Despite industry resilience, Israeli tech firms have a host of woes as Gaza war drags on
Reserve duty, sky-high travel costs and forced relocation are weighing on smaller companies as they cut, scramble and reorient while trying to prove their worth to investors
Shoshanna Solomon was The Times of Israel's Startups and Business reporter
Much has been said about the resilience of Israel’s tech firms as the Gaza war struck in October – how they kept going even as their workers grieved the dead, worried about the hostages or struggled to care for their children while their partners were called up for reserve duty.
The latest data confirms that resilience: Israeli tech has fared well both in fundraising and mergers and acquisitions in the first half of the year. Even so, as the war nears its 12th blood-soaked month, the challenges for the economy and the tech sector, the economy’s beating heart, are piling up.
Data compiled by Startup Nation Central (SNC), a nonprofit that promotes Israel’s tech ecosystem, shows that in the first half of the year Israeli tech firms saw a 31% surge in private investment, to $5.1 billion, compared to the second half of 2023, with the cybersecurity sector accounting for 52% of the funding. Fourteen mega rounds, or those above $100 million, contributed to $2.8 billion of that figure, representing 56% of total private funding.
Mergers and acquisitions in the first half of the year surged to $4.1 billion, a 70% increase from the second half of 2023, the data showed, including two deals each exceeding $1 billion. Global investors took a key role in the first half of 2024. They participated in 93% of all the funding rounds, a seven-year peak, an indication of the confidence they feel about the ability of the founders and their companies to deliver on their commitments.
However, the data does not reveal the full picture, say experts and players on the ground. It is skewed by the success of the bigger companies — those that have already proven their worth to customers and investors — and the “hotter” companies, which operate in fields such as cybersecurity and artificial intelligence that are investor favorites currently. They manage to raise funds, find partners, and sell their products despite the months-long war.
Smaller startups, however, are struggling. They were caught by the war just as they needed to prove that their technology works and that they can continue to develop or start selling their product even in wartime.
A deeper look at the ecosystem reveals a gloomy picture: that of companies cutting costs and employees; picking new projects carefully; having to explain the political situation to investors, customers and strategic partners; and mulling the moving of operations and projects out of Israel so as not to risk them stalling because of the war.
“The mega rounds and also the cyber sector were the two major engines behind the very favorable numbers,” said Yariv Lotan, VP of Digital Products and Data at SNC. “But when we look down into the people, the companies behind the numbers, then obviously these are challenging times.”
New entrepreneurs in small or mid-size companies or those in sectors such as agritech, foodtech and healthcare, for example, are suffering more than others, he said. “They are less confident in their ability to raise money, less confident in their ability to continue to grow as they want.”
And because of the explosive geopolitical situation, and the fact that Israel’s risk profile has risen — three ratings firms have downgraded the country’s credit rating — Israelis need to work harder to prove their worth.
The Times of Israel spoke to four Israeli tech companies about the challenges they face and how they are coping in these tough times. Not many were eager to be interviewed, and the four interviewed here, in food tech and health tech, may not be representative of an ecosystem that counts over 7,000 firms in a variety of sectors. But they do give an insight into the struggle, the choices, and dilemmas they face.
NRGene is an agtech company whose shares are publicly traded on the Tel Aviv Stock Exchange. The firm uses algorithms and software to map out the genetic makeup of plants to increase their yields and resilience. The company has R&D centers in Ness Ziona, Israel, and in Canada. Last year NRGene set up a food tech subsidiary, Supree, to develop naturally self-drying fruits. Supree’s new cherry tomato species were planted in September in a greenhouse on the border with Gaza, just a month before the war started. On October 7, everything was ruined and the company had to start over.
Unlike Supree, NRGene’s operations have not been significantly impacted by the war, said CEO and founder Gil Ronen in a phone interview. The company has foreign partners and investors to whom it has already proven its worth, and existing projects are continuing as planned.
Even so, Ronen said, NRGene is more cautious about starting new projects, concerned that customers, partners and investors may be more hesitant to make a deal given the unstable geopolitical environment. The company is focusing on existing projects and partners instead, he said.
And while once the political situation in Israel may have come up in, say, the third day of meetings, now it is the first issue addressed by potential investors, partners or customers, Ronen said. It is “really urgent” for them, he said.
Because many foreign airlines have canceled flights to and from Israel, the cost of travel, both financially and in terms of travel time, has surged, Ronen added.
“We have significantly cut down on the number of flights because of how much they cost,” he said. This is making it more difficult for the Israeli teams to visit their Canadian counterparts and vice versa, as well as keeping away visiting potential investors and partners.
Ronen said that NRGene’s situation is better than that of smaller startups in the agtech sector, which are moving into “survival mode,” he said. Many are putting workers on unpaid leave and cutting back on projects out of concern it may take them longer to raise funds. Some come to NRGene seeking collaborations that they hope will enable them to raise further funds.
“This is terrible because these are very, very good companies” that have been caught by the war at a too-early stage, he lamented.
If he had to decide between setting up a new project in Israel or abroad, Ronen said, he would set it up abroad. He would also focus more on computational, software-based projects, which can be easily moved, rather than asset-based projects that are linked to physical location or field.
Israeli firms continue to be resilient, however, said Ronen. “We normalized this terrible situation,” he said.
Aleph Farms, a Rehovot, Israel-based cultivated meat producer that develops meat from non-modified cattle cells, has cut back 30% of its workforce and is focusing on streamlining activities while trying to raise funds, said CEO and founder Didier Toubia in a phone interview.
After October 7, many workers were called up to reserve duty and the company had to cut back activity at its pilot production facility in Rehovot, Toubia said. Operations have now restarted, and the firm is working to meet milestones it has promised investors, he said.
“At Aleph Farms we are adjusting our… budget. We are focusing on profitability, reducing operational costs, increasing our scalability, meaning our ability to scale up quicker at lower capex,” or capital expenditure, he said.
“For the majority of the investors, the war is not an issue. But for a significant minority, it is… All together, this is reducing the pool of potential investors.”
Aleph Farms is making “good progress” in raising funds it needs to launch its product and scale up production, he said. But the fundraising “is taking longer” than expected, given a macroeconomic environment of more-picky investors and Israel’s higher geopolitical risk.
As opposed to software companies, whose assets are intangible, Aleph Farms and other food tech firms have labs, production facilities and factories in Israel, and that affects companies when the country’s risk is higher, he said.
Whereas Aleph Farms always had plans to set up production operations abroad, Toubia said he hears some Israeli agtech and foodtech firms are looking to set up operations abroad because of the war. That would put the local foodtech sector at risk, he said. He urged the government to set up dedicated programs to support companies “until the macroeconomic and geopolitical environment stabilizes and improves.”
AISAP, a Ramat Gan-based medical tech startup, has developed AI-based diagnostic software to provide accurate ultrasound diagnosis for physicians. The company said in May it raised $13 million in seed funding from mainly Israeli investors. Last week, the startup received approval by the US Food and Drug Administration (FDA) for use of its software for the rapid and accurate diagnosis of structural heat disease and heart failure. Founded in January 2022, it has sales in Israel and has started marketing and sales in the US, said Amit Aharoni, VP Operations and Business Development in a phone interview.
When the war broke out in October 2023, one third of its employees — seven of 20, including top management and the CEO and co-founder Adiel Am-Shalom — were called up to reserve duty and served for several months. Am-Shalom even took part in a conference call with investors while overlooking the Gaza border, said Aharoni, who was also called up.
“It was such a crisis for all Israelis,” said Aharoni. The company “went into emergency mode,” but continued its product development and clinical trials.
The high price of flights has made it harder to send teams abroad to meet with potential customers, said Aharoni. “Each delegation must be planned, but we did what we had to do.” It was harder for employees to leave their families and travel abroad for business as rockets were falling in Israel, he said. “These are not easy times.”
Aharoni said he had just returned from the US where he met with five US partner hospitals. “Mostly we were met with empathy,” he said.
The plan is to add dozens more hospitals to their partnerships, and for that the company is planning to set up a US entity in Boston that will have both Israeli and local employees. This was the original plan to boost growth, he noted, not one triggered by the war.
The fact that delegations are not coming to Israel for conferences or other business, because of the war and the lack of flights, “affects and challenges the ecosystem,” he said.
BlueTree Technologies develops sugar-reduction technology for use in the beverage industry.
The startup has raised $5.6 million to date, according to company data. In July the startup managed to raise $2.26 million, even though it had to relocate from its facilities in Kiryat Shmona, in the north of Israel, due to the Hezbollah rockets from Lebanon following the start of the Gaza war. The company was set up as part of the Fresh Start incubator. Didier Toubia, of Aleph Farms, is a co-founder of BlueTree.
On October 7, most of the company’s team was living in the north and as the war broke out “my primary focus was on safety of the team,” said CEO Michael Gordon in a phone interview. Many workers were also called up to reserve duty but the company “quickly adapted to the situation with a reduced team” and sought to secure a new location, he said. This took four months, and the team now works from Katzrin, in the Golan — which has also come under Hezbollah rocket fire.
“We continued our experiments in Katzrin, moved everything over there, and continued both fundraising and product development,” Gordon said. Since the start of the war, the company has managed to extend its solutions to additional drinks categories and finalize its fundraising round.
The company only recently got state compensation for its war-induced relocation, he said. Even so, he added, the startup expects “more government support because we lost precious development time.”
BlueTree is also still waiting for the Health Ministry to approve the firm’s technology so it can launch its product with an Israeli natural juice maker. The company said in May it received FDA approval for its sugar reduction technology.
Gordon said BlueTree is prioritizing some projects over others and focusing on its obligations to investors.
The firm is also seeking to sign an agreement with a global manufacturer. “We’re very close to that,” Gordon said.
Even so, “every discussion starts with ‘what’s going on over there,’” he acknowledged. “We are a startup. We must show them that we can continue developing despite the challenges we face from the current conflict.”
