Decrease in the Number of Israeli New Start-Ups ? Best Time to Be an Entrepreneur

2020 was another record year for the Israeli start-up and technology industry — until we start counting the number of new start-ups that were founded during the year. There was an alarming ~60% decline of new-born startups compared to the peak of 2014. It was also the sixth year in a row of decline and the lowest number yet since 2010. What may be confusing and also encouraging is the fact that the number of seed funding rounds did not decrease by such a large percentage, and by some analysis even grew during the year.

This trend is something we discuss a lot here at Vertex. We are proud to be one of the most active seed and early stage investors in Israel. Some of the amazing founding teams we were fortunate to partner with in recent years at the seed stage include Trigo, Nexite, Innoviz, Verbit, Axonius, Argus, Cylus, Identiq, Watchful, Vee, Meta, Fleetonomy, Adaptive Shield, Nucleai and a few more that are still in stealth-mode. We were also the first investor to join boot-strapped Dot Compliance and EasySend.

Let’s Start with Reviewing the Actual Data

New established start-ups: as you can see in the graph below — the start-up nation is producing less, much less, new start-ups. What is still unclear is what will the actual number for 2020 turn out to be. According to IVC, the number of new start-ups that were founded during 2020 in only 341 start-ups. But much of the data lags due to delayed reporting and IVC assumes the final/actual number will grow to about 600 — the lowest number in a decade and 25% lower than 2019.

Seed fund raising during 2020: according to IVC data, we had a bumpy year with a very slow first half due to the CoVID-19, and a surge in the second half of the year. Again, as some of the data reporting is delayed, we need to rely on forecasts.

IVC assumes that 2020 will end with a 20% decline in the number of start-ups that raised a seed round of at least $1m. Another interesting data point arrives from Oren Bar-On, Senior Partner at EY. Oren only counts start-ups that raised seed rounds of at least $1.5m, and does not count healthcare companies. According to his data, the number of seed rounds in 2020 actually grew by 10% from 48 in 2019 to 53 in 2020. As many start-ups remain in stealth-mode for several months, it’s fair to assume that the growth by Oren’s counting will reach 20%-30%. Encouraging!

One of the Best Times to be a Founder

Before we try to explain these trends, we think that the most important message to new entrepreneurs is that we are now in one of the best times ever for entrepreneurs who are raising their seed round. This is especially true for serial entrepreneurs and experienced executives — but this is also the case for young and first-time entrepreneurs.

Our view is that good and balanced founding teams that identify an interesting market need and opportunity, have already studied their market thoroughly and can articulate their vision — have a high chance of raising their seed round. In fact, it will most likely be a faster process than previous years, at higher valuations and larger rounds.

As a side note, we believe that part of the ideation process of entrepreneurs can and should include meeting venture investors. We do such brain-storming sessions with many teams.

This can be explained in few ways:

(i) We are in the midst of a technology led wave of innovation that is disrupting all industries on earth — in recent years we invested in start-ups that were seeking to disrupt mobility, industrial, healthcare (digital health), fin-tech and ag-tech — which leads to high demand for new start-ups;

- (ii) The ability to build a relationship with customers remotely, via Zoom without actually visiting the customer/design partner, helps close the disadvantage gap of working remotely from Israel;

(iii) The CoVID pandemic increased investors’ capital allocation towards technology investments, which shine in a world of zero interest and low growth;

(iv) If you view this from a supply and demand point of view, then less new start-ups and more early stage investors and capital allocation should generate an “easier life” for the high-quality teams out there trying to raise money. They are facing less competition over investors’ attention.

Should We be Worried?

Yes, at the end of the day a decrease of more than 60% in the number of new start-ups means that in few years we may not have enough start-ups that will grow to become the next Israeli category leader. The next JFrog, monday.com, SolarEdge, OwnBackUp, Yotpo and CyberArk to name just a few.

If you believe that entrepreneurs are among the best in the world in their ability to identify new trends (as is our strong belief at Vertex), then maybe something changed. Maybe they feel that there are not as many good ideas left or that their chances to be successful in their start-up journey have decreased. This may have to do with the feeling that many sectors are already too crowded with many recently-founded start-ups.

It may also have to do with the impact of tech giants like Amazon and Google. For the first time in many years, technology innovation and deep tech is coming also from these giants, who have learned how to nurture innovation in-house and have endless resources to lure top talent with dream compensation packages and endless development budgets. This is not to say that start-ups are not the source of innovation — they are. But it seems we are going in the direction of a mixed reality in which some breakthroughs will come from the giants.

A Blessing in Disguise?

Another way to look at the decline in the number of new start-ups is that maybe this is a market correction. The argument here is that the peak in the number of new start-ups a few years ago meant we also had too many me-too teams and half-baked ideas that were not validated enough. This created too much “noise” in a market that was already running in full steam, especially in terms of scarcity of talent. The recruitment needs of the multinational tech giants that operate in Israel and the hundreds of scale-up and fast growing Israeli start-ups could not be met. We do not have enough developers, product managers and sales and marketing talents.

So What’s Hot / Interesting?

According to Oren Bar-On, the number of new start-ups that raised significant seed rounds did grow in 2020. We will need to wait and see if this is the beginning of a new growth trend. This also leads to the question of what’s interesting these days and what are the markets and opportunities new entrepreneurs should target.

The increase in seed rounds in the second half of 2020 was fueled by another wave of new cyber security (mainly around cloud) and DevOp/IT Operation start-ups. Digital health and Gaming are also areas that generated more seed rounds in 2020. But in all cases we can argue that these are continuation of trends that started a few years ago.

We are very optimistic. We are in the middle of a Golden Age of the Israeli start-up and scale-up nation. The quality of the teams we meet every day, the ideas they have, the validation process they share with us all make us confident about seed investments in Israel also in the coming years.