As AI rides global wave, troubled Israel risks missing the splash

Israel may miss riding the AI wave if the Israeli government doesn’t halt its planned judicial upheaval and focuses on creating a strategy for the technology that is rocking the world, experts say.

“There are going to be countries that are leaders in artificial intelligence and those that aren’t. And so, the real question is, what are we as a country doing to be leaders?” Michael Eisenberg, the general partner and co-founder of Aleph, a Tel Aviv-based venture capital firm told The Times of Israel. “And the answer is not enough. Not close.”

“The government needs to stop being distracted and get focused on what matters,” Eisenberg said.

Israel’s far-right government led by Prime Minister Benjamin Netanyahu is advancing a judicial overhaul that economists, jurists and human rights activists claim is leading the nation from being the Middle East’s only democracy to the cusp of dictatorship.

The political upheaval has sent hundreds of thousands of protesters onto the streets since the start of the year, the shekel has nosedived and high-tech investments and exits have plunged. In addition, a majority of technology leaders and entrepreneurs have started to register their new startups in the US rather than in Israel, with long-term implications for the nation’s until-recently thriving startup ecosystem.

Israel has the potential to ride the AI wave, the experts say. But a long-term strategy must be in place to allocate significant amounts of money and resources to boost education and academic research, encourage startups, and provide the infrastructure and cheap computational power needed to run the AI models.

“We need to make compute as ubiquitous and as affordable as electricity,” said Eisenberg, referring to the ability to give computers enough power to run complex calculations. “We need to bring back many Israeli Jewish academics and leaders who are in this space and are living abroad in the US, the UK, France and other places, so we can create a critical mass of talent here in Israel.”

“And we need to have a national policy managed by one person who is focused on this…We need coherent policy and action,” he urged.

Israeli tech leaders and politicians are, however, putting their efforts elsewhere. Politicians are focusing on advancing the judicial overhaul, shrugging off the damaging implications for the economy and the nation’s tech ecosystem. While tech leaders, many of whom have taken to the streets to protect the checks and balances that preserve the nation’s democratic character, are too busy putting out the fires of the global tech downturn and trying to save what they have rather than looking ahead to what is changing under their very feet.

“My friends in the tech industry are not doing anything else but dealing with the protest. This has consequences,” said Shlomo Dovrat, a tech veteran and co-founder of VC fund Viola, which has over $4.5 billion of assets under management. “If we don’t bring the train back on track, we will find ourselves 10 years behind.”

Dovrat made the comments at a conference by the Aaron Institute for Economic Policy held at the Reichman University in June.

Fundraising by Israeli startups dropped to the lowest level since 2018 in the first six months of the year as local political uncertainty has amplified the effects of the global downward trend in the tech industry, a report released by Start-Up Nation Policy Institute (SNPI) on July 2 showed. Investments in tech firms plunged 68% in the first half of the year to $3.7 billion compared to the same period in 2022.

Israeli startups raised $2 billion in the first quarter of the year, a figure that dropped to $1.7 billion in the second quarter of 2023 — the lowest quarterly figure since the second quarter of 2018.

If this pace continues, total investments in the Israeli tech industry in 2023 are forecast to decline by 55% from 2022, according to SNPI estimates. Israeli tech firms raised close to $15 billion in capital last year and, during a bonanza funding year in 2021, nabbed $25.6 billion in private investments in total.

“We are definitely in the most vulnerable spot that the Israeli tech has been in the last 15 years,” said SNPI CEO Uri Gabai.

This is due to a dangerous combination of a global downturn and the political “chaos” in Israel around the judicial overhaul, he said. “The instability here is not a good sign for startups, it is not a good sign for entrepreneurs.”

The main concern is that many Israeli entrepreneurs with a “killer idea” for an AI startup will set up their new company outside Israel to avoid the current turmoil that has caused a drop in investments in Israeli tech companies.

“Startups that are in seed (stage) spread their wings wherever they find a place to grow,” Gabai said. “The most frightening scenario is that the next startup that will rise from this AI revolution will be based on Israeli founders but will not be Israeli.”

“To make the most of the AI revolution, wave, we must restore security and stability to Israel,” said Gabai. “The world is not waiting for us.”

Israel’s tech foundation, set up over 40 years ago, is strong. “But if you keep pounding at the foundation again and again and again, at some point the building is going to collapse,” Gabai said.

“I’m very concerned that in 10 years’ time we will look at the graph and say 2023 is the year that ended the unprecedented run of the Israeli high-tech industry since basically the 1990s…I am very concerned 2023 will mark the change,” he cautioned.

AI, the next big thing

Artificial intelligence — the tech that gives computers the ability to learn — has been around since the 1950s. But over the last decade the field has enjoyed a renaissance made possible by the huge amount of data available online and the higher computational power of chips. Advances in the field over the last 10 years have enabled computers to analyze datasets and find useful patterns to solve problems, with the machine often outwitting the human brain.

Private investment in AI technologies has surged in the past decade, with the amount of private investment totaling $91.9 billion in 2022, 18 times greater than it was in 2013, according to the AI Index 2023 annual report by Stanford University.

The hype around generative AI (GenAI), which can create complex content that resembles human creativity, in the likes of OpenAI’s ChatGPT and Google’s Bard chatbot, is setting the world abuzz with potential and expectation.

OpenAI CEO Sam Altman said recently in a conversation at the Tel Aviv University that entrepreneurs worldwide must take advantage of this huge disruption created by AI, to set up startups that can become the next big thing in tech.

“This is truly the best time to start a startup,” Altman said at the event in Tel Aviv. “You have an incredible new, fast-moving technological wave, and (that) is when startups win…when the incumbents screw up and get displaced.”

“The ground is shaking right now, that is what you want as a startup,” Altman emphasized.

Israel has the “talent density” and its entrepreneurs have the “relentlessness, drive, ambition” that can give the nation “incredible prosperity both in terms of AI research and AI applications,” he remarked.

Indeed, Israel has the potential to replicate, with AI, its success in cybersecurity, said Prof. Isaac Ben-Israel, who was instrumental in setting up the nation’s policy for protecting the cyber sphere.

As with cybersecurity, all you need to succeed in AI is a brilliant idea and a computer, Ben-Israel said. You don’t need massive production lines, and the AI field is perfectly suited for a small country like Israel which is known for its edge in software-based technologies. But to become a winner, Israel first needs to get its house in order, he said.

Israel is considered a cybersecurity powerhouse, with exports of its products at around $10 billion, accounting for 10 percent of global cybersecurity exports, and with its startups in the field garnering over 40% of total global private investments.

A good starting point

According to a Stanford University report, Israel is the fourth-largest recipient globally of AI private investment, garnering $3.24 billion in 2022, compared with the $47.4 billion invested in the US, which leads the ranking. China comes in second and the UK third, with $13.4 billion and $4.4 billion, respectively. In the period between 2013 and 2022, Israeli startups raised a total of $10.83 billion, compared to $248.9 billion for the US.

There are some 2,200 companies in Israel that use AI for deep tech in a variety of industries, according to data compiled by the Israel Innovation Authority, in charge of setting out the nation’s policy for its tech ecosystem and fostering startups.

Three of these startups were included in the 100 most promising AI startups of 2023, listed by New York-based data company CB Insights: Exodigo, a physical infrastructure startup; Visionary AI, in the field of image processing; and AI21 Labs, a natural language processing startup that has created generative AI models.

Researchers like Hebrew University Prof. Amnon Shashua, the founder of Mobileye, a maker of self-driving technologies, which has a market cap of $36 billion on the Nasdaq, and Shimon Ullman, a professor of computer science at the Weizmann Institute of Science, are globally renowned for their contributions to the fields of AI and computer vision.

“Israel is well positioned in this space,” said Ziv Katzir, Vice President and Head of the National Plan for Artificial Intelligence Infrastructure at the Israel Innovation Authority. “We are systematically ranked very high in all international indices for AI.”

“We’ve got a very solid basis of academic research…and perhaps one of the best systems for taking academic knowledge and transforming it into startup companies,” Katzir added.

This transfer of knowledge from academia and Israel’s accessible tech ecosystem that allows people from different domains to work “around a single table” and solve problems together make it an ideal environment to foster AI technologies, he said.

The government in 2021 budgeted about $350 million over some seven years to boost the AI tech ecosystem in Israel by increasing the amount of research at universities, promoting cutting-edge projects and “positioning Israel as a lead power” in this arena, he said.

Israel will also soon be home to one of the world’s most powerful AI cloud supercomputers, which will be built by US tech firm Nvidia for use by its Israeli R&D center. In 2019, Nvidia acquired Israeli chip maker Mellanox Technologies for $7 billion – a move that has given the US firm an edge over competitors in its ability to provide the high-powered computational systems necessary to run AI models.

The supercomputer, called Israel-1, will be based on technology developed by the Mellanox, now Nvidia, team in Israel and is expected to start working by the end of 2023.

“Nvidia has a very big R&D center in Israel. Networking technology, which is a very important component of supercomputers, was developed here in Israel,” said Liron Freind-Saadon, Head of Developer Relations and Alliances – Israel, CEE at Nvidia. “So, it was very natural that the supercomputer should be located here.”

The infrastructure will serve mainly Nvidia engineers and help them in their work on new technologies, finetune chip architecture and to work on the next generation of products, she said.

Israel is in an “excellent position” to ride the AI wave, she said, because there is a fertile local ecosystem of startups. Nvidia’s program to boost startups in the AI field in Israel counts more than 800 early-stage firms in a variety of fields including healthcare to robotics, generative AI and retail, she said.

The Israel-1 platform is tailored to enable data centers around the world to transition to AI and accelerated computing, using a new class of ethernet connection that is built from the ground up for AI, Nvidia said.

The fact that Nvidia is building a supercomputer here in Israel will “definitely contribute” to the AI ecosystem, said Hamutal Meridor, a partner at Herzliya-based Vintage Investment Partners. Those building the computer and working with the computer “get to be part of building the best of class projects with the best of class teams. Then they spin off and they start their own companies…. That’s how you get the next big company.”

A sidelined AI strategy

In 2019 Prof. Ben-Israel, and Prof. Eviatar Matania, founder and former head of the Israel National Cyber Directorate, presented Prime Minister Benjamin Netanyahu at his request with a report detailing an AI roadmap for Israel based on the work of hundreds of experts from all over the Israeli ecosystem who worked on the project since 2018.

The report said Israel has the potential to become a world leader in the field and the goal should be to “place Israel in the top five countries in the world in the core areas of artificial intelligence.”

To take its place at the lead, and take full advantage of what can be achieved, the report said, the Israeli government must define AI as a “major and critical area for the future of the country,” declare the field a “national priority” and allocate a budget of NIS 10 billion ($2.7 billion) for the sector over 5 years, between 2021 and 2025.

In addition, a national plan to boost education, research and critical infrastructure with enough computing power to run AI models must be established. The report also called for the setting up of a national administration to manage the AI initiative along with a non-governmental advisory committee.

The idea was to set out a coherent program for AI that could be implemented in a comprehensive manner, just like was done for cybersecurity, Ben-Israel said in an interview at his Tel Aviv office in July.

But the political turmoil that has enveloped Israel since 2019 – including the five election campaigns in three years and now the judicial overhaul tumult, has meant that Ben-Israel’s AI plan, updated and published in 2020, is still waiting in the wings.

“Because of the political instability, the plan has not been budgeted since,” he said.

Some parts of the plan have been implemented independently anyway, he said, for instance within the Israeli army, or within the Israel Innovation Authority, with existing budgets. While TELEM, the National Infrastructure Forum for Research and Development, decided to implement with its own budgets some infrastructure parts of the report. Ben-Israel said.

“So, for AI, we did a little bit here and there,” he said. “But, like everything in life, when it is piecemeal, it is not enough.”

‘Lethal blow’

The judicial overhaul has wrought “terrible” damage not only to the AI sector but to the tech industry in Israel as a whole, Ben-Israel said.

“All the money, the engine, for AI and cybersecurity comes from outside, and that has halted. In Israel, investments…are at 20% of what was previously,” he noted.

Foreign investors, he said, are waiting to see what will happen, and are holding on to their funds. But Israeli entrepreneurs are not waiting, he added. They are setting up companies and registering them in the US or elsewhere.

“These two things, together, are almost a lethal blow to the advanced technology sectors,” he said.

“We are at a very high risk to miss the [AI] train,” he warned. “We haven’t yet. I hope in the end rationality will prevail, but I cannot say this is what will happen.”

Meanwhile, AI investments have dominated tech investments in the first half of this year, and generative AI companies are racking up funds globally.

Some of the biggest deals include that of Inflection AI, a Palo Alto, California-based startup, that said in June it closed a whopping $1.3 billion funding round led by Microsoft, Bill Gates, Eric Schmidt and Nvidia, among others. Anthropic, a San Francisco, California-based firm, which has created a generative AI model, has reportedly raised $450 million in a series C round with investors including Google and Salesforce. Adept AI reportedly raised $350 million from a Series B round in March, and one cannot forget the massive “multi-year, multibillion-dollar investment” Microsoft made into OpenAI for a reported $10 billion.

In the first half of 2023, Israeli AI firms secured around $2 billion in 143 deals, compared to almost $5 billion in 305 deals in the first half of last year, and $2.8 billion in 227 deals in the second half of that year, according to data provided by IVC Research Center, which tracks the local tech industry.

AI21 Labs, the Israeli natural language Processing (NLP) company, said in July that it raised $64 million in a Series B funding round, bringing its total funding to $118 million since its founding in 2017. The company was named as one of the leading generative AI companies by Crunchbase.

“This is a market that is advancing at a very fast pace and with big and aggressive players,” said AI21 Labs co-founder and CEO Ori Goshen.

“We are placed in a good position and want to continue to be so. And we understand that the game here is velocity, our ability to be fast to take a leadership position in a market that is still taking shape.”

Weep for generations

Netanyahu in June announced plans for a national AI policy in both the civilian and the security spheres, saying he spoke with Tesla’s Elon Musk about the need for governments to understand both the opportunities and the dangers of AI and about Israel turning into a “significant global player in the field.”

“We are at the dawn of a new era for humanity, an era of artificial intelligence,” Netanyahu said. “Things are changing at a dizzying pace and Israel must formulate a national policy on this issue.”

A spokesperson for the Prime Minister’s Office said by email on July 13 that there are no updates on the matter.

“I hope the prime minister really means to jumpstart this cart,” said Ben-Israel. “If not, we will weep for generations.”