Six Charts on what is really going on with healthcare investments in Israel after a year of conflict.

It has been over a year since Hamas started a war that destabilized Israel and the entire region. It has been over a year since Hezbollah joined in by attacking Israel - further destabilizing Israel and the entire region.

The citizens of Israel, Gaza, the West Bank, and Lebanon are linked by the fact that terrorist actors catapulted everybody into a state of war and insecurity - again.

But the Israeli tech sector has kept churning and producing and delivering.

The health sector is arguably the most relevant of all.

It has the largest market potential (the global health market is at least 50X the size of the global cyber market), and it has the largest impact on the Israeli economy, which stems from employment, the number of startups, the presence of multinationals, and the active involvement of the Israeli healthcare organizations.

I am sharing with you six charts that highlight the impact of a full year of war on investment activity - Q4 2023 through Q3 2024.

The full HealthIL 2024 summary report will be issued in early 2025, so this is just a teaser.

The past years has been tumultuous, to say the least.

But it has not been entirely bad. There have also been some distinct positive signals that merit mentioning.

These six charts highlight some of the underlying activity over the last year of conflict - from Q4 2023 through Q3 2024 - and some of my thoughts on what this means.

We will look at three distinct WINS and three distinct AREAS OF CONCERN.

Feel free to ping me for any questions or follow ups.

All data presented below is compiled from Startup Nation Central and HealthIL.

WINS

• Proven resilience and commitment to business continuity – particularly in A/B rounds. 

A and B rounds showed significant gains, even considering the complications since Oct 7th. This is a testament to the proven resilience and commitment to business continuity, deliverables, and performance of Israeli healthcare startups.

Disclosed capital to A/B rounds almost doubled in Q1-Q3 2024 as compared to the same period prior to the war (Q1-Q3 2025)

These are startup at a critical stage - too early to have stable recurring revenue abroad and are still proving themselves. The fact that these startups were able to succeed, let alone function, considering the past year is truly impressive and unprecedented.

• Reduced reliance on “alternative” funding mechanisms 

For the purposes of our understanding, "Alternative” funding mechanisms are extension rounds, grants, debt, or PIPE deals. These types of funding mechanisms are typically used when traditional funding sources are not available due to market complications and capital constraints. The use of these mechanisms indicates uncertainty and are highly correlated with exogenous or macro-level issues.  

The use of “Alternative” funding mechanisms peaked in Q1 2024, in the immediate months after October 7th, and has steadily declined since.  

This is a positive signal and indicates that the investors are less hesitant to invest directly into Israeli startups, and that Israeli startups are less reliant on extension rounds and grants.

• Attractive valuations across all stages 

Valuations across all three sectors of healthcare (Bio/Pharm, Equipment/Device, and Health-tech) have resettled globally following the frothy markets in 2020 and early 2021.  

Valuations have also resettled in Israel. On average, valuations in Israel are about a third less than in the US, which creates an opportunity to buy in to cutting edge Israeli healthcare innovation at attractive price points.  

AREAS OF CONCERN

• Not yet at Full Recovery

Looking at private placements only (excluding raises from the public markets), it is clear that all three sectors of healthcare innovation have not yet recovered to activity levels prior to the war. Investment activity in Q1-Q3 2024 is still about 25% below activity in the same period in 2023.  

• Lack of Early Capital

Private capital contributions to Pre-Seed / Angel / Seed rounds from Q4 2023 - Q3 2024 represented about 6% of all private investments.

This is not a new phenomenon.

Back in 2015-2020 Pre-Seed / Angel / Seed rounds frequently accounted for upwards of 20% of all private capital.

There are four main reasons for this: 1) Organic maturing of the market, 2) Decrease in number of new startup formations (which I wrote about before), 3) Decrease in the quality of new startups, and 4) misalignment between fund sizes and early stage funding needs.

The lack of early-stage capital that has persisted over the last 4 years is concerning as it raises questions about the next generation of healthcare innovation coming out of Israel.

There has been an uptick in new startup formations in 2024 - partially as a response to the unique challenges faced by the Israeli healthcare system over the last year - but not all of these are venture backable, and the question of quality still persists.

The investor pendulum has swung from the early-stage activity in 2015-2020 to growth, but Israel should be mindful to balance between both extremes to maintain a healthy mix of startup activity.  

• Foreign investment activity has not rebounded 

Foreign investors are still hesitant to participate in investments due to the continuing heightened risk profile of the country. Typically, in the healthcare space there is a 1:1 ratio between Israeli investing entities to foreign investing entities (excluding corporate investors). Meaning for every incidence of an Israeli entity putting in money, there is a foreign entity as well.

If we tie this back in to the decrease in "Alternative" investment vehicles, it seems like Israeli investors have come back to the table, but that foreign investors have not yet.

This poses concerns for later stages, as more developed startups need foreign investors who have the pockets, networks, and knowledge to propel the startups forward.  

SECURING FUTURE GROWTH

War is terrible for all parties involved, but even if the conflicts end tomorrow, there are significant questions about maintaining the primacy of Israeli healthcare innovation for the coming decade. Stakeholders in Israel, including governmental entities, should be mindful to addressing the following aspects: 

Laying the groundwork now for future innovation, which may include: 

• Strengthening the infrastructure of GenAI and healthcare in Israel 

• Strengthening the infrastructure for biotech, including bio-convergence and bio-synthetics 

• Increasing effective collaboration between academia and industry 

• Supporting corporate activity in Israel and creating incentive structures that support employment 

• Mechanisms to increase both the quantity and quality of the next generation of healthcare innovations 

• Exploring the option of financial incentive mechanisms for international investors to address the heightened risk profile 

Address lingering regulatory and policy frameworks that create business friction, which may include: 

• Unpacking lingering IP legislation and assessing where IP legislation has hindered progress 

• Addressing persistent tax and accounting constraints as compared to international standards  

• Restructuring ownership structures of public Israeli healthcare and research organizations to incentivize more internal innovation  

• Reducing regulatory hurdles that limit opportunities for trials and pilots, both for multinationals and startups.  

SUMMARY

It is impossible to ignore the relevance of Israeli healthcare innovation and its contribution to the wider Israeli economy. No other sector has such significant global potential, and such significant internal impact on the country.

The continuing conflict, and the higher risk profile of Israel, will undoubtedly continue to affect investment activity in healthcare.

The last year has surpassed gloomy expectations, and there are definite accomplishments, particularly the proven resilience and commitment to business continuity of Israeli startups, but we are not yet out of the woods.

There is noticeably opportunity to tap into attractive valuations, but it seems like foreign investors are still hesitant to do sue due to the persistently heightened risk profile of the country.

Here's hoping for better days for all of us.

Till next time.