Judicial reform is having a negative on Israeli start-up companies according to new report

Start-Up Nation Central (SNC) revealed that the controversial judicial overhaul in Israel is having a negative impact on the tech ecosystem, according to a published report.

Private funding by Israeli startups has plunged to a five-year low in the first half of 2023, reported SNC, a nonprofit organization that tracks Israel’s tech industry.

Israeli startups raised a total of $3.9 billion from private financing rounds, a 29% drop from the volume of funds raised in the second half of 2022, and a 67% decline from the $11.9 billion raised during the same period last year, SNC’s Finder startup database showed.

Even more alarming, the report showed a quarter-on-quarter fundraising decline of 10% from the first to the second quarter of this year, while U.S. private funding trends have been stabilizing.

According to the SNC Finder platform, activity from six local tech ecosystems was evaluated for the report: cybersecurity, fintech, enterprise IT & Data, climate, health and agriculture-food tech.

The Finder platform is a startup database that maps over 850 investors, including venture capitalists, private equity, and angel investors and tracks more than 7000 Israeli tech startups. Finder also maps where startups congregate in accelerators, incubators, hubs, and co-working spaces.

“The uncertainty and internal changes in Israel together with global economic changes are prominently expressed in the activity of the Israeli ecosystem and reflect a significant slowing down and an ebb in activity,” said Yariv Lotan, Start-Up Nation Central VP of Digital Products, Development, Data and BI.

“This sharp drop stands in opposition to the stable trends in funding and venture capital seen in the US.”

Executives, startup founders and employees in the tech sectors have been on the front lines of mass protests against Israel’s judicial reform for the past seven months. The health tech and fintech sectors have taken the hardest hit in securing private funding. Many are concerned the judicial overhaul plan undermines Israel’s system of checks and balances, threatening the tech ecosystem’s stability for investments.

Israel’s tech ecosystem contributes more than 25% of the total income tax collected by the government and generates about 16% of the Gross Domestic Product and over 50% of exports.

“It is essential to acknowledge the uncertainty in Israel resulting from the recent judicial reform,” the SNC report noted. “The ripple effect is already being felt with indicators such as decreased fundraising and fewer emerging Israeli startups.”

Mergers and acquisitions only amounted to $1.3 billion in the first half of this year, a sharp decline, over 64%, compared to the same period last year. In addition, the market for initial public offerings has dipped to its lowest since 2018.

Financing from private investors plunged by 53% in the first six months of 2023, the lowest in nine years in comparison to 2022. During the same time frame, foreign investors contributed more financing deals than their Israeli counterparts for the first time in a decade.

“Even in the face of an 11% dip in their participation from H2 2022, these international financiers led 70% more rounds than Israeli investors and initiated 17% more new investments, serving as a steadying force in these uncertain times,” the report stated.

Investments into health tech startups plummeted more than 70% in the first half of 2023 and total investment in Israeli fintech startups dropped from $6 billion in 2020 to $2.6 billion in 2022.

In the first half of 2023, cyber sector investments dropped 57% to $1.05 billion in 2021, with about 70% of the funding invested in data and cloud security firms.

SNC reported: “Despite the drop in investments, it appears that a new wave of companies are succeeding in gaining a foothold by partnering with large strategic partners and leveraging the power of Generative AI, a field with high growth potential.”

In the first half of this year, investment round deals in the agriculture and food tech sector plunged from $600 million to $200 million, compared to the same period last year. In contrast, climate tech startups brought in $900 million in public and private funding compared with $700 million in the second half of 2022.

“There is reason to be optimistic that the sector will remain relatively resilient to the current market and economic conditions thanks to the urgency for climate solutions and the expectation that regulation and corporate commitments for decarbonization will necessitate the rapid rollout of these solutions,” said to Yael Weisz Zilberman, Climate Tech Sector executive at Start-Up Nation Central.