Fears of a ‘lost decade’: Will the tech sector be able to save the war-hit economy?
One year on from the Hamas onslaught, experts fret over whether economic recovery is possible in the face of government inaction to bolster a key growth engine
Ophir Dror, one of the founders of a newly formed Israeli cyber startup, was drafted to the Israeli army on his birthday last year — October 7.
“For four or five months, I was not available. I was in Gaza, I couldn’t even jump on Zoom calls, so it was just super hard not to be there and be part of a company I just founded and that came out of stealth while I wasn’t there,” Dror told The Times of Israel. “We were four founders and four employees at the outbreak of the war. As my army unit had a lot of missing equipment, one of the founders started fundraising. And for around a month and a half, the office was not really doing cybersecurity but buying various supplies, packing and sending us boxes.”
Despite all this, Lasso Security won the confidence of investors, raising the funds it needed to develop its product, and almost tripled its workforce during the war period.
Lasso is just one example of Israel’s economic and national resilience. For the past year, startup founders, investors, and employees have transformed, and adapted. Many struggled during the challenging war period as they attempted to keep fueling Israel’s tech powerhouse, a major driving force for the growth of the country’s economy.
Now a year into an unprecedented war with the Hamas terror group and fears of a wider regional escalation, Dror worries that the much-praised resilience could be in danger. War broke out after Hamas terrorists invaded Israeli southern communities near the Gaza border on October 7, massacring some 1,200 people and kidnapping 251.
Then, on October 8, Iran-backed Hezbollah began attacking Israeli border communities, saying it was doing so to support Gaza amid the war there. In the past few weeks, Israel has stepped up its attacks on the terror group in Lebanon, all but decimating its top command in a series of massive airstrikes on Beirut and southern Lebanon.
“The main reason behind the progress of our [startup nation] brand is the talent that we have here in Israel,” said Dror. “A lot of this talent has the option of working anywhere around the world for any company.
“I think if we get to a point where a lot of this talent — either the younger guys who just come out of the army or university, or the more traditional people that build this industry with much more knowledge and experience working in enterprises — decides that Israel is not the best place for them to live, and I think it is right now, this will be a big blow to the high-tech industry and the recovery of the economy,” he warned.
The economy’s dependence on the tech sector has significantly grown in the past decades. The tech industry contributes about a fifth of the local GDP, versus 6.2% in 1995, and makes up more than 50% of total exports, while its employees generate a third of the tax revenue, according to data by the Israel Innovation Authority.
Since October 7, Israeli startups have been grappling with the ongoing military call-up of tens of thousands of their employees, and the displacement of residents and families from southern and northern communities has been causing disruptions in the day-to-day operations of businesses.
With no end in sight to the war, the tech industry is at a tipping point where its standing as both a stable global tech hub for doing business and as a primary driver for the resilience and recovery of the war economy are being challenged. Nevertheless, Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich insist that the war’s economic damage is only temporary and that recovery will be strong once the fighting ends, as previous conflicts have shown.
Senior economists and former policymakers The Times of Israel spoke to all agree that this time is different and that Israel will grapple with long-term economic damage regardless of the outcome of the war. The extent will very much depend on the ability of the government to devise a responsible budget and economic policy that invests in growth engines, especially the tech sector, as it faces higher defense spending in the coming years to secure the country’s survival.

“There are worrying signs of a slowdown in the high-tech sector, but it is still resilient,” said Sergei Sumkin, senior researcher at the Aaron Institute for Economic Policy at Reichman University. “We are at a crossroads right now and if the government will not step in, increase the budget of the Israel Innovation Authority, and make the right decisions to support the tech sector, the price of taking the wrong decisions today will be very high.”
Israel’s tech sector, which depends on foreign investment, still ranks third as a global hub for investments, attesting to its resiliency. However, the picture the data paints is distorted since after October 7, the majority of funds were raised by mature or established tech companies mainly focused on cybersecurity solutions and services.
“You can’t ignore the fact that the war adds more risk to investing, to working, and to the continuity of operations here in Israel,” said Dror. “A lot of big international companies that are less known than Intel are closing their R&D centers in Israel, which is bad news because they are a good place for your first job after university and are a source for bringing in more talent and money from abroad.
“I think we will probably see the bigger impact next year,” he said.
Early-stage startups and tech firms in other subsectors face funding uncertainty because they are perceived as riskier for investment and therefore are struggling to survive during the war period. Without sufficient funding, many startups are being forced to shut down or develop their innovative ideas outside of Israel.
“The key element of concern is the level of uncertainty that the government put Israel in — not on October 7, but already in January last year because of the contentious judicial overhaul, which creates hesitation by investors, financial institutions, and corporations that need to have future predictability,” said Ami Appelbaum, former chairman of the Israel Innovation Authority. “The key difficulties that we are experiencing today is that the industry lacks outside money coming in and that the number of new startups is declining, which has long-term implications.”
In the first 10 months after the outbreak of the Hamas war, Israeli startups and tech companies raised almost $9 billion in funds from investors, according to the Israel Innovation Authority. Total investments in Israeli tech companies since October 7 were 4.7% lower than during the same period last year.
“You can hear a lot about the industry’s resilience, as Israelis know how to pivot, but it cannot last forever,” said Moran Chamsi, managing partner at Amplefields Investment Fund. “People feel uncomfortable… early-stage investors because of the uncertainty, as they don’t know what’s going to happen, which is causing damage to the high-tech industry.
“Everybody needs liquidity, which is a trend in the global economy, but in Israel even more because of the geopolitical situation — so many companies have stopped recruiting as they are cutting their burn rates,” Chamsi said.
Recent data by the Israel Innovation Authority on the impact of the war on the industry showed that its length and accompanying funding challenges have led to a slowdown in employment growth in recent months.
“In the years 2017 to 2022, the high-tech sector grew three times the rate of the growth of the economy and hence if this platform will not be maintained and nurtured, during the war period, by advancing economic policies to support various tech fields as well as incubators, that could be the harbinger of a lost decade for the Israeli economy,” cautioned Reichman University’s Sumkin.
“If high-tech, the platform for the growth of the economy, will be hurt and we will not be able to grow at a rate of at least 3.5% in the coming years, we will not only face a lost decade, but it will also not allow us to finance the country’s defense and security costs,” he said.
Leo Leiderman, chief economic adviser to Bank Hapoalim, one of the country’s largest banks, noted that the economy has shown some signs of resilience, which he attributed to the good fundamentals at the outset of the war, including a low budget deficit and a low debt-to-GDP ratio.
“This war is very unique because, number one, it is taking a long time, and number two, it is fought on multiple fronts in the south and the north of the country — all of this is quite a burden for the economy,” said Leiderman. “Uncertainty is the key factor why so many investors sit on the sidelines and postpone plans as they are waiting to see what will happen.
“The longer it takes to stabilize the security situation in the north and the south to reach some degree of certainty about what’s going to happen, the more negative the impact will be on output,” he added.
The economy is already experiencing slower growth, a larger budget deficit due to high military and civilian spending, and more expensive interest payments to finance the ongoing war, which has cost more than NIS 250 billion ($65 billion).
The economy grew at a much slower pace in the second quarter of the year, falling short of economists’ expectations, as the fallout from the war with Hamas and increased fighting with Hezbollah in the north hit investments and put a heavy financial strain on the country. GDP grew by an annualized 0.7% in the April to June period from the previous three months, and was down 1.4% in comparison to the corresponding quarter last year, experiencing the biggest slowdown among 38 member countries in the Organization for Economic Cooperation and Development.
For this year, the Treasury cut its growth forecast and now expects the economy to expand by 1.1%, down from a previous forecast of 1.9%. In July, the Bank of Israel lowered its growth projection to 1.5% for 2024. The economy expanded 2% in 2023 after expanding at a fast pace of 6.5% in 2022.
Alongside the hit to growth, S&P and Moody’s recently downgraded Israel’s credit rating, as both agencies see the ongoing war lasting well into 2025 accelerating the economic fallout, putting further pressure on state coffers and leading to a slower recovery than previously estimated. S&P lowered Israel’s sovereign rating for a second time this year to A from A+ and maintained a negative outlook, while cutting its growth forecasts to 0% for 2024 and 2.2% in 2025 from 5% previously.
In a more drastic move, Moody’s slashed Israel’s credit rating by two notches, from A2 to Baa1, citing the lack of an “exit strategy” for the military conflict and increased uncertainty over security and longer-term growth prospects. In this environment investments are expected to remain “subdued for longer because the risk premium for doing business in Israel will remain elevated,” which in turn poses longer-term risks for the highly mobile tech sector to grow, Moody’s warned.
In a discussion following the downgrade, Moody’s cautioned that there is anecdotal evidence that new startups have started registering abroad rather than in Israel, as they did when the government was pushing its judicial overhaul, and that there are more requests from employees for relocation, which it described as a downside risk that could lead to further rating cuts.

“As for the decision of leaving Israel and deciding to go abroad, there’s always a business use case for doing that. It’s not a new drill for the CEO to move to the US,” said Dror. “But I do think that today, more than ever, it’s a good time to stay and to be strong and to try and grow your business out of Israel, despite everything.”
Amplefields’ Chamsi said that for now “Israeli tech, the ideas, and the entrepreneurs are still here,” but there is an urgent need for the government to step in.
“We need a push from the government to offer a lot of carrots to investors, for example with some tax benefits to encourage those who still want to invest in Israel to put their money in Israeli tech and those who are worried about the geopolitical situation to reconsider,” he urged. “Or the government could provide benefits to employees, and improve education so people will be more encouraged and will want to work in high-tech.”
Appelbaum called on the government to act, as Israel cannot count on foreign money during the war period.
“The government should create more incentives for local institutional and insurance companies, which manage about NIS 70 billion ($18.3 billion) in insurance and pension funds, to invest in Israeli high-tech,” said Appelbaum. “The government support would also send a very strong signal to foreign investors to jump in.”
Appelbaum cited as an example the government’s Yozma 2 fund initiative announced earlier this year, which is a program in which the Israel Innovation Authority chips in 30 cents for every dollar of institutional investment.
“From the investor’s perspective, Israel needs to be perceived as a place where you can do business safely again,” said Dror. “I do see the potential damage of what is happening here for the future in terms of the tech industry and tax revenues.
“The high-tech ecosystem is a very central cornerstone of the economy and I would want to see more people from this industry in the decision-making roles going forward,” he said.
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