Israel is producing fewer new startups, raising concerns about future tech jobs
The past decade has seen the number of newly founded startups plunge 45% and more, creating a potential economic shortfall in the coming years, according to RISE Israel
Sharon Wrobel is a tech reporter for The Times of Israel.
On the 53rd floor of the Azrieli Sarona Tower in Tel Aviv, venture capitalists, start-up founders, and entrepreneurs gathered last week to hear about trends and forecasts for the coming year.
They listened to Gigi Levy-Weiss, a general partner at the NFX venture capital fund, who expressed serious concern about the “silent departure of Israeli tech entrepreneurs” from the country, with some leaving because of frustration with the current government and its management of the ongoing war, which he said no one dared to talk about openly.
On the sidelines of the same confab, Liad Agmon, managing partner of the US private equity firm, Insight Partners, told The Times of Israel that there was also talk about top Israeli engineers relocating to work for the big multinational tech corporates from Google to Facebook. Otherwise, they likely would have turned out to be Israel’s future entrepreneurs setting up new startups.
This apparent trend, anecdotal though it remains at this time, is worrisome, as it seems to be confirmed by new data showing that the pace of founding new startups in Israel continues to decline, challenging the country’s image as a beacon of technological innovation and a hotbed to build large companies.
Over the past decade, the number of newly created startups has plunged about 45 percent from an annual 1,432 to about 788 in 2023, with a lower trajectory expected for the current year, according to a study by the RISE Israel institute, formerly known as Start-up Nation Policy Institute (SNPI).
“Tech is very important for Israel’s economy, and the ecosystem relies more on startups than other global markets as a breeding ground to develop large companies, since we don’t have many of them,” Danny Biran, a senior policy fellow at RISE Israel told The Times of Israel. “The fact that we have fewer startups is a problem because we will have fewer companies that employ a lot of people x years from now.”
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 more than 14 months of war with the Hamas terror group.
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%, or NIS 340 billion (NIS 95 billion) to local GDP, versus 6.2% in 1995. It also made up 53% of total exports.
Data presented in the RISE report found that out of every 100 newly founded Israeli startups, 14 to 16 will eventually employ more than 25 high-earning workers, and between 3 to 5 will employ more than 100.
In the past couple of years, both due to the global slowdown in general and specific events in Israel — including the political instability caused by the proposed judicial overhaul and outbreak of war in 2023 — many tech startups and companies are struggling to raise capital. The difficulty affects the motivation of potential entrepreneurs to create new startups, as they will be faced with the challenge to raise funds needed for their survival, according to the analysis in the report.
“If it’s very difficult to raise money, potential entrepreneurs are more reluctant to create new ventures knowing that they will need to raise money,” said Biran. “But then again, over the past decade, we have had good years for raising capital and bad ones, and the decline has been fairly continuous.”
According to the report out of every 100 startups, 6 to 7 will raise $25 million or more, and 3 to 5 will raise $50 million or more, one company will go public, and one will be acquired for more than $100 million.
Biran explained that one of the reasons for the continued decline in the number of new startups in the past few years is that the opportunities that previously existed for creating innovative new ventures for the development mobile apps, e-commerce, or other subsectors of software have almost disappeared.
“These fields did not require unique technological innovation or large initial investments, so the entry barriers were low,” said Biran. “Over the years, these fields consolidated, and few new opportunities remained.”
“We have not seen new sectors that created enough new opportunities to compensate for that,” he added.
Brian noted that there is a lot of talk about the AI revolution creating new opportunities, but that it has not yet led to an increase in the number of startups in Israel.
“If in the past, there was a trade off between being able to work on really cool, new technologies, that you only could do it in the startup that is no longer the case, because the centers of many of the multinational companies in Israel are working on state of the art technology,” said Biran. “A young person who is considering whether to create or work for a startup, or instead seek employment with a large Israeli company or a multinational corporation, will find that the terms of employment are now excellent, and obviously, it’s a lot safer, and there is less risk.”
