Israel’s Startup Funding Drops As Its Famed Cyber Sector Takes A Hit

Israel has long taken pride in its blossoming tech startup scene, which has birthed large companies such as Check Point Software, CyberArk and Imperva, and trails only the U.S. in terms of cybersecurity funding.

But Israel drove much of the decline in Asia’s significant drop in venture funding last quarter. Israeli startups saw a 67% year-to-year drop in funding, falling from $2.7 billion in Q2 last year to less than $900 million in Q2 this year, according to Crunchbase data.

What may be most concerning is one of the sectors leading the way in the decline: cybersecurity, Israel’s best-known tech sector.

The country, which is the second-largest cyber startup market in the world behind only the U.S., has witnessed a massive dropoff in venture dollars, with Q2 startup funding dropping 87%, per Crunchbase data.

What’s going on?

While it’s certainly true venture is down nearly everywhere, Israel may well have its own set of issues when it comes to venture and its startup ecosystem as the country faces significant political upheaval that seems to have made investors wary.

Earlier this year, Prime Minister Benjamin Netanyahu and his right-wing government began overhauling the country’s judiciary, a change that many fear will undermine the country’s democratic foundations and give more power to the government led by Netanyahu.

The political tensions seem to have caused some investors to pull back, and even prompted startups to reconsider where they put their money — although, again, venture dollars are down globally.

The drop in venture in Israel began well before the political changes started, with funding dropping in the past six quarters — and possibly a seventh — with startups having only raised more than $800 million with only weeks remaining in the quarter.

The largest rounds to Israeli startups this year include trading platform eToro’s $250 million raise in March after its plan to go public via SPAC fell through, and Israel-based AI startup AI21 Labs’s $155 million Series C.

However, to put the drop in better perspective, there have only been four rounds of $100 million or more raised this year in Israel. That number was 18 at this time last year.

Cybersecurity falters

Even the country’s famed cybersecurity industry has been vulnerable to the downturn.

Israeli cyber startups have witnessed a funding decline for five straight quarters. It was just in Q1 last year that such startups saw $638 million invested. That dropped to only $69 million in Q2 this year — down a staggering 87% from $514 million in the same quarter last year.

Venture funding for the current quarter already has topped Q2, but seems unlikely to hit even $100 million.

No cyber company in the country has raised $50 million in a 2023 round. The largest round this year is Grip Security’s $41 million Series B last month.

By this time last year, the country’s cyber startup scene had already seen eight rounds of $50 million or more.

Dealmaking also has slowed. While there were 20 deals completed in Q2 2022, only eight were completed last quarter.

A short history

The drop in cyber is a little shocking. While cyber funding has slipped everywhere, Israel’s drop is more pronounced.

The country also has a proud history in cyber. Besides the large public and private equity-backed companies already mentioned, startups including Snyk and Wiz have Israeli roots.

Cybersecurity has been heavily backed by the Israeli government and military. The country’s military is home to the famed Unit 8200 — originally founded as a pure intel unit by the Israel Defense Forces. Through the decades it has become a premier cyber unit and has served as a training ground for many cyber entrepreneurs from the country.

If funding is to pick back up in the country to even last year’s numbers, there is no doubt the cybersecurity industry will have to go on the offensive and leave its vulnerabilities behind.