By the second half of 2016, the Startup Nation suffered from the Silicon Valley drop. Read Geektime’s comprehensive report to find out how Israel can bounce back
Today, we at Geektime are excited to release our 2016 annual report of the Israeli venture capital and startup ecosystem, written by Geektime’s data team analysts Beni Hakak and Rinat Korbet, along with Geektime’s co-founders Yaniv Feldman and Moran Bar. In the report, we chronicle in full detail what Israeli startups experienced in 2016, which was both a successful and rocky year, and provide our thoughts on what sectors will take off in the Startup Nation in 2017.
The TL;DR of what happened to Israeli startups in 2016
In the first half of 2016, it looked like Israel was on to a record year in startup funding, raising almost as much financing in H1 of 2016 ($2.32 billion) as in all of 2015 ($2.8 billion). But by the second half of 2016, it appears the Silicon Valley bubble burst that occurred in the fall of 2015 came to Israel’s sandy shores. While the second half of the year usually brings in more funding than the first, Israel saw a more than 20% drop in funding: In H2 of 2016, Israel only raised $1.85 billion in startup financing.
Still, despite this slump, Israeli startups performed significantly better in 2016 ($4.2 billion) than they did in 2015 ($2.8 billion), and in comparison to many markets around the world. One can also explain the dip in funding as a result of various global events, such as Brexit, the US elections, and China’s economic slowdown.
Interestingly, there was an increase in seed and growth funding rounds, as well as the average amount that seed and growth rounds raised. For this reason, 2016 was a particularly “entrepreneur-friendly” year.
The report’s authors attribute this to Israeli investors following similar behavior in Silicon Valley-based funds, particularly in regards to seed funding rounds:
“In previous years, even early stage VC investors were eager to ask for liquidation preference at a relatively early stage. In the last few years, the competition for good deals in the Valley caused investors to relinquish the more aggressive terms, with liquidation preference at an early stage being one of them. It took us a couple of years, but in 2016 we are starting to see the same trend with Israeli VCs. This causes rounds that were previously considered A rounds (with a liquidation preference) to be completed as seed rounds and therefore reflect bigger deal sizes for this stage.”
As Israeli startups grew bigger, without needing to go public, they also were able to raise larger growth stage funding rounds. This trend continued to climb in 2016.
IPOs and M&As
Considering 2016 was a record low year for IPOs, it is not surprising that Israeli startups were also not thrilled by the prospect of going public. There were only 3 IPOs of Israeli tech startups in 2016 in comparison to 12 in 2015.
That said, there was a modest increase in acquisitions of Israeli startups. A total of 75 tech startups were sold, raising $4.6 billion in total funding.
Which tech trends boomed?
The report details the highs and lows of Israel’s most prominent tech sectors in 2016: cyber security, the Internet of Things (IoT), adtech, fintech, transportation and autonomous vehicles, and the life sciences. It also describes increased corporate venture capital interest (as well as VC interest in general) in sectors like artificial intelligence (AI), digital health, virtual reality (VR) and augmented reality (AR), insurance tech, and drones, all of which are popular globally.
For a full breakdown of these trends, as well as which investors and companies performed the best, you can sign up to read the full report for more details.
While investment in cyber security startups increased in 2016 by 29%, the report notes that acquisitions of Israeli cyber companies drastically dropped by 82% in comparison to 2015. The report’s authors think this indicates that, “The sector has reached maturity and has lost its growth momentum.”
Internet of Things
2016 was a very good year for Israeli IoT startups. As the report explains, Israel “saw a 430% rise in the sum invested and a 143% growth in the number of investments. IoT M&As have increased 44% since 2015, amounting to $288 million. This validates the Israeli ecosystem as one of the strong leaders in the field and we predict it will continue to grow extensively in 2017 and beyond.”
Fintech continued to impress investors in 2016. There was an enormous 434% jump in the sum of investments, and a 200% increase in the number of investments. However, there was a 25% decrease in M&As.
Transportation and autonomous vehicles
Just as the world was excited by transportation and autonomous vehicle startups in 2016, Israel was no exception. The sector had a 346% jump in its sum of investments and a 114% increase in its number of investments. While the report’s authors state that, “We are still 4-5 years from autonomous vehicles reaching maturity,” they believe the sector will continue to grow until then.
Similar to the US, Israeli adtech has also reached a state of stagnation. While there was a 24% rise in the number of investments in advertising technology, the total amount raised showed a slight decline from 2015.
But Geektime is not pessimistic about adtech just yet. “We predict 2017 will be a year of rebirth for adtech. We believe younger startups will bring much anticipated innovation to this sector.”
The life sciences sector had a somewhat similar year as adtech in terms of funding rounds. While the number of investments jumped 42 percent, there was a 10% decline in the sum of investments.
But in terms of mergers and acquisitions, the life sciences had a great year. M&As in the life sciences garnered $1.39 billion in 2016, significantly more than the $145 million that mergers and acquisitions raised in the life sciences in 2015.
For more details, including specific information about funding rounds, mergers and acquisitions, and prominent investors, read the full report.
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