Study: Covid19 Impact on the Israeli Early-Stage Ecosystem

The world has changed. While we yearn to return to “normal”, the impact of COVID-19 on our lives will create long-lasting change. As far as technology adoption, it will hopefully be for the better. Digital health, vaccine discovery and manufacturing, work-from-home, digital educational tools and e-commerce have all made significant leaps towards mainstream adoption in 2020.

The stock market continues to rise and the headlines in the tech industry are filled with IPOs, SPACs and massive investment rounds. Away from the headlines, we felt that the start-up ecosystem seemed ok, maybe even good, but not crazy good or depressingly bad, like the media has made it sound. We decided to take a closer look at the data which might otherwise be obscured by these dazzling headlines.

We started by collecting data from PitchBook and CrunchBase on over 600 companies that had announced fundraising events in 2020. We analyzed the data and scraped it to 150 companies which fit the criteria matching the stage, industries and geographies where we are active investors. This enabled a comparison to what we were seeing out in the field. To compliment this, we conducted a survey to take a deeper dive with a representative subset of over 30 companies which matched these criteria.

At the highest level, PitchBook reported that in 2020, “investors deployed $156.2B into start-ups, liquidated $290.1B of value via exits, and closed on $73.6B [of new capital] in traditional VC funds.“[1] Clearly a frothy market. But where are all those investment dollars being deployed?

Pitchbook continues: “…the investment cycle, seed-stage and first-time financing activity fell sharply, proving a more challenging fundraising environment for newer entrepreneurs.”1 CrunchBase supported this conclusion reporting that, globally, seed funding in the 4th quarter of 2020 was down 27% year over year, and early stage funding was down 11% year over year”[2] – despite the sense that the market was coming back with the end of the pandemic in sight due to the vaccinations.

Our survey data showed differently. From the responses we collected, the majority of the companies in our survey who successfully raised capital in 2020[3] were early-stage start-ups (pre-seed, seed, seed+). Our survey further showed that 61% of the companies had planned to raise capital in 2020, of which 68% succeeded in doing so. Of those who raised capital successfully during 2020, about 53% raised up to 3 million USD, another 20% raised up to 10 million USD, with the remaining raising either above 10 million USD or preferred not to say.

Furthermore, there does not seem to be a high correlation between companies who were able to raise capital in 2020 and the existence of a prior relationship with the investors, or whether an in-person meeting with the investors occurred.

One possible explanation for this difference between the data sets is that seed rounds are not reported when they occur but rather at a later date, whereas the survey data was collected directly from start-up executives and founders, reporting anonymously.

 While pre-pandemic the Series A Crunch was a real concern for seed stage companies looking for their next round, from our analysis it seems that there was a clear reduction in early stage companies receiving seed, and even pre-seed, investments. The “crunch” seems to have expanded to the earlier stages, raising the bar for receiving funding. Investors were being even more risk averse with their venture capital. We also derived that later-stage companies (series B and beyond) were impacted in a very limited way by COVID-19, far less than was expected at the beginning of the pandemic[4], with late-stage and growth funding up year over year by 4% in 20204.

To address this new/expanded “crunch”, professional pre-seed and seed investors need to be able to move quickly, yet responsibly, to pursue promising opportunities.

The impact of the pandemic goes far beyond capital raising. Over 83% of the companies responding to our survey stated their business operations were affected by COVID-19. The areas that were affected most included sales, marketing, operations and R&D (in that order). Over 76% stated they adopted a work-from-home (WFH) policy with positive results. This corresponds with PitchBook’s findings[5] showing that more than 80% of US employers said enforcing WFH has been successful for their company, according to a late 2020 survey by PwC which included 133 executives and 1,200 office workers.

Many companies also had to reduce their employee headcount, prioritize new products or customize existing products while implementing cuts across administration costs, operations and even salary cutbacks. These responses support Ethosia’s year 2020 conclusion, presenting a 7% salary drop in the Israeli high-tech industry for the first time in the last decade[6]. On the bright side, PitchBook stated that almost 90% of private companies in the U.S. said they are hiring in the new year (2021)4.

A deeper analysis is required to understand who were the early-stage companies that secured funding and growth in 2020. The data lends itself to several hypotheses, including for example the power of top-tier (rockstar) teams and specific industries enjoying hyper-growth pursuant to the changes demanded on our lives due to the pandemic.

In conclusion we asked each founder how they felt about their company going into 2021. Despite COVID19 having a negative impact on most industries, it seems like the tech industry was harmed less: just over 80% of our respondents believe their company is positioned for hyper-growth in 2021, and most respondents declared their company’s valuation has increased over 2020, painting a picture of an optimistic future. We would expect nothing less from a start-up founder pursuing their dreams.

We hope that you – founders and investors – find this study useful as you look to navigate the early-stage Israeli start-up ecosystem in 2021. Please feel free to reach out with any questions or to share your own experiences and insights.

**This study was conducted with Dana Rosenfarb from MIT. Thank you Dana!


[1] “Venture Monitor, Q4 2020”, Pitchbook, NVCA

[2] “Global VC Report 2020: Funding and Exits Blow Past 2019 Despite Pandemic Headwinds”, Gené Teare, CrunchBase

[3] 77% of the respondents were early-stage startups: pre-seed, seed, seed+ and Series A.

[4] https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753

[5] “Job market outlook for 2021: More hiring and more remote workers”, Priyamvada Mathur

[6]“2020 Year Summary”, Ethosia, https://www.ethosia.co.il/content/לראשונה-מזה-עשור-ירידה-של-7-בשכר-הממוצע-בהייטק-בשנת-2020-0

Raising Funds: Q1 2021

Strong performance in the markets has encouraged many companies to accelerate their fundraising plans. Investors, in return, seem willing to discount certain metrics that used to be required to justify the next raise or uptick in valuation. Nobody wants to miss out.

While the tech media headlines seem full with new such announcements each day, I am not sure that it is that easy for everyone.

Take for example a first time founder. They probably have a limited network to begin with. And it takes time to develop the necessary relationships and to build trust. The same fund that just wrote a large check to a serial founder may not show as much enthusiasm for this new founder’s company. They will want to conduct more diligence, spend time with the team and get to know them, their product and their market much better before making a decision. That longer process may leave the fund with less capital to invest, a potential conflict if they already backed a company in this space (or if a portfolio company pivots in that direction) or just lost in the noise of other deal flow.

Sure, if this founder came from the right military unit, university program, unicorn, etc. that would help get some initial attention. The selectivity and pedigree of these previous roles are a clear indication of the top-tier individual/team. Or at least it used to be. But funding is far from guaranteed just because you have the right logos next to your name.

So what does one need to do to get a new investor onboard? Here are some ideas for you to consider:

  1. Stand out. In a positive way.
  2. Prove that you can own your niche – industry, technology, market segment.
  3. Become “the” expert in your space.
  4. Develop your story, materials (deck, financials) and team to support the above.
  5. Don’t hesitate to ask. Worse they can do is say “no”.
  6. Be persistent, yet courteous.
  7. FOMO

I am not sure about this last one. But it seems to be a powerful element in the VC industry where we can find herd mentality driving decisions. I prefer to focus on developing momentum, achieving smaller wins as building blocks for success that could inspire others to join you on your journey. At some point (the tipping point) it will become an avalanche of interest. That is a better place to be than FOMO driven interest, IMHO.

In raising a fund, emerging VCs face many of the same challenges mentioned above. Based on my personal experience only, it is even harder to raise capital for a fund than for a startup. With a fund the investor has even greater uncertainty since they do not yet know what the portfolio will look like. There is no FOMO.

I think that the key here is rolling intros. Introductions from those who decided to get onboard, to others they can potentially influence, or at least get you an audience with to make your pitch.

My suggestion: Ask everyone, whether they said “yes” or “no” to your pitch, to introduce two others from their network who might be interested in what you are putting together. This will create a flurry of warm intros to mostly relevant supporters. Close one, and then another, as you start to create that snowball effect mentioned above.