ISRAEL AT WAR - DAY 142

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80% of Israeli startups say judicial shakeup will have ‘negative impact’ — survey

Company heads and investors report concern about raising capital, outflow of funds, and employees seeking to relocate, according to poll by Start-Up Nation Central

Sharon Wrobel is a tech reporter for The Times of Israel.

Tech workers protest against the government's judicial overhaul 'time is running out for Israeli hi-tech,' in Tel Aviv, on March 23, 2023 (Avshalom Sassoni/Flash90)
Tech workers protest against the government's judicial overhaul 'time is running out for Israeli hi-tech,' in Tel Aviv, on March 23, 2023 (Avshalom Sassoni/Flash90)

More than three-quarters of Israeli startups are concerned that the government’s controversial plans to weaken the country’s judicial system will negatively impact their operations and their chances to raise funds from foreign investors, according to a survey published Thursday by Start-Up Nation Central, which tracks the local tech ecosystem.

The findings of the poll showed that 80% of startups and 84% of investors fear that the planned changes to Israel’s judicial system will have a “negative impact on them and their portfolio companies.” About 84% believe the government’s plans will have a negative effect on their ability to raise capital from abroad.

The survey was conducted among a sample of 873 companies and firms before the end of March and Prime Minister Benjamin Netanyahu’s announcement for a halt of the legislative process of the judicial overhaul to make room for dialogue and to reach a compromise. The Israeli high-tech ecosystem is the key engine of growth for Israel’s economy, as it generates about 16% of GDP, and contributes more than 25% of the total income tax collections by the Israeli government.

Weekly mass protests around the country against the government’s highly divisive efforts to weaken the judicial system have persisted in recent days even after the coalition paused the legislation late last month. Among the demonstrators are many leading entrepreneurs, investors and tech workers, who have in recent months voiced their opposition to the proposed changes which would grant the government more weight in the selection of judges while curbing the Supreme Court’s power to strike down legislation.

About 79% of the surveyed companies, who are currently raising capital said that since the unrest over the judicial shakeup started, meetings with investors were canceled, while 31% reported a total halt in investor meetings. In addition, 76% of investors said they believe the judicial changes will slow down M&A activity in the local high-tech industry, which makes up about 90% of the tech ecosystem’s funding, according to Start-Up Nation Central.

The main concern is that the judicial overhaul will erode democracy and weaken checks and balances, which in turn will make venture capitalists and other money makers leery of investing their money in the country, triggering an outflow of funds.

Israeli tech unicorn Riskified is the latest local firm to announce that it would be transferring $500 million out of the country and offering a limited number of relocation packages to interested staff members.

Of the surveyed companies, 46% said they have plans to move cash reserves outside of Israel, of which 58% of them said they plan to transfer more than 50% of their cash reserves, and another 31% answered that they plan to move between 25-50% of their Israeli cash reserves abroad.

Bank of Israel governor Amir Yaron has in recent weeks cautioned against the potential economic danger posed by the government’s push to curb the justice system, warning about a slowdown to investments into the local tech industry and risks of a brain drain. Israeli tech companies raised $1.7 billion in the first quarter of this year, down 70% from the $5.8 billion in the first three months of 2022, according to a report by IVC Research Center and LeumiTech. The quarter marked the lowest figure in four years.

Going forward, 78% of investors said that they expect their portfolio companies to make changes to the jurisdiction of their headquarters to other countries outside of Israel and 42% of Israeli startups said they are considering changing their companies’ local registration.

Israel’s tech ecosystem consists of over 7,300 startups and companies, over 400 venture capital and investment funds, and about 500 multinational corporations’ (MNCs) innovation and R&D centers, according to Start-Up Nation Central data.The tech sector employs about 400,000 people, representing 11% of the Israeli workforce.

About 72% of investors in the survey believe that as a result of the negative impact of the judicial changes, their portfolio companies will be forced to make more layoffs with 34% expecting a significant increase. In addition, 27% of Israeli startups said they are considering relocating their employees outside of Israel and out of those, 35% are proactively planning to offer relocation packages to employees.

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