Israeli life sciences funds are gone, and the ones who stayed have mostly pivoted away from traditional life sciences in favor of digital health, and perhaps non-invasive medical devices.
I can fully understand their circumstances. In traditional life sciences, time-to-market is very long, there are large investments and high regulatory risks involved with clinical trials, etc. While I am certain AI will be utilized by pharma and biotech companies to become more efficient and cost-effective, there need to be biotech and pharma companies around to utilize this AI. In the end, they will capture most of the value by creating novel drugs and much needed life-saving treatments.
To my knowledge, the aMoon Fund and OurCrowd are perhaps the only exceptions today in Israel who stepped in to fill the huge void left by the historical pharma / biotech funds, and kept investing during the corona days in traditional early-stage biotech startups. I can only hope that with the help of government and private funding, Israel will bring back its former life sciences glory.
The writer is a lecturer and strategic adviser to start-ups and investors, and co-founder of VCforU.com, which helps over 17,000 start-ups with their investor one-pager while hundreds of investors use the platform for deal flow. He is also the Israeli adviser at Allied Advisers, a boutique investment bank from Silicon Valley. Connect with him on LinkedIn and on Twitter at @itaysagie.