The Israeli fintech industry, known for its vibrant and innovative ecosystem, has seen more than a 73% drop in funding in 2023, further exacerbating concerns surrounding the effects of the global economic crisis and local turmoil brought on by the government’s controversial judicial reform plans.
A recent report from Fintech.IL, in collaboration with the IVC Research Center, has revealed a significant drop in fundraising in 2023.
Compared to the previous year’s impressive $2.98 billion and the record-breaking $7.5 billion in 2021, Israeli fintech companies have only raised $784 million in funding during the current year, with estimates suggesting it will reach approximately $1 billion by year-end — even if it manages to reach that estimate, fintech funding would still end up a staggering 66% lower than 2022.
The report also highlights an 85% decrease in the establishment of new fintech companies in Israel. In 2023, only nine new fintech startups emerged, a far cry from the 61 established in 2022 and 82 in 2021. This could be attributed to the challenges faced by newcomers in a competitive landscape.
Deals, exits and mergers are lagging
The number of transactions in the Israeli fintech sector stood at 165 in 2022 and reached a peak of 203 transactions in 2021. This year, only 44 transactions have occurred so far. Exit deals, such as mergers and acquisitions, also took a hit in 2023. Only five exit deals worth a total of $20 million were recorded, compared to 15 deals totaling $1.12 billion in 2022 and a staggering 33 deals valued at $2.67 billion in 2021.
A sliver of silver lining
On a positive note, the fintech sector in Israel has proven resilient in terms of employment. Despite waves of layoffs in other tech sectors, fintech companies continued to grow their workforce. This represents a promising trend in an otherwise oppressive hi-tech climate.
“There is no doubt that 2023 is shaping up to be a disappointing year, although the fundamental picture is not substantially different from the situation in the entire hi-tech industry. The known factors are the global crisis in high-tech and the negative sentiment in the Israeli market,” said
Shmuel Ben-Tovim, Director of Fintech.IL and President of The Israel Fintech Center.
Indeed, a recent report from the Start-Up Nation Policy Institute (SNPI) found that investments in startups fell by close to 20% between the second and third quarters of 2023, with the number of deals dropping by nearly 50% from 131 to 77 between July and September. SNPI chalked these up largely to global factors and judicial reform woes.
“Nevertheless, several encouraging trends can be identified for the next year,” Ben-Tovim continued. “Israeli regulation is promoting significant reforms in areas such as open banking and payments, creating important business opportunities for both established and new companies. One of the positive side effects is that more and more large fintech companies (the unicorns) are exploring entry into the local market, which will increase competition and create new benefits for the Israeli consumer, both private and business.”
He went on to explain that the advancement of artificial intelligence poses a huge opportunity for growth within the financial sector, and that AI “is opening up new avenues for innovative applications in the financial sector, and it will foster new and exciting players.”
AI has emerged as a leading topic of interest in the discussion surrounding preserving the hi-tech industry’s health. On Thursday, Prime Minister Benjamin Netanyahu Prime Minister announced his goal of “turning the State of Israel into the No. 3 country in the world in this field.”
“For several months now, I have been formulating a national plan. Soon I will appoint a project manager on the subject and I will also submit the national plan to the government and the public,” he said.
In its report earlier this week, SNPI also emphasized the need to establish a comprehensive AI plan, further emphasizing the importance of the fledgling technology in relation to Israel’s hi-tech well-being.
“Amidst the general slowdown, one area buoying the hi-tech industry globally is Artificial Intelligence, and particularly Generative AI,” it stated. “This space attracts investments and contributes to increased valuations of both public and private companies.”
