Israel innovation head urges state to insist on stimulus for vital tech industry
More funds needed in 2025 to stimulate investment and protect resilience of tech sector, the main growth engine of war-battered economy, Israel Innovation Authority says
Sharon Wrobel is a tech reporter for The Times of Israel.
Israel’s high-tech tech industry is at a crossroads where its standing as both a global tech hub and as a key driver of the country’s economy is tested after being hit by a double whammy, with last year’s contentious judicial overhaul and the outbreak of war with the Hamas terror group, the Israel Innovation Authority (IIA) warned in its annual report.
Maintaining its growth and thereby preserving its central contribution to the recovery of Israel’s war-battered economy will depend on the availability of additional government funds, as the eight-month fighting with Hamas is putting a heavy strain on securing foreign investments that the industry relies on, the IIA, in charge of directing the nation’s tech policies cautioned.
“Despite all the local and global challenges over the past year, the slogan that Israeli tech delivers manifested itself in reality as the sector is resilient and continued to grow in 2023 albeit at a slower pace,” Dror Bin, CEO of the state-run IIA told The Times of Israel. “However, going forward the tech sector’s high dependency on foreign investments and increasing competition, backed by massive government investments in other global innovation hubs, require the Israeli government to double-down on their investments in Israeli tech.”
As part of the 2024 budget, the government bolstered the IIA’s base budget by an additional NIS 1 billion ($273 million) to help fund a stimulus package to aid local startups that have been struggling to get critical funding in the face of geopolitical uncertainty and growing security tensions during the wartime period.
“Now that the 2025 budget is in the works, we believe that this increased investment should continue and be included in the coming years to make sure that all the necessary investments are here to sustain the leadership of the Israeli tech hub,” Bin remarked.
Israel called up hundreds of thousands of reservists, many of whom are working in local tech firms and companies, as the government declared war on Hamas after terrorists broke through the fortified Gaza border on October 7 and murdered some 1,200 people, most of them civilians, including babies, children, and the elderly. That same day, the terror group abducted 251 people, of which 120 are believed to still be held by Hamas in the Gaza Strip.
The ongoing callup and continued uncertainty about the duration and extent of the Gaza war 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. About 80% of venture capital investments in local high-tech startups are generated from foreign funds.
“In a sector reliant on foreign capital for growth, this is a significant threat, and we must ensure that a funding shortage scenario does not materialize,” said Bin.
Already 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 government in early 2023.
Startups’ fundraising in 2023 dropped 55% — a sharper decline than that reported in US tech hubs and some of the European hubs, according to data presented in the IIA’s State of the High-Tech Industry in Israel 2024 report released on Tuesday.
One of the central questions tackled in the IIA’s annual is whether, in the current challenging war environment, the local high-tech sector which reached a peak in the first half of 2022, will be able to return to a growth trajectory, enter a stagnation phase similar to the post-dot-com bubble burst in 2001, or, worse, shift towards contraction.
“The Israeli economy as a whole is now very dependent on the success of the high-tech sector especially as the state’s security and civil funding needs rise during the current war period,” said Bin.
The economy’s dependence on the high-tech sector has significantly grown in the past decades. The Israeli high-tech industry last year contributed 20%, or NIS 340 billion to local GDP, versus 6.2% in 1995, and made up 53% of total exports amounting to $73.5 billion, while generating “substantial” tax revenues for the country, according to data cited in the report. In 2023, the number of employees in the high-tech sector increased by 2.6% to 396,000, accounting for almost 12% of the country’s workforce.
Analysis presented in the report comparing nine countries showed that the centrality of Israeli high-tech in driving economic growth is a “unique phenomenon” and resembles the weight natural resources have in other countries. For example, in Russia, the oil and gas industry only contributes 16% to GDP and makes up 43% of exports.
Israel comes in first in the world for R&D expenditure as a percentage of GDP, at 6%, but it is mainly driven by private sector investment and foreign capital, said Bin.
Meanwhile, the share of local government investment in R&D is lower than that of other global tech hubs, including the US, UK, and Korea, despite the reliance on the high-tech industry in driving growth in Israel’s economy, according to the IIA.
As part of the report, the IIA presented the findings of a war impact survey conducted in April among a sample of 500 Israeli startups and tech companies that reported that they expect a decline in their hiring plans for new employees during the coming year, mainly in Israel.
Asked about the main impact of the ongoing fighting on their plans for 2024, the startups cited a slowdown in business operations due to product development delays, or failure to meet company goals, as well as difficulties in raising funds, including financing that was already underway and had been canceled or suspended because of the war.
Startups will close down
“Many startups are going to be shut down, but that’s also after in 2021 and 2022, tremendous amounts of money were invested into the local tech scene and some of these funds went to companies that should not have been financed,” said Bin. “As a result, good human capital is going to be released from bad companies, and they will be employed by good companies and strengthen those good companies to grow even further.”
More than 60% of the respondents in the survey estimated that there was a low probability that they would be able to raise the capital they needed over the coming year, and almost 40% of the companies were confident that they were highly likely to secure the needed funds.
Most of the investments into local tech in 2023 have been in startups that advance technologies in the areas of organizational software, cyber, AI, as well as in defense and fintech. In May this year, in the middle of the war, American-Israeli cloud cybersecurity unicorn Wiz raised $1 billion in a private funding round, and Tel Aviv startup Xtend, a developer of a human-guided AI drone and robots operating system secured $40 million in capital from investors.
Data collected from 30 Israeli venture capital funds, in collaboration with the Israeli Advanced Technology Industries (IATI), showed that almost 40% of these funds reported that at least one company in their portfolio is relocating intellectual property abroad since the start of 2023, due to political instability and the ongoing war.
Almost a quarter of venture capital funds estimated that over 30% of their portfolio companies have either shifted significant operations abroad in the past year or plan to do so in the coming year.
Regarding investments in Israel, venture capital funds anticipate that foreign funds will reduce their investments in Israeli startups in the coming year, according to findings in the report.
“Many good Israeli companies that are maybe not in the most popular, or trendy tech sectors, such as cyber, are struggling to raise funds and this is where we see our role to help them to get through this challenging period,” said Bin.
The IIA has in recent months launched a number emergency funding plans, including the Yozma (initiative) fund aimed at encouraging Israeli institutional bodies to invest in local venture capital funds, to 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 is a fast track channel of grants to provide cash-strapped startups with a lifeline to cope with the challenges posed by the war.
“For about 30 years, we have gone through so many downturns, whether it was the 2000 dot-com bubble, global economic crises, or the wars in Lebanon and Gaza, and every time we saw the skies falling and then the outcome was that Israeli high-tech just got stronger,” said Bin. “I hope that this will be the case also this time.”
“With continued additional government funding, we will be able to launch all strategic initiatives and programs to secure this scenario so that despite the challenges, Israeli tech will emerge stronger also from the current situation,” he added.
