Israel at 77: Tech economy shows resilience during war, though clouds of change loom

As the nation celebrates its 77th birthday, one of the most resonant words that can be used regarding Israel’s tech economy is “resilience.”

Investors, lawyers and tech experts interviewed by The Times of Israel look with pride at the nation’s achievements in the field of technology despite political and economic uncertainty driven by the contentious planned judicial overhaul and the war with the Hamas terror group. Glancing ahead, though, they warn that the challenges in sustaining the foundations of the tech sector — the economy’s beating heart — are piling up.

“Israel’s innovation economy stands at a critical juncture after more than 18 months of war, which tested the entire ecosystem — infrastructure, capital, talent and trust,” said Startup Nation Central CEO Avi Hasson. Startup Nation Central is a nonprofit that promotes Israel’s tech ecosystem.

“Israeli tech has proven its strength and resilience, but the next phase will require more than resilience. It will demand strategic action — talent development, sector diversification and alignment between innovation and national priorities,” Hasson said.

Over the last 19 months, Israeli startups have been grappling with the ongoing callup of employees to perform reserve duty, staff shortages, and funding woes amid the continued uncertainty about the duration and extent of the war, which broke out after Hamas-led terrorists invaded southern Israeli communities near the Gaza border on October 7, 2023, massacring some 1,200 people and kidnapping 251.

Israel’s economy grew by around 1% in 2024, down from 1.8% in 2023 and 6.3% in 2022, before the outbreak of the war with Hamas. The growth rate last year surpassed forecasts even as the fighting with Hamas and the Iran-backed Hezbollah group led to increased government spending on military and civilian needs and took a toll on exports and investments.

One of the key reasons for this is that the nation’s tech economy has continued to lure foreign investors despite local entrepreneurs registering their companies abroad and many firms moving part of their workforce outside the country. Similarly, the economy quickly recovered from the worst recession ever, wrought by the deadly COVID-19 pandemic, with the booming tech industry leading the charge.

“The tech industry has managed to stay and is still the most attractive part of the Israeli economy, as most of the capital inflows for investment are in tech,” said Ian Rostowsky, co-head of the hi-tech and venture capital practice at law firm Amit, Pollak, Matalon & Co. “Israel has a mature high tech ecosystem, more than most other countries, but when we talk about independence, it is clear that the high-tech ecosystem is not independent in the sense that it can be standalone and survive without foreign investment.”

“One of the main worries is that the international perception of Israel is very negative as the war interrupts everything,” warned the South African-born Rostowsky. “Although Israel has done relatively well despite the negative headwinds, they are significant and are becoming more and more difficult if the situation continues and leads to a larger outflow of companies relocating outside of Israel, some of it happening at the demand of investors.”

In a year during which Israel faced one of the longest and most intense wars in its history and levels of geopolitical uncertainty have been off the charts, the tech industry racked up $13.4 billion in merger and acquisition deals in 2024, up from $7.5 billion in 2023 though a far cry from the $82 billion high recorded in 2021.

US chipmaker Nvidia spent almost $1 billion to buy two Israeli startups: Israeli AI startup Deci for about $300 million and local startup Run:ai, for about $700 million. Run:ai is Nvidia’s biggest acquisition in Israel since it bought Mellanox Technologies Ltd. in 2020 for $6.9 billion.

San Francisco-based software giant Salesforce also scored two big deals in Israel with the acquisition of Own, an Israeli data backup startup, for $1.9 billion and local data management startup Zoomin for $450 million. Other notable mega deals that closed this year are Blackstone acquiring Priority Software for $800 million and Johnson & Johnson buying V-Wave.

On top of that, this year saw the biggest buyout in the country’s history as Google’s parent company, Alphabet, agreed to snap up Israeli-founded cybersecurity unicorn Wiz in an all-cash deal for a staggering $32 billion. The mega deal is estimated to generate $4 billion in taxes, which will flow into national coffers.

In the shadow of the war, Israeli tech companies raised $10.6 billion in fresh capital in 2024, according to data by Startup Nation Central. In the first quarter of 2025, private funding generated $3.2 billion for investment into local tech companies.

“What comes to mind when I think of Independence Day and what Israeli tech has achieved in 77 years is a sense of great pride,” said Yonatan Sela, an Israel-based partner at Australian venture capital fund Square Peg. “The Wiz deal is just the icing on the cake but it doesn’t come in a vacuum.”

“It comes out of an ecosystem that is thriving with a lot of foundation: a VC ecosystem built over the years that supports companies from the early stages, great innovation, and one big breathing organism with many parts that supports and fuels each other, inspires each other, finances each other, and hires each other,” Sela said.

Square Peg, with $3.3 billion in assets under management, has been active in Israel for more than a decade and has since invested $400 million in local startups and tech companies, including Deci (bought by Nvidia), Exodigo, and Qodo.

“The war hurt the Israel brand. Especially during the first year, until we made military achievements as a country, there were a lot of headwinds,” said Sela. “Since the beeper operation and everything that followed, we see regained recognition of Israeli technology, intelligence, and other capabilities luring foreign investors, especially American funds, which entered the local market during the past year more aggressively than before.”

“Investors understand that as a tech hub, Israel is among the world’s top three hubs, and that hasn’t changed — what offsets it a bit is that for some investment bodies, and especially European investment funds and some Asian investment funds, it’s been more challenging to get Israeli investments approved because Israel is at war,” he said.

In Israel’s tech ecosystem, startups are the lifeblood of future mergers and acquisitions, tax income, and employment creation. Tech employees pay more than a third of all tax income collected, which underpins the vital importance of the sector as a key driver for the recovery of an economy that has been stumbling through the repercussions of 19 months of war.

The economy’s dependence on the tech sector has significantly grown in the past decade, driven by rapid growth in tax revenues from the sector, led by an increase in the number of employees and rising salaries.

The tech industry last year contributed 20% to local GDP, versus 6.2% in 1995. It also made up more than 50% of total exports. Tech employees account for about 11.4% of the workforce.

Both Sela and Rostowsky cautioned that the still impressive fundraising and M&A figures achieved during this difficult war period are marred by a number of worrying trends and challenges that have only increased during the past few months as attempts to revive the protested judicial overhaul resurfaced.

“Over the years, many Israeli entrepreneurs and founders have succeeded in growing valuable companies and are becoming more skillful in managing large companies to sell them, but many like Wiz are registered in Delaware and not in Israel, which is unfortunate because they are paying taxes elsewhere,” said Rostowsky. “In Israel, for every success, there are a lot of companies that didn’t manage to raise enough financing, and have reduced their operations significantly, were closed down, or were sold for relatively small amounts during the challenging war period.”

He added, “Some multinational companies have scaled back or even closed their Israeli operations because of the war and amid growing internal political instability.”

Sela cautioned that starting with the proposed judicial overhaul in January 2023, local companies “felt insecure and started to move their incorporation outside of Israel, and that has intensified by the war.”

“Would it be better if companies were incorporated in Israel and felt safe to do it here? Yes, but I don’t think that will be the case in the next few years,” Sela said. “The biggest question in that regard is where the talent is going to want to live and whether this country will be a place where Israeli entrepreneurs like the Wiz founders will want to do business.”

From the beginning of the war until July 2024, the number of tech employees who departed Israel for long-term relocation increased and stood at about 8,300 people, or about 2.1% of the local tech workforce.

“If this trend is going to continue — whether it’s for economic incentives, imbalance in the burden of serving in the military, or the feeling that the justice system is going to turn to be something less predictable — then we are going to see more and more people not come back from either relocations or academic studies abroad and slowly but surely this drip of talent will grow,” said Sela.

Rostowsky urged the government to play a significant role in seeing that the ecosystem remains attractive by offering tax incentives or additional grants for Israeli companies.

“It’s up to us as a country and for the government to ensure that in the long term, the talent continues to feel very welcome in Israel,” said Sela. “At the end of the day, that’s what’s going to define the strength of the Israeli tech ecosystem and whether companies will remain and work here.”