Almost 70% of Israeli startups act to shift funds, relocate due to judicial shakeup

Steps by startup heads and investors to withdraw cash reserves and move operations outside Israel have accelerated in past 3 months, according to a poll by Start-Up Nation Central

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

Tech workers march in Tel Aviv to protest against the government's planned overhaul of the judicial system, January 31, 2023. (Tomer Neuberg/Flash90)
Tech workers march in Tel Aviv to protest against the government's planned overhaul of the judicial system, January 31, 2023. (Tomer Neuberg/Flash90)

Almost 70 percent of Israeli startups are taking active steps to pull money and shift parts of their businesses outside the country due to the uncertainty created around the proposed judicial overhaul, according to a survey by Start-Up Nation Central, which tracks the local tech ecosystem.

The findings of the survey showed that 68% of Israeli startups have started to take “legal and financial steps,” including the withdrawal of cash reserves, moving their headquarters outside of Israel, relocating employees and conducting layoffs. Overall, 78% of the surveyed startup executives reported that government’s controversial plan to weaken the country’s judicial system is “negatively” impacting their operations, and 84% of venture capital investors said it has a negative influence on their portfolio companies.

“Companies and investors are taking active steps to move activity away from Israel and this behavior has increased significantly over the past three months,” said Start-Up Nation Central CEO Avi Hasson. “Concerning trends like registering a company abroad or launching new startups outside Israel will be hard to reverse.”

“As an organization with a mission to strengthen the technology industry in Israel, it is our duty to share this data with decision makers in Israel and provide an up-to-date picture of the situation as it unfolds,” Hasson said.

The tech ecosystem is a key engine of growth for Israel’s economy, as it generates about 16% of GDP and over 50% of exports, and contributes more than 25% of the total income tax collected by the government.

The survey, among 734 founders and CEOs of startups and managing directors of venture capital funds representing a sample of 521 firms in the Israeli tech ecosystem, was conducted July 18-19 to gauge the economic implications of Prime Minister Benjamin Netanyahu-led government’s plans to curb the authority of the Supreme Court. Among the respondents were 615 leaders of startup companies and 119 investor executives.

Anti-overhaul protesters march in Jerusalem on July 23, 2023. (Chaim Goldberg/Flash90)

The contested changes to the judiciary proposed by the coalition have been triggering mass protests across the country for more than six months. Tech executives and employees have been taking part in the protests amid concern that the plan undermines Israel’s system of checks and balances and threatens its democratic character, which in turn, it is feared, will drive away foreign investment.

The publication of the survey come as some 200 businesses in the tech sector and a group representing 150 of Israel’s largest companies announced a strike for Monday, with some banks, shopping centers and gas stations closed and some businesses working in a reduced framework ahead of and during the final Knesset vote on the “reasonableness” bill, the first piece of the planned judicial overhaul to become law.

About 22% of the companies in the survey said that they have moved cash reserves outside of Israel to diversify risk, and 31% said they intend to withdraw funds in the future. Meanwhile, 37% of investors reported that companies in their portfolios have withdrawn some of their cash reserves and moved them abroad.

Additionally, 19% of the surveyed startups said they had laid off employees, out of which 46% fired 10-30% of their workforce and 28% reduced more than 30%. About 25% of VC investors reported layoffs in their portfolio companies. The tech sector employs about 400,000 people, representing more than 11% of the Israeli workforce.

Among the surveyed, 8% of startups responded that they have already started the process of moving their headquarter locations outside of Israel, and 29% expressed their intention to do so in the near future. Among investors, 20% noted that companies in their portfolios have begun changing their headquarters and 69% of investors said that companies in their portfolios seek to make the relocation in the future.

The uncertainty over the proposed changes to the judicial system is already driving investors to increasingly back foreign companies, which is harming the ability of Israeli startups to raise funds. About 67% of investors said that they are investing or considering investing in foreign companies.

An illustrative photo of the Tel Aviv financial business district skyline. (Elijah Lovkoff via iStock by Getty Images)

Recent data by venture capital firm Viola published this month showed that fundraising by Israeli tech firms in the first half of the year plunged 73% to $3.2 billion versus $12 billion during the first half of 2022, and marked the lowest figure since at least 2018.

Tech investments have continued to slump globally, albeit at a slower pace. In the first six months of the year, global funding activity dropped 50% to $168 billion from the $333 billion raised during the same period in 2022 and $348 billion in the first half of 2021.

With first signs of recovery already being seen in the US technology sector’s bounce-back this year, the Israel Innovation Authority and other representatives in Israel’s tech ecosystem have raised concern in recent weeks that the continued local political and social instability may cause a recovery in the global tech industry to bypass the Israeli economy.

Looking ahead to the coming months, Israeli startups and investors in the survey alike said they expect venture investment in the US to pick up more substantially and at a faster pace than in Israel.

About 65% of investors believe the US is already seeing signs of recovery or will see them within six months, compared to only 12% in Israel.

“The ecosystem is currently experiencing headwinds and there is uncertainty about the future of VC investments in Israel,” according to the survey. “There is significant lack of clarity regarding the expected horizon of recovery in Israel.”

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