2023 Israel Health-Tech Startup: Summary Report

I am sharing with you all the complete 2023 Israel Health-Tech Startup summary report in full (with some minor edits). This report complements the Health-Tech Investment summary that I recently published, which can be viewed here.

Executive Summary

2023 was a challenging year for Israeli health-tech startups. This summary will review high level insights from 2023 that are relevant for the continued success of the Israeli health-tech sector:??

• Continued decrease in new startup formation, driven by local risk and global market uncertainty.
• Early stage (pre-seed and seed) activity grew significantly, reversing a four-year long decline. These companies have been priced according to market expectations in 2022 and 2023, and therefore could be more attractive to investors in 2024 and 2025.?
• Need for possible governmental support and intervention in building out Generative AI infrastructure and fostering stronger relationship with later-stage international investors.
• Founders need to put in extra effort to understand dynamics and trends that will affect healthcare systems in the coming years, specifically the practical usage of GenAI, shifts in utilization, workforce and cost constraints, outcomes, and regulation.

Introduction

The HealthIL startup ecosystem is uniquely focused on “health-tech”, which is defined as technology enabled healthcare products and services where software is a critical component of the usage of the product or services.?

This definition is to differentiate from products or services where software is not a component of the usage, even though software may be used in the creation, for example innovation in clot retrieval.?

?This distinction separates all the Israeli startups in healthcare into three distinct categories: “Health-tech”, "Devices", and "Pharma/Bio-tech". All three have their own internal dynamics and considerations.?

This report will highlight startup activity in Health-tech only, not including cannabis or psilocybin-based products or services.

High Level Review

There are currently 1084 Health-Tech startups in the HealthIL database. Of these, 138 are confirmed to be inactive, 7 have been acquired, and another estimated 120 - 150 startups are of limited or partial activity.???

Of the 939 active (or semi-active) health-tech startups, over half are in the early stage (pre-seed, angel, or seed), or unfunded.?

There are three main trends in 2023 that should be recognized:??

• Continued decrease in new startup formation??
• Shift to early-stage investments?
• Increasing reliance on foreign investors for later stage?

Continued decrease in new startup formation?

New startup formation continued to decline from the peak in 2020. 34 new Israeli startups were created in Health-tech in 2023, as compared to 67 in 2022, a decrease of nearly 50%.??

There are many possible overlapping explanations for the continued decline in new startup formation, but two overarching themes stand out:???

• Local Market Uncertainty in 2023?

The Judicial Reform of 2023 created significant uncertainty in the local market, specifically regarding the viability of the government, specifically the Ministry of Finance, to continue to support high tech as the leading economic anchor of the Israeli economy.??

This uncertainty affects every aspect of high-tech, including the health-tech sector, and undoubtedly creates risk for Israeli entrepreneurs. Potential founders are hesitant to start new ventures when there is uncertainty regarding how the Judicial Reform would affect capital inflows, governmental support programs, and general economic stability.??

• Global Market Uncertainty??

Global factors typically trickle down to the Israeli startup world on a delay, and the uncertainty of the global economy in the post-COVID period still has lingering effects on the Israeli health-tech ecosystem. Interest rates are still notably high – stifling private market capital – and inflationary pressure is still an issue in both the US and Europe.??

During periods of economic stability and growth potential founders feel more comfortable taking on personal risk in pursuit of innovation, whereas during periods of economic uncertainty potential founders prefer to reduce their risk and remain in their current jobs.?

Global markets are starting to show signs of recovery. Inflation has come in line, and both the FED and the ECB have indicated that they will lower interest rates in the second half of 2024. The concern is that local uncertainty will remain, and possibly increase, which means there may be even fewer startup formations throughout 2024.??

Shift to Early-Stage Investments?

Funding decreased in 2023 as compared to 2022, but there was a notable increase in seed and pre-seed funding activity, which reverses a four-year trend. There was notable increase in the number of pre-seed/angel and seed investments in 2023 as compared to 2022, but at significantly discounted valuations. The decrease in valuations reflects global market uncertainty and the higher risk profile of Israeli investments due to the local economic and political climate.??

The increase in early-stage activity in 2023 could be a result of dry power from 2022 and 2023. Even though investors prefer to maintain cash reserves during challenging economic environments, venture capitalists also have a time horizon whereby they must deploy their capital. Therefore, if later stages become “too rich”, they may shift their allocation to earlier stages.?

In addition, as valuations decrease, venture capitalists can buy in to equity stakes for smaller allocations.?

These two factors could explain the increase in pre-seed and seed activity and the significant decrease in round sizes and valuations. These are areas where investors are willing to take on more risk (as opposed to A and B rounds) and given the market conditions investors can get strong equity stakes for less capital allocation.?

It is important to note that the pre-seed and seed stage investments are not exclusive to startups founded in 2023 only, and investments also flowed to startups that were founded in 2021 or 2022.??

*For complete review of 2023 Health-tech investment activity please see the Health-Tech Investment Summary Report here.??

Increasing Reliance on Foreign Investors?

Even with the challenging investment environment in 2023, there were still several notable deals.??

The largest disclosed private placements in 2023 provide insights on growth stage companies: (Israeli investing entities are highlighted)?

These ten investments represent 54% of all disclosed private placements in 2023, compared to 44% in 2022 and 36% in 2021. The continuing war with Hamas also affected investment activity, particularly in Q4 2023. It is estimated that over $100M of investments were not realized in 2023 due to the conflict.??

Moreover, there has been a steady decline since 2020 of Israeli investing entities who participate in later stages. This reason for this is not a need for foreign investors with deeper pockets, but rather it is driven by later stage companies who actively seek out international investors who have added value and relevant networks in target markets.??

International investors are critical for the continued growth of Israeli health-tech startups, which emphasizes the importance of maintaining strong relationships with international investors to ensure the capital inflows to later stages.??

This is particularly relevant given the noticeable decrease in foreign investment activity in the fourth quarter of 2023. Therefore, there may be a need for governmental action to actively foster relationships with international investing entities.??

Preparing Israeli Health-Tech Startups for the Future

The success of any health-tech startup is not just based on technology, but also on a deep understanding of the critical non-technical aspects of healthcare. Health-tech founders also need to have a deep understanding of the key trends that will affect healthcare systems going forward. The key element of successful Israeli health-tech is building solutions that will be relevant to the challenges of tomorrow.

Therefore, it is critical for Israeli health-tech startups, whether new, established, or not yet formed, to deeply understand future trends in healthcare, outside of Israel, to be successful. We highlight five important global trends that Israeli health-tech founders should consider as they develop and grow their ventures:

Practical Uses of GenAI

The practical application of Generative AI will have significant ramifications in healthcare in every aspect of care. Some possible use cases include:

1.????? Medical image generation to augment training datasets and potentially address issues of data scarcity and privacy concerns

2.????? Creating synthetic data to help improve the performance of predictive models for disease diagnosis, prognosis, and treatment planning

3.????? Generation of novel molecular structures for drug discovery; proposing new compounds with desired properties and potentially accelerating the drug discovery process

4.????? Personalized treatment plans based on individual patient data, including genetic information, medical history, and lifestyle factors, which can help optimize treatment strategies for better patient outcomes

5.????? Augmenting patient engagement and interaction based on generative speech, language and text

6.????? Reducing administrative and bureaucratic burdens based on generating and automating back-end processes and workflows

7.????? Improving behavioral health interventions based on individual patient characteristics, acuity, and preferences.

8.????? Improved disease modeling and forecasting based on simulated disease spread and progression.

There are countless potential applications for Generative AI in healthcare settings, but the challenge will be in defining practical uses, implementing to existing workflows and processes, clinical validation, and provider / system buy-in.

Shifts in Utilization

As healthcare expenditure continues to rise in every country, there will be a continued effort to move patients to lower cost care settings. This shift in care settings will have implications across many aspects of care. For example, remote, virtual, and hybrid care will continue to be relevant in the coming years. Large provider systems are also exploring strategic changes, for example with “Virtual ICUs”, which will require economic and technological considerations and innovation.

Workforce and Cost Constraints

The significant shortage in healthcare workforce, coupled with persistent inflationary prices in healthcare, will continue to impact healthcare systems. Not only are there less available staff, but staffing is more expensive than ever.

This creates significant financial pressure on healthcare systems to close care gaps while controlling costs.

This also creates significant opportunities for startups who can build solutions that can address staffing shortages while also positively impacting the bottom line in a short fiscal time frame.

·?????? Outcomes outweigh Growth

There has been an incredible proliferation of health-tech startups over the last decade, but the increased number of startups also decreases the differentiation between them.

For example, over two thirds of the Israeli health-tech startups in the Mental / Behavioral health sector are building “self-care” solutions with little differentiation between themselves.

Moreover, the organizations who are potential customers of startups – like providers, employers, payors, or multinationals - have been inundated with so many potential solutions that they are unable to differentiate between one startup and another

The trend for health-tech in the coming years will be to focus less on growth and more on proving outcomes – both clinical and economic.

Regulation

There have been recent regulatory changes, both in the US and Europe, that will impact health-tech startups in the coming years. Regulation typically takes many years to become fully realized, so founders are encouraged to familiarize themselves with regulations that may impact their business in the future.

For example, price transparency improvements in the US healthcare system started in 2020, and the US government has continued to push this agenda.

Also in the US, CMS very recently revised its risk adjustment reimbursement methodology for Medicare Advantage[2] (also known as “CMS V28”). This may impact how Israeli health-tech startups approach their business models, specifically for those who are looking to sell into the lucrative Medicare Advantage market.

V28 also mapped CMS coding to ICD-10 as opposed to ICD-9. This could be important for Israeli health-tech startups, as Israel still uses ICD-9 coding for disease classification.

In Europe, the DIGA regulation in Germany will be expanding to include medical devices and products that are class IIb (medium risk). Currently DIGA only allows products up to class IIa or lower (low risk), so this presents additional opportunity for Israeli health-tech startups.

And finally, the EU AI Act was adopted in 2023, and may have implications for Israeli health-tech startups who are interested in the European market.

A special note on Generative AI

There is growing concern that Israeli is losing its technological competitive edge, particularly regarding Generative AI. It is important to note that many innovations in health-tech do not require generative AI approaches, and some do not require even traditional AI approaches (Machine Learning).?

At the same time, generative AI is notably lacking in Israeli health-tech solutions. Some startups are adding generative features to their existing products, but Gen AI solutions are noticeably scant.?

Governmental intervention to support Generative AI may be critical to maintain competitive edge.

Summary and Closing Thoughts

2023 has been a very complex year for Israeli health-tech startups. On the one hand, there has been a continued decrease in the number of new startup creations. On the other hand, there is reason for (very) cautious optimism considering the increase in the number of pre-seed and seed stage activity.

There are areas where the government can help Israel health-tech startups, specifically regarding relationships with later-stage international investors and building a strong infrastructure for Generative AI solutions.

Founders also need to put in extra effort to understand market dynamics and trends outside of Israel to increase the probability of success.

Ultimately, future success of the Israeli health-tech sector is also dependent on exogenous factors – specifically the ongoing war with Hamas and internal political uncertainty.

As is commonly known, Israeli high tech is the anchor of the Israeli economy. According to data from the Israel Innovation Authority, high tech represents 50% of exports, over 20% of Israel’s GDP, 10% of the workforce, and over 30% of the tax base. Health-tech is a noticeable and active component, based on a robust and supportive healthcare system. In “normal” circumstances, we would see an influx of capital in 2024 and 2025 based on attractive valuations in 2023, coupled by an increase of new startup formations.

But the current situation, politically and economically, is not “normal”. Prolonged instability could create continued negative impact on investments, not only into health-tech but to all sectors, which could have negative trickle-down effects throughout the broader Israeli economy.

Even if the conflict with Hamas ends quickly, internal politics, and the financial implications of the Judicial Reform must also be resolved. Therefore, it is in the country's collective interest to maintain political and economic stability to protect this critical national asset known as “The Startup Nation”. Otherwise, the health-tech sector, like all sectors, risks losing relevancy on the global market.