ISRAEL AT WAR - DAY 142

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Government approves stimulus package to assist vital hi-tech industry during wartime

As part of the 2024 war budget, the Israel Innovation Authority, in charge of directing tech policies, will get additional funds to help incentivize investments in startups

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

Illustrative. High-tech office buildings in Herzliya Pituach, in central Israel, December 12, 2015. (Nati Shohat/ Flash 90/ File)
Illustrative. High-tech office buildings in Herzliya Pituach, in central Israel, December 12, 2015. (Nati Shohat/ Flash 90/ File)

In a long-desired move, Israel on Monday paved the way for a stimulus package to aid local startups that have been struggling to get critical funding during wartime, and to help retain the country’s standing as a high-tech hub.

As part of Monday’s approval of the 2024 war budget, the government announced a package aimed at encouraging investments in the struggling local high-tech industry. The approval followed “exhaustive deliberations” between the Finance Ministry’s budget division and the Israel Innovation Authority, which is in charge of directing the nation’s tech policies, according to a joint statement by the government entities.

For the incentive program, the government will bolster the Israel Innovation Authority’s base budget of NIS 1.5 billion, by an additional NIS 940 million in 2024.

“The decision to increase the budget of the Innovation Authority, aimed at encouraging investments in Israeli high-tech, is crucial beyond measure,” said Innovation, Science and Technology Minister Ofir Akunis. “It sends a message to the Israeli industry and foreign investors worldwide that we are committed to fostering the Israeli tech sector.”

The approval of the government-backed program comes when about 15 percent to 20% of the tech workforce has been drafted to the army, as Israel called up more than 350,000 reservists during the war with Hamas that started after some 3,000 terrorists invaded southern Israel on October 7 and killed 1,200 people, most of them civilians.

The massive callup presents challenges in particular for early-stage startups, both in terms of attaining critical funding for their survival and in terms of their daily operations.

Dror Bin, CEO of the Israel Innovation Authority. (Courtesy/Hanna Teib)

Even before the outbreak of the war, Israeli tech companies suffered from a severe plunge in investments of as much as 70%, which was exacerbated by a global economic slowdown and the contentious judicial overhaul advanced by the Israeli government earlier this year — and then, in recent months, due to the Hamas war.

The worrying funding trends that have intensified since the start of the war prompted the Israel Innovation Authority to launch emergency funding plans, while urging the government to support additional investment incentives.

“The decision to embark on this ‘boost program’ is a strategic decision that will bear fruit for the next decade,” said Israel Innovation Authority CEO Dror Bin. “The ability of the Israeli economy to emerge from the crisis largely depends on the establishment of more startups, the continuous growth and sales of tech companies, and ongoing investment attraction.”

Bin explained that the incentive package seeks to help tackle key challenges for the local high-tech sector including the consistent decline in the number of new startups created each year, the sharp drop in investments over the last quarters, and the high dependence of the local tech ecosystem on foreign capital.

“The program we are launching today will provide a meaningful response to these challenges and assist the Israeli high-tech sector in emerging stronger from the current crisis, as has happened in previous downturns,” he added.

The Israeli economy’s dependence on the high-tech sector has significantly grown in the past decade. The Israeli high-tech industry is contributing 18% to local GDP, versus less than 10% in the US, and about 6% in the EU.

Illustrative: Investors, founders and entrepreneurs gather at annual VC trends conference in Tel Aviv, December 28, 2023. (Talmid Tali)

About 14% of all employees work in the local high-tech sector and in tech jobs in other sectors. As such, the Israeli economy relies on high-tech products and exports, which make up about 50% of total exports, as well as high-tech taxes.

As part of the stimulus program, the government will commit more than NIS 800 million to establish a Yozma (initiative) fund aimed at encouraging Israeli institutional bodies to invest in local venture capital funds, thereby expand funding availability, as well as boost the share of local capital in the Israeli high-tech sector, and reduce the dependence on foreign capital.

Another initiative of the stimulus plan is a startup fund which will be created to help with the establishment and funding of early-stage startups. The Israel Innovation Authority will participate in all investment rounds, from pre-seed through seed to Series A, with joint investment alongside venture capital firms or private investors, to lower the risk for investors and help startups reach the next funding milestone.

In the coming months, the Israel Innovation Authority will publish a tender to create an incubator fund, allowing international firms to participate in the financial backing. The fund has two main goals: first, to catalyze the establishment of new startups focused on deep tech, and second to create new and large ventures in Israel, in partnership with major international financial bodies.

The winner of the tender will receive a grant of up to NIS 40 million over a five-year period, to cover operational expenses of the incubator and the establishment of a central laboratory for the use of the incubated companies.

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