Israeli startups see tightening conditions from investors

Israeli startups see tightening conditions from investors

Business news |
By Nick Flaherty

Israeli investors are looking for more control and protection in deals with startups, according to a survey. 35 percent of the 200 Israeli startups surveyed reported tougher terms in their latest round, including special liquidation rights, as opposed to only 7% in the US.

Those startups raised a record $5.37bn in Q1 2021, with the growth driven by a number of large later stage financing rounds and only marginal growth recorded in early stage rounds. 

The data from Startup Snapshot with Intel’s Ignite programme showed that the time it takes to close a round has been almost cut in half, thanks to virtual pitches and increased competition for deals. Today, 59 percent of the startups closed a round in under four months, compared to only 36 percent pre-Covid.

“It is interesting to witness the impact of Covid on early stage startups. If at the beginning of the pandemic these startups were at a disadvantage in terms of fundraising, the excess of capital in the market has led to a high level of investments in early rounds. At the same time, in light of the uncertain market environment, we see investors seeking more protection and thus requesting more restrictions when it comes to closing deals. For this reason, I believe startups will be seeking to diversify their funding types, with credit products resuming to appear more significantly in their portfolios,” said Nurit Pirani, Head of the Business Centre for Israeli bank LeumiTech.

Covid has also seen founders are also cancelling relocation plans. Of the startups that opened an office abroad during the past year, 59 percent hired a new employee as the first person on the ground. Given the difficulty of hiring senior talent remotely, 32 percent of companies hired a more junior employee as the first step to international expansion, versus a more senior hire right off the bat. 

Remote working makes location less important as 21 percent of companies reported that location of their first employee abroad is not important at all.

“41 percent of startups that raised funding in the past nine months did so without meeting their investors face-to-face. With digital meetings replacing in-person interactions, early stage startups are struggling to create credibility with investors that they have never met in person. Startups that manage to do this successfully will be able to tap into vast international funding and business opportunities,” said Yael Benjamin, Founder of Y. Benjamin Strategic Marketing that worked on the survey.   

“The speed of closing a round has almost been cut in half compared to pre-COVID, with 29% of the companies closing a round in under two months. The shift to digital pitches has accelerated the fundraising process, providing Israeli startups with access to a wide base of international investors who are now willing to run a whole funding process on Zoom,” said Tzahi ‘Zack’ Weisfeld, Vice President and GM of Intel Ignite

“Funds are flowing, but Israeli investors want more checks and balances when serving their term sheets. Pre-COVID, you would see a majority of deals containing a standard list of restrictive provisions (veto rights). However, in 2021 investors are seeking more active involvement in overseeing expenses and ongoing business activities, trying to protect themselves in today’s uncertain market environment,” said Nimrod Vromen, Partner Yigal Arnon & Co and CEO of Consiglieri.

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