ISRAEL AT WAR - DAY 146

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After Israeli tech mobilized in wartime, how will startups fare in 2024?

Former innovation policy chief urges government to support tech sector, revive confidence of investor community, to ensure it doesn’t lag behind as global industry recovers

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

Volunteer team at Israeli startup Lasso Security coordinating purchases and deliveries of protective gear to Israeli soldiers, October 2023. (Courtesy)
Volunteer team at Israeli startup Lasso Security coordinating purchases and deliveries of protective gear to Israeli soldiers, October 2023. (Courtesy)

Since the October 7 atrocities, it has been widely felt among the Israeli public that nothing will ever be the same again. That same sentiment became a call for action for the tech ecosystem, a driving force of the country’s economy, to rise to the challenge even as up to 30 percent of its workforce was called up for military reserve duty in the war against the Hamas terror group.

Now, three months into the fighting, startup founders, entrepreneurs, and investors tell The Times of Israel how they are transforming, adapting, and enduring during this difficult period as they attempt to keep up Israel’s reputation as a high-tech powerhouse.

Even before the outbreak of the war, the clouds had been gathering for months over Israeli startups and tech firms, as the government’s proposed judicial overhaul led to heightened political uncertainty and fears that the planned changes to the legal system would make business and investment in the country less predictable, which kept foreign investors away.

Then, war erupted after some 3,000 Hamas terrorists crossed the Gaza border in a devastating attack on October 7 that killed over 1,200 people, mostly civilians. In the aftermath of the onslaught, more than 350,000 reserve soldiers were called up. The military mobilization of employees has hurt businesses across the country, and tech firms, both small startups and established companies, were not spared.

“Startups and tech companies suddenly had to meet their business goals with a reduced workforce,” Noa Asher, CEO of NTT Israel Innovation Lab, told The Times of Israel. “It was a year that reminded us of the importance of unity and the power of mutual support and civilian ingenuity.”

“We’ve seen the entire ecosystem stand behind the message that Israeli tech delivers, no matter what,” said Asher, who has headed the Japanese telecommunications giant’s Israel operations since the innovation lab was established in 2021.

Noa Asher, CEO of NTT Israel Innovation Lab. (Michal Levy)

Taking stock three months into the war, other Israeli tech founders and investors  agreed that while 2023 was a very tough year for a local sector that has been battered by two crises, the industry has shown formidable resilience in adapting to the new reality of operating in a war situation.

This fortitude was also recently commended by Pat Gelsinger CEO of Intel, Israel’s largest private employer and exporter, who called Israelis the “most resilient people on earth,” adding that despite the war, the US semiconductor giant has not failed to fulfill all its commitments to supply chips or develop products coming out of the country.

For serial entrepreneur Elad Schulman, the resiliency exemplified during the ongoing war period is an attitude that will continue to drive the local tech industry going into 2024.

“We are resilient, we will win, in war and in business,” said Schulman. “Israeli entrepreneurs have another X factor which is the community — everyone in the local industry is always willing to assist others.”

Schulman co-founded Tel Aviv-based cyber startup Lasso Security, which emerged out of stealth during the war in November armed with $6 million in seed funding even as another of its founders, Ophir Dror, was in reserve duty.

Realizing that Dror and other soldiers lacked protective gear, the three-month-old startup with its team of 10 employees launched a fundraising campaign from its office and raised over $1.5 million. The effort resulted in the supply of over 800 packages of equipment, including first aid kits, field medicine, and other necessary supplies to numerous Israel Defense Forces units to help ensure the safety of soldiers in the field.

Two jobs

Protective equipment donated by Israeli startup Lasso Security is delivered to an IDF combat unit operating in Gaza. (Courtesy)

Lee Moser, founder of AnD Ventures, an Israeli venture capital firm investing in early-stage startups, said that in the war, those who have not been called up for reserve duty have two jobs.

“We have our work, and then we have our volunteering,” said Moser. “It’s important for us to go about our day-to-day operations as best as we can because we need to make sure that there are companies for our soldiers to come back to, but that doesn’t diminish the importance of finding ways to volunteer and help Israel in this time of need.”

Moser is married to Eyal Naveh, a veteran of Israel’s most prestigious special forces unit, Sayeret Matkal, and one of the initiators of Brothers and Sisters for Israel, a civilian aid organization powered by more than 15,000 volunteers, among them many from the tech industry who use their knowhow and entrepreneurial skills to organize and manage donations dedicated to supply equipment and whatever is needed to the Israeli army and the October 7 victims.

“The resilience and creativity of Israeli companies, paired with their ability to create influential and groundbreaking solutions, make them a compelling investment,” Moser remarked.

Similarly, Moran Chamsi, managing partner at Herzliya-based Amplefields Investments, said that the “readiness of companies to deploy their infrastructure and teams to support the civil front, and the readiness of individuals to take on their colleagues’ workload because they were called up for duty, are a testament to the Israeli mentality of ‘bite the bullet.”

“We can see that the majority of Israeli high-tech companies have successfully established a long-term ‘plan B,’ taking into account that reservists might remain out of the office for longer than three or four months,” said Chamsi.

Moran Chamsi, managing partner at Amplefields Investments. (Merav Ben Loulou)

Bullish…

With the war still ongoing in 2024, Lasso’s Schulman strongly believes that Israeli tech will continue to “lead and deliver even through hard times” and therefore he is focusing on growing the startup’s business.

“We are starting with massive recruitment of new employees and are kicking off 2024 with robust R&D and marketing plans to supply cutting-edge technology to our customers,” said Schulman, who also serves as the CEO of Lasso.

Echoing similar expansion plans is Yoav Zurel, co-founder of Pontera, an Israeli-founded fintech startup that developed a software platform to help financial advisers better manage retirement accounts.

“We are extremely bullish about the talent in Israel and are looking to hire at least 50 people, in areas of engineering and product,” said Zurel. “We are optimistic that we will win this war, and people will go back to their lives.”

“Even if the war will keep going for a while it doesn’t change our hiring plan,” he added.

Like many local startups, Pontera has about 20% of its team in Israel in reserve duty and another 10% whose daily schedules are impacted by their partner being called up, said Zurel. The startup has 140 employees in Israel out of a total of 220 based at its offices in Herzliya and New York. To provide support to employees during the war, Pontera launched employee assistance programs, offering family outreach and support, childcare, and the option to work from home with paid lunch.

Yoav Zurel, co-founder and CEO of Israeli-founded fintech startup Pontera. (Maya Rado)

“Although we have like 30% impact on our team in Israel, customers are not facing any disruptions — nothing,” Zurel said. “Everybody’s pulling through and working very hard, extremely focused and I think this is what’s on an investor’s mind – they know that we will make it work.”

…but peril seen for short-runway firms

At the same time, Zurel said that some companies, in particular smaller firms and early-stage startups that are struggling to operate or don’t have enough financial buffers to survive during the war period, will fail.

“But I think, in the ecosystem as a whole, what we are seeing is a dramatic improvement in how people run companies,” said Zurel. “It’s efficient, it’s focused, it’s client-centric, as they don’t have a choice.”

Speaking to The Times of Israel, Avi Hasson, the CEO of Start-Up Nation Central, noted that one of the reasons that Israeli tech has been relatively resilient in the delivery of its products is that it’s almost entirely based on software using the cloud and is not affected by logistics or supply chain challenges. In addition, most high-tech firms also have global operations, which continue while the war is raging.

However, fundraising is going to remain a “major issue,” in particular for early-stage startups that have a relatively short runway of three to six months, cautioned Hasson.

In the three months since the war broke out, Israeli tech startups raised less funding than in any quarter since 2017, according to a recent report by the Start-Up Nation Policy Institute (SNPI). The downturn in investments was steeper than the trend experienced in both Europe and the US. SNPI is an arm of Start-Up Nation Central, which tracks the tech industry and connects it with international businesses and government leaders.

Start-Up Nation Central CEO Avi Hasson. (Miri Davidovitz/Courtesy)

“We are seeing investors who are saying, we are going to double down on Israel as there is a wave of innovation coming out of the country right now as a result of the war, for example in areas of defense tech, rehabilitation, mental health, or AI and drone technologies, that are tested in the battlefield, or civil society,” said Hasson.

“Several of the challenges that Israel has to cope with are not unique to Israel; obviously other countries don’t have Hamas, but they have similar challenges for which solutions are sought.

“With regards to the sentiment of foreign investors vis-a-vis Israel, it’s actually more optimistic than we thought,” Hasson noted.

Furthermore, Hasson believes that for those investors who refrained from backing Israeli tech in 2023 because of the political uncertainty and high company valuations, local startups are likely to become more attractive this year.

“What we need to make sure is that as the global tech industry is recovering, the Israeli tech sector will not be lagging behind,” said the former innovation policy chief, urging the Israeli government to play a more active role in supporting tech and innovation.

“The government needs to focus on infrastructure building, such as human capital, the R&D infrastructure, and the national AI program, which was designed but never implemented,” Hasson said. “It also needs to signal very clearly to the global investor community and to global multinational companies that its support for high tech is long-standing.

“That support cracked in 2023, mostly around the judicial overhaul, and it’s super important to bring it back coming into 2024,” he urged.

Israel’s tech sector contributes about 18% of GDP, versus less than 10% in the US and about 6% in the EU. About 14% of all employees work in the tech sector and in tech jobs in other sectors. The economy relies on tech exports, which make up about 50% of total exports, as well as taxes from the sector.

“After this year (2023), it’s clear that our title as the high-tech nation is not guaranteed; it’s something we need to dedicate ourselves to keeping,” said Amplefields’s Chamsi. “The key moment for the coming year will be the exit point from major military engagement and once we have established a stable security environment, the sector will resume at full steam ahead.”

Amplefields, which invests in late-stage Israeli high-tech companies, sees investment opportunities in areas of climate tech and food tech, cybertech, ad tech, HR tech, and insure tech.

“Experienced investors know that every crisis is an opportunity, but in Israel even more so – these periods of uncertainty bring about a huge mobilization of the best minds here to produce solutions, which become the next generation of tech for the rest of the world,” said Chamsi.

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