Around 80% of new Israeli startups said electing to incorporate in the US
Various entrepreneurs tell Reuters the move is a result both of economic advantages in America as well as local uncertainty caused by the judicial overhaul
Some 80% of new Israeli startups are currently choosing to incorporate in the United States, particularly in the state of Delaware, the Reuters news agency reported Wednesday.
The report cited an Israel Innovation Authority (IIA) survey, which noted that the figure was up from 20% in 2022. The IIA did not give the number of companies surveyed.
Israeli entrepreneurs told Reuters that the move is spurred both by economic advantages in the US as well as growing uncertainty caused by the Israeli government’s efforts to curtail the judiciary.
“The fact that you are shaking up the judicial system puts Israel in a very high level of uncertainty and investors don’t like uncertainty,” IIA Chairman Ami Applebaum, who is also chief scientist at the Innovation, Science and Technology Ministry, told Reuters.
However, others said the decision was purely a business one, citing proximity to US investors and Delaware’s low corporate taxes and no state sales taxes.
Meanwhile, the agency said a survey of 615 firms by Startup Nation Central, a nonprofit organization that tracks Israel’s tech industry, showed that 8% of Israeli startup/tech companies had started moving their headquarters abroad, and 29% intended to do so soon.
“It’s just a very high level of uncertainty,” said Ian Amit, an entrepreneur in the process of registering an AI cloud security company in Delaware.
“It mainly really revolves around corruption and uncertainty of what system is there to protect me as a business, from a tax perspective, from a legal perspective or an intellectual property perspective,” he said.
Tomer Tzach, CEO of the agri-tech firm CropX, told Reuters he was also considering the move.
“At the end of the day as a CEO I need to do what’s right for my shareholders, my investors, my company and I feel terrible about it,” he said.
Ayal Shenhav, who leads hi-tech and venture capital at the law firm Gross & Co., added: “It’s not something concrete that you can say ‘Judges in Israel are corrupt.’ No one is saying that. It’s just a feeling that it is not as stable as it used to be and a lot of people follow the crowd.”
Earlier this month, Start-Up Nation Central said private funding by Israeli startups in the first half of 2023 dropped to a five-year low as the “ripple effect” from the growing uncertainty around the judicial shakeup takes its toll on the country’s tech ecosystem.
In the first six months of the year, Israeli startups raised a total of $3.9 billion from private financing rounds, marking a 29% drop from the volume of funds raised in the second half of 2022, and a 67% decline from the $11.9 billion nabbed during the same period last year, the data compiled by SNC’s Finder startup database showed.
More concerning, the report pointed to a quarter-on-quarter fundraising decline of 10% from the first quarter to the second quarter of this year, while in the US private funding trends are stabilizing, it was noted in the report.
Health tech and fintech were among the sectors that got hit hardest during the first half of the year in nabbing private funding, while climate tech firms attracted more capital and the downturn in investments in cybersecurity firms stabilized.
“The uncertainty and internal changes in Israel together with global economic changes are prominently expressed in the activity of the Israeli ecosystem and reflect a significant slowing down and an ebb in activity,” said Yariv Lotan, Start-Up Nation Central VP of Digital Products, Development, Data and BI. “This sharp drop stands in opposition to the stable trends in funding and venture capital seen in the US.”
Tech executives, startup founders and employees have been at the forefront of mass protests against the changes to Israel’s judicial system advanced by the coalition government, led by Prime Minister Benjamin Netanyahu, since the start of the year. The concern is that the judicial overhaul plan undermines Israel’s system of checks and balances and its democratic character, which in turn, it is feared, threatens the ecosystem’s position as a stable hub for investments.
Israel’s tech ecosystem is a key engine of growth for the local 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.
“It is essential to acknowledge the uncertainty in Israel resulting from the recent judicial reform,” it was cautioned in the report. “The ripple effect is already being felt with indicators such as decreased fundraising and fewer emerging Israeli startups.”
In July the Knesset approved a law which grants some tax benefits to investors in Israeli hi-tech companies, as well as incentives for acquiring or merging with startups if the intellectual property is registered in Israel and they have operations in the country.
The government said that the purpose of the law was to preserve Israel as an attractive hub for investment in tech companies and to support the development of the industry. The law has been advanced over the past couple of years and was passed in an initial reading in 2022.
But the Bank of Israel warned recently that growing and prolonged uncertainty posed a threat to the country’s financial system and economy.
In its Financial Stability Report for the first half of 2023 report, the Bank of Israel presented the challenges to the country’s financial system and raised its assessment of the level of risk to Israel’s macroeconomic environment to “medium-high,” from “medium-low,” citing concerns of legal and institutional changes leading to a slowdown in the tech sector and a weakening of the shekel exchange rate.
The central bank explained that the increased risk level also stems from other factors, including continued interest rate hikes due to rising inflation and expectations of a slowdown in local and global economic growth.
Sharon Wrobel contributed to this report.
The Times of Israel Community.