In the wake of the War with Hamas, a recent report by the Fusion Fund sheds light on the state of pre-seed investments in Israel’s startup ecosystem. The report, covering investments in the pre-seed stage throughout 2023 and early 2024, reveals a significant downturn in pre-seed funding activity during the last quarter of 2023.

According to the findings, 56% of leading private investors in Israel and 55% of participating investment funds halted pre-seed investments during this period. Pre-seed investments, typically the initial capital injected into startup ventures, were defined in the report as investments totaling up to one and a half million dollars.

The report delves into the challenges of tracking pre-seed transactions, citing their small-scale nature and tendency to fly under the radar of research bodies and media outlets. Amit Shechter, part of Fusion Fund’s investment team and lead author of the report, explains that these transactions are inherently difficult to measure and document.

Beyond the decrease in transaction volume, the report also highlights a reduction in transaction sizes. Over half (57%) of angel investments in the past year were below $100,000 per transaction, with 35% investing less than $5,000 per transaction. Moreover, a significant portion of investors refrained from diversifying their portfolios, with 65% of angels investing in fewer than two startups and 45% of funds investing in only 2 to 4 companies over the same period.

An intriguing trend noted in the report is the preference for registering new companies in the US, particularly in Delaware, amidst political and security instability in Israel. Approximately 80% of the newly established companies included in the report opted for American registration.

Interestingly, the report highlights a similarity between Israel and the US regarding investment mechanisms, with around 80% of transactions utilizing the SAFE (Simple Agreement for Future Equity) mechanism, which defers the valuation of the startup until a later stage.

In light of these findings, Shechter emphasizes the importance for entrepreneurs to adopt leaner strategies, advising startups to raise initial rounds in smaller portions from strategic investors. He advocates for a shift away from traditional seed rounds, urging companies to maintain lean operations with a focus on producing tangible proof of feasibility.

Fusion Fund, established in 2017 by Guy Katsovitch and Yair Vardi, has played a significant role in the Israeli startup landscape, investing in over 110 companies across 13 rounds. Notable investments include Agora, DigitalOwl, Base.ai, Innplay Labs, and Hoopo Asset Intelligence, among others.