Israel judicial plan sparks brain drain fears, threatens US tech gateway: VC firm

Ben Rabinowitz, founder of venture capital firm Amiti Ventures, says the contentious proposals to weaken Israel’s judicial system are threatening the gateway of Israeli tech to reach the US market.

“The US is the early adopter of Israeli technology. This is the market that absorbs our technology the quickest and if we are not in sync with them, if we don’t have the same values, and the same structure, we are going to pay a price for it,” Rabinowitz told The Times of Israel. “Many of our Israeli companies are working with the US Department of Defense or the US Department of Energy because we have the same values.”

“To lose that will cause significant damage to the business side for sure,” he cautioned.

Founded in 2010, Amiti Ventures has raised more than $240 million and says it helps Israeli deep tech companies to get started and help them take off, especially in pursuing the US market. Among the companies backed by Amiti are Innoviz Technologies, Valens, Vayyar, Cycognito, NextSilicon, Dataloop, and Autotalks.

“Israel’s economic miracle depends on mobile capital and a liberal, globalised tech workforce that generated 54% of goods-and-services exports in 2021,” British weekly The Economist cautioned on Wednesday, calling on Prime Minister Benjamin Netanyahu to halt the legislative process, describing the proposed legal changes as a “dreadful answer to a real problem.”

The proposed changes to Israel judicial system advanced by Justice Minister Yariv Levin would grant the government total control over the appointment of judges, including to the High Court, severely limit the High Court’s ability to strike down legislation, and enable the Knesset to re-legislate laws the court does manage to annul with a majority of just 61 MKs.

Israelis wave flags during a protest against plans by Prime Minister Benjamin Netanyahu’s government to overhaul the judicial system, outside the Knesset in Jerusalem, February 13, 2023 (AP Photo/Ohad Zwigenberg)

“Israel’s unwritten constitution is flawed, but the changes would make things worse by allowing nearly unchecked majority rule. All societies need judicious checks on power, and Israel is no exception,” The Economist wrote.

The changes if passed in their current form “could make the country less prosperous, more polarized at home and more vulnerable abroad,” the Economist warned.

Tech companies, moneymakers, business organizations, policymakers and prominent economists have repeatedly warned that the judicial overhaul plan will hurt Israel’s standing as a stable democracy and a hub for investments and doing business, since an independent judiciary is seen as a basis for a predictable and strong system of checks and balances in a country which has no formal constitution.

“In the private sector, you need to have very established laws, very established precedents, to know how a court would rule just to run your day-to-day business, protect your employees, minorities, working within your companies which are so essential for expanding the job force,” said Rabinowitz. “Innovation happens in the most liberal democratic societies and that’s why Israel is doing very well in tech.”

“When you pull back you get uncertainty, which affects the performance of tech, and what happened in China or Russia are good examples of that,” he remarked.

Rabinowitz also raised concern that the proposed changes to Israel’s legal system will prompt software engineers and other tech workers to leave at a time the country is already suffering from a shortage of skilled staff.

Tech workers march in Tel Aviv to protest against the government’s planned overhaul of the judicial system, January 31, 2023. (Tomer Neuberg/Flash90 )

“Given that the changes will be against the value system of so many tech workers is also very concerning as an investor because we need more people in tech in Israel,” Rabinowitz said. “The bottom line is as a software engineer, you just need a laptop and you connect it to the cloud, and then you could actually work anywhere, you don’t have to work here.”

In recent weeks, concern has grown that a weaker judiciary will negatively impact Israel’s credit rating and harm the country’s prosperous economy and its local currency triggering the start of an outflow of funds.

“We already see the impact on what’s happening with the shekel, which has been weakening and the credit rating of Israel will clearly be damaged, and that will increase interest rates, and that means people’s mortgages are going to go up,” said Rabinowitz.

A number of local firms and startups at the request of their foreign investors have started to shift money out of local bank accounts to diversify risk and hedge their assets before the planned reforms are set to be approved.

Rising uncertainty over the ramifications of the judicial changes on economic growth and asset regulation has also private individuals looking to move money to foreign accounts. Some $4 billion has been transferred out of Israel and into foreign banks in the past three weeks, according to unnamed banking sources cited in the Hebrew media.

“I see on an individual level that people are moving their money because they are truly worried about what’s happening here,” Rabinowitz said. “I think for companies it is also making sense because the shekel is depreciating and if you believe that the US dollar is going to keep getting stronger against the shekel, why not hold dollars in the US versus holding it here.”

For the past weeks, tens of thousands of Israelis, including tech employees, have gone to the streets in protest of the emerging judicial changes and in support of protecting Israel’s democracy and judicial independence. On Saturday, US President Joe Biden weighed in publicly for the first time on Israel’s judiciary changes in a rare statement to The New York Times calling on Netanyahu’s government to seek “consensus” rather than jamming through its controversial judicial overhaul.

Calling Israel a strong ally, US Senator Dick Durbin, the chairman of the Senate Judiciary Committee and the second-highest ranking Democrat in the chamber, told Haaretz this week that the Israeli government was on track to “harm key shared values between the United States and Israel,” calling on political leaders to “step back from the brink of recklessly damaging the country’s key democratic institutions.”

Senate Majority Leader Chuck Schumer is reportedly coming for a visit to Israel next week with a delegation of Senate Democrats for meetings with Netanyahu and other senior officials as more supporters of Israel in the US Congress are speaking up to warn the government about going ahead with the proposed changes.

Rabinowitz is urging Schumer to not just meet with political leaders in Israel but to come to the planned Saturday protests on Kaplan Street in Tel Aviv on February 25th together with all the senators that are traveling with him.

“Meet the people that truly build this country from previously leading the most elite army units to the high-tech sector that drives the country forward and helps solve so many of the world’s challenges,” Rabinowitz wrote in an appeal note. “Be on the side of democracy, be on the side of justice, be on the side of women, LGBTQ and minorities.”

“We truly want our engineers and their laptops connected to the cloud, to remain in Israel, serve in our army R&D units, pay taxes and lead the world innovation from here in Israel.”