Layoffs resume as Israeli high-tech industry struggles to thrive in dark times
Fraught politics and the Gaza war are harming Israel’s technology sector, but the US is also seeing a downturn, while Europe is closing in on both of them — and fast
After 10 months of war, a year and a half of societal upheaval over the proposed judicial overhaul, and four years of global economic crisis, it turns out the Israeli high-tech industry is capable of functioning even under the most difficult circumstances.
In the second quarter of 2024, there was a slight rise in investments in Israeli tech companies compared to the previous quarter, and headlines hailed the industry’s recovery.
According to Moran Chamsi, a managing partner at the Herzliya-based Amplefields Investments, “Israeli high-tech’s durability is abnormal. In New York, in Silicon Valley, everyone is praising the Israeli high-tech resilience, the Israeli entrepreneur who is completely involved in managing their company, the reserves soldier who opens their laptop at midnight, the teamwork and the caring, and this is expressed in investments.”
But many high-tech workers themselves don’t share the rosy assessment. Companies have been laying off employees recently after a firing freeze following the October 7 massacre, while general demand for employees in the industry is not high. Some 200 employees were fired each week over the month of June. The widespread estimate in the industry is that between a quarter and half of the companies cut down on manpower by five to 10 percent in the last four months.
According to data from Israel’s Central Bureau of Statistics, June saw a 2% decrease in available jobs in high-tech and a 6% decrease in available program developing jobs compared to May. The demand for tech employees is slightly higher than it was a year ago, but 45% lower than two years ago and 61% lower than two and a half years ago.
Many of the American tech giants are also firing thousands of employees worldwide. There are a few reasons for these layoffs, including the advancement of artificial intelligence, which makes some professionals redundant; ongoing inflation and fear of recession in the US; and the shaking of the global stock exchange. This reality is confronting tech giants with the massive workforces they amassed during the “COVID-19 bubble.”
At the same time, local startups have been harmed severely by the judicial overhaul and the war in Gaza. According to data from Rise, formerly the Start-up Nation Policy Institute, in 2022, Israeli companies recorded investments of some $15 billion, which sank to about $7 billion in 2023. Israel’s Innovation Authority said Israeli venture capital funds raised domestically decreased by about 70% last year.
In 2023’s fourth quarter, investment in high-tech amounted to some $1.3 billion — the lowest sum since 2015 — and reached $1.6 billion in the first quarter of 2024. In the second quarter, investment rose to about $2.8 billion, but $2 billion of that was invested in only six companies, and about $1 billion was invested in Wiz alone.
Meanwhile, the number of investors, which sank in 2023, continued to fall this year by another 20%.
Layoffs in the industry began in 2023, with about half of local tech companies reducing staff, according to an ICBS survey. Layoffs halted in October when thousands of employees were called up for reserve duty, leaving companies short-staffed and struggling to operate. The Defense Ministry covered the salaries of reservists, discouraging further layoffs. Since then, however, many reserve soldiers have been released from duty.
Layoffs and belt-tightening
According to Israeli High-Tech Association CEO Maya Schwartz, “The situation in the market, after massive onboarding during COVID, requires layoffs and a reduction in expenses. Not in all high-tech sub-industries — health, security, and cyber companies are still hiring people — but most fields need to optimize.”
Meanwhile, companies that pushed off layoffs until employees in key positions returned from reserve duty are firing fewer returning reserve soldiers than employees who stayed behind.
“There’s a cooling-off period in which it’s prohibited to fire employees returning from reserve duty, and the employers cannot bring themselves to do it. Usually, it’s the person who sits next to the reserve soldier who needs to worry,” said Chamsi.
“In the last two years, there has been a reduction trend that stems from global macroeconomic processes that are unrelated to the situation in Israel. The war in Gaza actually stalled the layoffs, but they have since begun again,” he added.
According to the ICBS, the average salary of high-tech employees, which was high to begin with, has risen by 6.5% since 2021, and has continued to rise despite the layoffs and talk in the media about the need to cut salaries.
In 2022, the average salary in the industry rose by 4.8%, and it rose by 6.8% in 2023, reaching some NIS 30,000 ($8,000) a month. Some employers say the raises during the crises were sometimes meant to entice employees not to leave Israel.
One way or the other, industry reports say the average salary is now frozen.
“When many employees are on reserve duty, those who stay behind work more at a salary that has stopped rising. Employees who got used to the consistent rise in salary have a hard time getting used to this, but raises aren’t possible,” said Chamsi.
The investments that Chamsi’s capital works on enable investors and employees to exercise their own options, and he says that many employees choose to do so instead of getting a raise.
“It’s hard to say how much some of the layoffs are related to the situation in Israel,” said Yoav Sherman, a partner and head of high-tech and venture capital in the Arnon Segev and Partners law firm who represents hi-tech companies in investment negotiations.
“The big companies have been firing employees as a result of the market after COVID and the slowing down of the global economy. It’s possible — it’s too early to know — that it is also related to the rising use of AI,” he added.
Israeli resilience put to the test
Sherman said that despite what is happening in the political arena, the tech world is quite supportive of Israel, which can encourage investment in the country — and as importantly, keep it there.
“Business considerations transcend all else,” he said. “But the fact that we are not lepers politically in the high-tech world may be a factor that prevents investment from escaping.”
Sherman added that Israeli venture capital has also been slower to invest in domestic high-tech, though he said he wouldn’t describe this as a freeze or a stall.
“On the other hand, high-tech is raising more money than in the past from Israeli institutional investors — insurance companies, savings funds, and investment houses, and so on — in part because of the Innovation Authority’s ‘initiative’ fund that helps with this,” Sherman said.
Schwartz sounded less optimistic.
“The Israeli high-tech industries exhibited incredible resilience,” she said. “But you cannot ignore reality. When you compare the state of things before the judicial reform to now, it’s a world apart. And even though we’re not in the bad state of the beginning of the war, we are still in a worse place than before it, which was also bad.”
Schwartz said that despite the coronavirus pandemic, the Israeli tech sector had an average year in 2020, with the birth of 14 new “unicorn” companies, meaning startups that reach a valuation of $1 billion or more without being listed on the stock market. In 2021, 39 were launched, while in 2022, there were 20. Last year saw only three such companies started, and this year there have been just four.
“We’ve proven we’ll survive anything,” Schwartz said. “The question isn’t whether we’ll survive, but when we return to thriving.”
European high-tech is closing the gap with Israel
The Israeli High-Tech Association does not have statistics about Israeli companies that have closed or international ones who moved their development centers out of Israel since the war began, and such information does not appear to have been collected elsewhere. Only a handful of such cases received publicity, such as the shuttering of Veev and Phantom Auto.
Companies that publicly moved their development centers out of Israel before the war include Alibaba, Electronic Arts, Asurion, DropBox, Corning, Forescout, and Ford. Bright Machines and Chegg exited after the war was underway.
Many other companies moved a portion of their development abroad, enabling employees to relocate as well — though naturally, only some of them have chosen to emigrate.
While Israeli high-tech faces difficulties, other nations have seen their tech sectors growing as new tech hubs pop up, mainly in Europe. Israel still has the largest high-tech industry in the world when adjusted for the size of the country, but the gap between it and Europe is slowly closing.
According to data published on the Tech EU website, tech companies in the European Union raised about 30 billion euros ($32.8 billion) in the first quarter of 2024. That was 20 times more than what Israel raised — but the EU’s population is 45 times greater than Israel’s, so adjusted for size, the volume of investment in Israel was more than double that of the EU.
However, looking back to the first quarter of 2023, only about $14.7 billion was invested in the EU, while $1.7 billion was invested in Israel. This means that investment in Europe’s tech industry has doubled within a year, while in Israel it has actually slightly shrunk.
While tech may have been inflated during the pandemic, Israel felt the subsequent correction much more than Europe did. In the first quarter of 2022, approximately 33 billion euros ($36 billion) were invested in EU tech, while in Israel about 5.8 billion shekel ($6.3 billion) were invested over the same period. Tech investments in Europe have, therefore, shrunk by about 10% in the last two years — and in Israel by about 68%.
According to Sherman, “the gap between us and Europe is getting smaller. There’s a concerning side to this. I work with a French capital venture, for instance, and I hear from them about crazy things that are happening there in the AI development market.”
Entrepreneur Tali Shem Tov, founder, partner, and CEO of programming and cloud service companies Well Done, Code Value, and Cloudex, told The Times of Israel in February that the industry was in crisis.
“But there were crises in 2002 and 2008, and we came out of them stronger, and we will this time as well. There’s immense motivation. The employees are working hard, management supports them, and even evacuees are continuing to work,” she said at the time.
Now she says that “the situation is bad.”
“In the last four months, there have been expansive cuts to the workforce. This is part of a general global occurrence. Only a few days ago they announced, for instance, that Intel and Amdocs are laying off employees. The investors spent a lot during COVID, and in the last two months, they’ve been matching their expenses to their income,” said Shem Tov.
“But there is no doubt that there is also a local problem,” she said. “Cyber and defense companies are thriving, but all the rest — programming, retail, e-commerce, and biotech — aren’t. High-tech is thriving in Europe, and Israel saw a sink in investments. Development centers have been moved abroad, companies have registered abroad, and Israeli entrepreneurs have started companies abroad instead of in Israel. I was very optimistic a few months ago. I didn’t imagine it would go on for such a long time.”
“I’m still optimistic,” said Shem Tov. “Israel has a crazy entrepreneurial power that is fighting with all its might against the most difficult situations. We are a country that has learned to survive and cope, and we will cope and survive.”
