‘Directly tied to the Gaza war’ – money has dried up and Israeli startups are folding
The founders of Sproutt in 2019. The security technologies startup which raised funds based on a valuation of $200 million, submitted a request to begin bankruptcy proceedings in May 2024
Sagi Cohen writes in Haaretz on 26 August 2024:
Up until three years ago, dreamy amounts of money were streamed into Israel’s tech industry, constantly inflating its bubble. But after over two years of continuous crisis, the money in the companies’ coffers is running out fast, resulting in devastating outcomes for founders and investors.
A review by TheMarker indicates that a string of Israeli startups have shut down or significantly reduced their activity in the past year, with the trend being even more pronounced in recent months. Their common denominator is that their last significant funding round was in 2021 – the height of the high-tech bubble.
According to the data, the rate of startup bankruptcies was seven times what it was in 2019. Some of these companies folded after the money ran out and they were unable to start a new round. In some cases, entrepreneurs report, the war in Gaza was another key cause of problems.
‘Even Israeli investors decided to pull out’
There are no figures proving that the number of collapsed startups in the past year are historically exceptional; after all, startups shut down all the time. However, last week, the British daily The Financial Times published figures from the Carta Data Desk showing a 60-percent rise in startup bankruptcies in the U.S. compared to last year. According to the data, the rate of startup bankruptcies was seven times what it was in 2019. Since the trend in Israel usually follows the U.S., there’s no reason to think that its situation is any better.
“We had sales of hundreds of thousands of dollars a year and were nearing $1 million. We sort of had momentum, but we were unable to raise the money,” says Raviv Kula, a co-founder of the agri-tech company FruitSpec. The company’s last funding round was completed in 2021, when it raised $5 million. It tried to raise another $4 million last year but couldn’t get commitments for the entire sum. The funding round didn’t happen, and in February, the company shut down and its 20 employees were laid off.
“It’s directly tied to the war,” says Kula. “Foreign investors disappeared, and those who wanted to work together said it wasn’t the time. Investors in Israel who had expressed interest also decided to pull out. That’s the situation in other companies, too. It’s very hard to raise money, even small amounts. It’s related to the decline in investments worldwide as well as with the economic and political uncertainty in Israel.”
An entrepreneur who shut down a company earlier this year agrees. “The valuation estimates declined, the investors stopped investing,” he says. “They tell themselves, ‘A bomb just went off and now we’re taking our time.”
‘We felt we were on the right track’
The digital health company GistMD also shut down recently after failing to raise additional capital. Less than four years earlier, in one round at the end of 2020, it raised $6.5 million. “GistMD has come to an end, and we’re forced to close it,” wrote CEO and founder Dan Rolls on LinkedIn a month ago. “We felt we were on the right track. Despite quite a few challenges and problems, we were able to build partnerships with health care organizations and leading companies in Israel and worldwide.
“But the funding round that couldn’t reach agreements and a delay in payments led to a cash flow tailspin, and at a certain point the hole in the cash flow took everything,” Rolls wrote. We went far, but not enough. These are very sad days.” Rolls wrote that along with other partners, he was now trying to find financing to buy the company’s assets and activity back from the court-appointed trustee.
These two are part of a long series of companies in a similar situation, all of which reported their last funding round in 2021. Sproutt, a security technologies startup that raised funds based on a valuation of $200 million, submitted a request to begin bankruptcy proceedings in May. “The company made considerable efforts to raise additional investments – but the efforts to raise money were unsuccessful,” the request said.
The company OrCam ended its manufacture of products for the visually impaired, dismissed most of its employees and now exists as a skeleton team that continues to develop its hearing aid. DayTwo, which offered nutrition recommendations and raised $85 million over the years, ceased operations after a prolonged period of difficulty.
Kaholo, which dealt with software development tools, raised $3 million in 2021 and an expansion round in 2022. It discontinued its activity at the end of last year and completed a process of voluntary liquidation in July.
Earlier this year, the cybersecurity company Rezilion cased operations and sold its intellectual property to the U.S.-based GitLab. It also completed its last significant funding round in 2021, struggling to grow after that. It was able to raise only a small fraction of the amount it needed, and talks about selling it collapsed because of the war.
Companies that were founded in 2021 share a similar fate. Entor, for example, was founded with seed capital of $5.3 million and developed a product in the field of software development tools. A few weeks ago, one of the founders, Omer Rabin, shared the decision to close it in a LinkedIn post.
He wrote that the previous 18 months had “brought upon immense challenges: market conditions shifted and technological leaps occurred. While we were quick to adjust our strategy and maintained steady revenue growth, our results did not meet our expectations. At the same time, our Israeli team members faced geopolitical and personal strife.”
He said that while the company was “fortunate to have options: from bridge rounds to acquisition offers,” its leaders “took the painful decision to shut down Entor, and return millions of dollars back to our investors.”
Almost written on the wall
The events of the past few months are almost written on the wall, part of a sobering up by the venture capital industry and startups – a hangover after the years of plenty. Several companies did manage to survive and buy time thanks to loans, funding rounds with existing investors, SAFE (Simple Agreement for Future Equity) rounds, cost-cutting, cutbacks and layoffs. But it didn’t always help, as investors also became more selective, and valuation estimates plummeted.
Every startup has a different story. For some, the money they raised in 2021 ran out and attempting to raise more capital failed because their business performance didn’t improve. Others said the fundraising also failed because of the war. In yet other cases, startups decided to shut down before the money ran out to return it to their investors.
Some are seed companies that suffered from “the Series A Crunch” – a problem transitioning from the seed funding stage to the Series A stage. Others are older companies that were able to hold later-stage rounds in the boom period, when money was available – only for their business performance not to be enough to justify another round when market conditions changed.
It’s important to remember that besides a global financial crisis and a war, the past few years have also seen rapid technological changes with the rise of artificial intelligence. Technologies and business models became outdated almost overnight, forcing many firms to calculate a new path, downsize significantly or simply close. This is part of what happened in companies like Orcam and DataGen.
Based on conversations with entrepreneurs who have closed their companies, the same challenges are shared by many companies in the industry. Looking at the entire venture capital and startup field, however, the picture becomes more complex. Over the past few months, many companies, especially in cybersecurity, have been able to raise quite large capital rounds. Towering above them all is, of course, the cybersecurity firm Wiz, which raised almost $1 billion.
IVC Research Center data for the first half of 2024 shows signs of recovery in venture capital investments. Capital flowing to Israeli high-tech was 19 percent higher than in the second half of 2023, and 3 percent higher than in the first half of 2023 (excluding the huge Wiz fundraising round). These are optimistic signs for the future – but for many entrepreneurs who have been forced to close their businesses, it’s too little, too late.
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