Instability at home has eroded global perception of Israeli startups, with some Israeli companies relocating their operations and intellectual property abroad to survive.
There is no anti-Israel camp on Wall Street, but investors may be quietly shying away from Israel, which is reflected in the decline in investment and could have significant implications for the Israeli economy in the near future.
To save themselves, some Israeli companies are choosing to relocate abroad.
Data on 30 Israeli venture capital funds collected by the Israel Innovation Authority (IIA) and Israel Advanced Technology Industries and released this week revealed that about 40% of these funds have at least one portfolio company that has transferred intellectual property overseas. Moreover, about 25% of these funds estimate that 30% or more of their portfolio companies have either transferred significant operations outside of Israel in the past year or plan to do so in the next year. This is not just due to organic growth.
Assaf Kobo, chief economist at the IIA, told The Media Line that instability in the country is damaging the global reputation of Israeli startups, and as a result, some Israeli companies believe that relocating operations and intellectual property abroad will be crucial to their sustainability.
The IIA report, titled “The State of Israel's High-Tech Sector,” revealed that investment in Israeli startups will fall by 55% in 2023, with later-stage funding rounds hit the hardest.
The firm noted that funding rounds are set to decline throughout 2023 and into early 2024, marking the lowest quarterly figures since 2017. Israeli venture capital funding is down 70% in 2023 compared to the 2018-2022 average, while other global hubs only saw declines of 30% to 40%.
The report also stated that only 39 percent of Israeli startups in the process of raising funds are likely to successfully secure the capital they need. Additionally, the report's survey, which included responses from 500 technology companies, indicated growing concerns about the future, with around 40 percent of Israeli startups expecting lower valuations in their funding rounds.
Kobo added that the downgrade of Israel's credit rating already reflects foreign investors' concerns about the future of the Israeli economy.
When I spoke to investors [and startups]We learned that some of these companies are struggling to prove they are Israeli companies in order to raise new capital.
“When I spoke to investors [and startups]”We found that some of these companies were having difficulty identifying themselves as Israeli companies in order to raise new capital,” Cobo said.
Yoel Israel, founder and CEO of Wadi Digital, which represents numerous tech brands, said he has lost business from many of his clients because they are Israeli, and has also experienced potential leads ignoring him on LinkedIn.
Last week, French authorities announced they would ban Israeli defense companies from exhibiting at the international land and air defense and security trade fair Eurosatory 2024 because “considering the French president's call for an end to the IDF's operations in Rafah, the conditions for inviting Israeli companies to the Paris exhibition are no longer in place.”
While the decision to ban Israeli companies was direct and bold, Israel noted that many companies face a “silent boycott” – they choose not to work with or invest in Israeli companies because, in Israel's words, “it's not worth the headache” if they can choose alternative, even if inferior, technology, and the potential backlash they may face.
Cobo added that another impact of October 7 on technology companies was a slowdown in business activity, delays in product development and the inability to achieve corporate goals.
According to Kobo, 7% of tech employees were serving in the reservists in the fourth quarter of 2023. This week, the government increased the number of reservists the army can call up from 300,000 to 350,000 in preparation for a potential clash with Hezbollah in northern Israel, a move that could further stifle the tech industry.
At a crossroads
Israel's high-tech sector accounts for about 20 percent of the country's gross domestic product (GDP), compared to just 9 percent in the United States and 13 percent in South Korea. By comparison, in Russia, where oil and gas is the dominant industry, the industry accounts for just 16 percent of GDP. Between 2018 and 2023, high-tech will account for more than 40 percent of Israel's GDP growth, according to the report.
According to the IIA, Israel is home to around 9,200 technology companies, 600 of which were founded in the last year, 515 multinational research and development centers employing around 90,000 people, and 843 venture capital funds (foreign and domestic) active in Israel, raising $1.52 billion in 2023.
The report notes that Israeli high tech is now at a crossroads: Israel's strong fundamentals remain unchanged and the country still has top entrepreneurs, investors and researchers. But heavy dependence on foreign investment and increased competition, backed by heavy government investment in other global innovation hubs, call for a reevaluation of how the Israeli government invests in the sector.
Additionally, the high-tech sector accounted for $73.5 billion in Israeli exports last year, making up 53 percent of total exports. According to the IIA, high-tech exports have exceeded 50 percent of Israel's total exports in three of the last four years.
But as some are beginning to worry, “past success does not guarantee future success,” said IIA CEO Dror Bin. “The report shows that Israeli high tech is now at a crossroads. Israel's strong fundamentals have not changed, and the country still has top entrepreneurs, investors and researchers. But a high reliance on foreign investment and increased competition, backed by heavy government investment in other global innovation hubs, calls for a reevaluation of how the Israeli government invests in the sector,” he added.
Building a better world
Despite the report, tech entrepreneur and former Minister of Science and Technology Yezhar Shay told The Media Line that Israel’s “optimism, resilience and entrepreneurial spirit” would overcome the adversity.
Hsieh's son, Yaron, was killed in action defending his country on October 7. During the seven days of mourning, the family began thinking about how to remember him. They thought about planting trees, a Jewish tradition. “But we're a tech family,” Hsieh said, so they decided to “start” a new company instead.
We wanted to create a company to commemorate Yaron's memory, and to create as many companies as necessary to memorialize all the fallen soldiers and civilians who protected us on that tragic day.
“In the tech industry, they say they'll fund a company, provide the capital and the manpower needed to start a new company,” Hsieh explained. “We wanted to fund companies in honor of Yaron's memory. We wanted to fund as many companies as needed to memorialize all the fallen soldiers and civilians who protected us on that tragic day.”
Based on this conversation, the Next October initiative was born. Next October “stands for optimism, resilience, entrepreneurial spirit, and the belief that next October will truly be better than last October,” Shay explained.
The idea is to create and fund around 1,500 companies, one for each victim of the October 7th massacre and the war that followed. Hsieh and his team are already working with hundreds of startups, and more are on the way.
“We are focusing on companies that are in the early stages of their formation process, up to those that have raised millions of dollars,” Shay said. “We hope that these companies will incorporate and play a key role in restarting the Israeli economy. In the past, Israel's high-tech innovation ecosystem provided the necessary leverage to restart our economy. That happened after the 1991 Gulf War, the Second Intifada, the Second Lebanon War, the 2008 economic crisis, and COVID-19,” he continued.
The main focus is to bring international investors back to the Israeli market. To date, Shay has hosted major international investment summits in London, Berlin and New York to encourage investors to capitalize on Israeli innovation opportunities. Shay told The Media Line that the concept is working well, at least as far as the Next October Initiative is concerned.
He also said that Israel's high-tech industry has returned from the battlefield and is back on the drawing board with new ideas that will play a key role in the tech economy in the coming years.
“This is a time of creativity and entrepreneurship, and this is an opportunity to get involved with some exciting companies,” he said. “I strongly believe this is not just a celebration, but to create and start something that will support Israeli high tech.”
Hamas came to destroy; we are responding by building a better world.
Shay continued: “Next October will be a day of national response to the brutal attack on our lives and livelihoods on October 7th. We are launching 1,500 new companies – each creating new services and experiences that will reach all corners of the world and build a better world. Hamas came to destroy. We are responding by building a better world.”
