JERUSALEM — Eleven months after the Oct. 7, 2023, Hamas massacre triggered a tragic war, Israel’s high-tech sector, a major driver of the economy, is showing small signs of recovery.
Investment in Israeli technology companies, which dropped from a record-breaking $28.2 billion in 2021 to $17.5 billion in 2022 and $8 billion in 2023, could reach $8-9 billion this year, according to analysts.
“Looking at the glass half-full, things are stabilizing, but it’s about half the investment we would be seeing without a war,” Israel Innovation Authority CEO Dror Bin said.
Even before the Oct. 7 Hamas massacre, the war between Russia and Ukraine, disrupted supply chains, global inflation, rising global interest rates, and political instability within Israel were making investors anxious.
Combined with these challenges, the Israel-Hamas war “was the perfect storm for Israeli high-tech,” Bin said. Productivity suffered as parents stayed home to watch their children and the army called up an unprecedented number of reservists, including 28,000 high-tech workers — 7% of the tech workforce, many in crucial positions.
Although most are back at their jobs, the war’s effects on the economy continue. GDP grew just 1.2% in the second quarter and on Aug. 11, the credit ratings agency Fitch lowered Israel’s rating to “A” from “A-plus” due to fears of an expanding war and higher military spending.
The importance of high-tech to the Israeli economy cannot be overstated. From 2018-2023, the sector was responsible for 20% of the country’s GDP, more than 40% of its GDP growth, 50% of its exports and 12% of its jobs. The sector contributes more than one-third of the country’s national income tax, mostly through the taxation of wages.
Despite the continuing uncertainty, there are definite signs that Israel’s “Silicon Wadi” is holding its own, at least when it comes to the largest firms. Not one of the 500 multinational companies, including Google, Amazon, and Oracle, has pulled up stakes, and Wiz, an Israeli cybersecurity start-up launched in 2020, recently rejected a $23 billion offer from Alphabet, Google’s parent company.
On the flip side, Intel Corp, which employs almost 12,000 Israelis, is reportedly holding off plans to build a $25 billion factory, the Israeli news site Calcalist reported in June. Both the war and Intel’s financial woes appear to have played a role.
“Israel continues to be one of our key global manufacturing and R&D sites, and we remain committed to the region,” an Intel spokesperson said in a statement meant to reassure stakeholders. “Our decisions are based on business conditions, market dynamics, and responsible capital management.”
Uri Gabai, CEO of the RISE Institute, an Israeli economic think tank, isn’t concerned about the multinationals in Israel or established Israeli companies. He worries about the smaller start-ups.
“The big companies, the Googles and the Amazons, Wix and Checkpoint, can fund themselves,” Gabai said. “Where we need to intervene, especially while there is a war, is in pre-revenue start-ups and start-ups making revenue but not a profit.”
Soon after the war began, the IIA researched which early-stage start-ups were unable to raise enough funds to pay their employees’ salaries for the next six months.
“We know of hundreds of early-stage, pre-revenue start-ups that cannot yet fund themselves but will be the next wave of growth for Israeli tech,” Bin said. With the data in hand, the authority established the Fast Track Program “to ensure that solid start-ups will not fail due to lack of runway to continue operations.”
So far, the program has allocated about $100 million to some 250 companies, with $150 million in matching funding from venture capital funds. Another new initiative, the Yozma Fund 2.0, is a next-phase program that encourages institutional entities to invest in Israeli venture capital funds that support local start-ups.
Even with such assistance, part of a larger stimulus package launched in January by the IIA and Ministry of Finance, Gabai fears that some Israeli start-ups will relocate at least part of their company to the United States or Europe, closer to possible investors and far away from the maelstrom gripping the Middle East.
Between 85% and 90% of money invested in Israeli start-ups comes from abroad. Nearly 50% of the entire sector’s funding is from overseas.
“Anecdotally, some have moved their headquarters abroad,” Gabai said. “I’m afraid that some believe this is not the best time to be an Israel-based company. We could lose the best and the brightest.”
Jonathan Medved, CEO of Jerusalem-based OurCrowd, often called Israel’s most active venture capital fund, is still extremely gung-ho about Israel’s start-up ecosystem.
“People think that everything has to do with the war, but Israel is a mirror of the global reality in Silicon Valley and elsewhere,” Medved said. He is optimistic that start-up investments will reach $10 billion by the end of this year and eventually exceed 2021’s historic performance. Since it is the war, and not the quality of Israeli companies that is bringing prices down, this is an optimal time to invest, Medved said. “It’s always better to raise money when a country isn’t at war but the story, by and large, is how well the Israeli high-tech community is surviving and actually growing right now. Hundreds of companies are raising money.”
For companies that aren’t, OurCrowd is one of a handful of venture capital houses that have launched resilience funds for those in danger of going under.
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While acknowledging the difficulties facing Israeli high-tech and the country as a whole, Maya Schwartz, CEO of the Israel High-Tech Association, said people should never underestimate Israeli resilience. Her association represents 400 tech firms.
“In what other country and industry could a large percentage of the workforce, including many women, be called away to serve in the army for several months and find that the industry has become better, stronger, and more innovative, out of necessity?” Schwartz said. “This is the story of Israeli high-tech.”
Michele Chabin is an Israel-based journalist. Her work has appeared in, among other outlets, Cosmopolitan, The Forward, Religion News Service, SCIENCE, USA Today, U.S. News & World Report, and the Washington Post.