Amid war with Hamas, Israeli startup funding drops to six-year low

Investment in tech startups slumped 46% in last quarter of 2023, as foreign funds shy away from reinvestment in local market, according to report by industry tracker

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

View of Kiryat Atidim, the tech business park of Tel Aviv. (Yossi Zamir/Flash90)
View of Kiryat Atidim, the tech business park of Tel Aviv. (Yossi Zamir/Flash90)

During the ongoing war with the Hamas terror group, Israeli tech startups raised less funding than in any quarter since 2017, according to a report by the Start-Up Nation Policy Institute (SNPI) released on Wednesday.

In the last three months of 2023, startups secured $1.3 billion in capital, a decline of 46 percent compared with the same quarter a year earlier. The breakout of war in the aftermath of the Hamas-led atrocities on Oct. 7 led to a sharper plunge in investments than in both Europe and the US, data compiled by SNPI’s 2023 annual report on the Israeli tech showed. SNPI is an arm of Start-Up Nation Central, which tracks the tech industry.

The Israeli army mobilized more than 350,000 reserve soldiers as the war began, many of whom remain in uniform after nearly three months. The absence of key personnel in the tech sector, the growth engine of the Israeli economy, has damaged startups’ day-to-day operations as well as their ability to attract foreign investors and raise funding.

The war hit the Israeli tech industry at the end of a crisis year in which it had already faced a global downturn in venture capital funding and local political uncertainty over the government’s proposed judicial overhaul that threatened to erode investor confidence.

“The events of the past year have thrown Israeli high-tech into ongoing uncertainty, making 2024 a pivotal year that will shape its future trajectory,” said SNPI CEO Uri Gabai. “Amid accelerated global competition alongside local instability, the challenges faced by Israeli high-tech are growing more substantial and intricate.”

“Without a world-leading high-tech sector, there will be no economic and national resilience,” Gabai warned.

IDF troops of the 5th Reserve Brigade operate in southern Gaza’s Khuza’a, in this undated photo published by the military on December 29, 2023. (Israel Defense Forces)

Israel’s tech sector now contributes 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.

Quarterly data presented in the SNPI report showed a continuous decline in investments in local startups from the second quarter of 2022, reaching its lowest point in the last quarter of 2023 due to the war.

Venture capital funding raised by Israeli startups in 2023 plunged 58% year-on-year and amounted to $7.3 billion, returning to levels last seen in 2018. The downturn in investment is not unique to Israel, as tech companies both in Europe and the US have also experienced a decline in capital investment amid a global economic slowdown and rising inflation. However, the data showed that Israeli tech has been more severely impacted than other Western economies.

The year-on-year drop of 58% in investment in Israeli tech in 2023 was almost double that recorded in the US of 30% and higher than the 44% in Europe.

One of the key concerns raised by SNPI is that in the past year local political instability, plus the uncertainty around the duration and magnitude of the Hamas war, has kept foreign investors away. About 80% of venture capital investments in local tech startups were generated from foreign funds in 2021 and 2022.

An analysis of the participation of foreign investors showed about 42% of foreign VCs that invested in the Israeli tech sector in 2022 did not invest in 2023 — more than double the average for the years 2018-2022, which stands at about 17%.

Prof. Eugene Kandel, chairman of Start-Up Nation Policy Institute (SNPI). (Micha Loubaton)

“This increase suggests that a considerable number of foreign VCs are either distancing themselves from the Israeli market or not identifying startups appealing enough for investments,” SNPI wrote in the report. “Either scenario is cause for significant concern.”

This trend was also found among Israeli VCs, but less profoundly. Among Israeli VCs, 32% refrained from investing in Israeli startups in 2023, an increase from the average of 19% observed in previous years.

In light of the worrying trends, SNPI chairman Prof. Eugene Kandel called on policymakers to act swiftly and establish a comprehensive government task force, together with the tech industry and civil society, to develop and implement a long-term strategic plan.

“As we have seen in past crises, it’s critical for the high-tech sector to not only recover but to emerge stronger and reaffirm its position as a global frontrunner,” said Kandel. “Now, more than ever, a strategic, unified, and forward-thinking government policy is essential.”

“Without a concerted effort, Israel risks sliding into an irreversible decline,” he cautioned.

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