Loss of confidence in the state’s actions drives startups to grow elsewhere – survey
A third of tech firms are considering moving some operations out of Israel due to war uncertainty and amid a lack of trust in the government’s ability to lead recovery efforts
Sharon Wrobel is a tech reporter for The Times of Israel.
With Israel’s war with the Hamas terror group approaching the one-year mark, almost 50 percent of local tech firms and startups are struggling with investment cancellations forcing many to move their operations outside the country as they lose confidence in the government’s ability to lead a recovery and stimulate growth, according to a survey published Thursday by Start-Up Nation Central, which tracks the local tech ecosystem.
The survey conducted in August among a representative sample of 230 companies and 49 investors found that Israel’s tech sector, the nation’s growth engine, faces future funding uncertainty, with 49 percent of the surveyed startups and firms reporting some investment cancellations, and only 31% expressing confidence about their ability to raise critical capital next year.
The Israeli economy’s dependence on the tech sector has significantly grown in the past decade, and it now contributes about 20% to the country’s output, generates 25% of income taxes, and accounts for more than 50% of exports.
As funding uncertainty and staff shortage due to the callup of reservists to the war remain major hurdles for the growth and survival of local startups in the past 12 months, 24% of the surveyed companies reported that they already relocated some of their operations outside of Israel or expanded globally.
“Talking to founders and investors alike they have moved to a routine in crisis mode doing whatever is needed to keep delivering and maintaining business continuity,” Startup Nation Central CEO Avi Hasson told The Times of Israel. “But you can only do that for x amount of time, it is like running with 100 kilos on your shoulder, which you can do for a mile, but it is very hard to run a marathon that way.”
“The prolonging of the conflict and with it the uncertainty are definitely having an impact, which is causing companies to think harder about what they should do next, including moving activities outside of Israel, because that resilience also means that you got to do whatever it takes to make sure that your company keeps delivering,” said Hasson.
Even more worrying, Hasson said the survey’s findings showed that the sentiment of local tech firms struggling with the war situation, is driven by a lack of confidence in the government’s ability to create some certainty about doing business in Israel.
About 80% of the respondent startups, and 74% of the investors in the survey said they were concerned about the government’s ability to lead a recovery, including in the tech sector. More than 80% of the companies said they did not receive any support due to the war.
“We do see a huge lack of confidence in what the government has been doing and will be doing, not just with regard to tech-specific policies and incentives, but people are talking about ending the conflict, bringing the hostages home, or passing a responsible budget,” said Hasson. “The private sector is telling us that they are doing whatever they can and everything that is needed but they can only do that much, while certain actions and policies have to be taken by the government if we want to weather the storm in the longer-term.”
“Companies and investors are looking for the government to take action on the things that can reduce uncertainty and will send a signal to the market that it is at least dealing with the things which can be controlled,” he added.
Hasson cited the need to pass a responsible budget with policies that prioritize measures contributing to the future growth of the Israeli economy, such as dealing with the academic crisis which relies on public funding.
“The government needs to choose its policies and plans according to that priority, which is not happening right now,” he lamented.
Despite the mounting challenges amid the ongoing war and a global downturn in funding, Israel’s tech sector continued to attract investments, according to data collated by Startup Nation Central. Since the outbreak of the war triggered by the October 7 Hamas onslaught, Israeli startups raised $7.8 billion across 577 investment rounds, a slight decline from the $8.2 billion secured during the same period a year ago.
“One of the reasons multinational companies and investors are still confident in the Israeli ecosystem is their understanding, which is based on past experience, that Israeli founders and investors are professional and experienced enough that they will do whatever is needed to ensure business continuity,” said Hasson. “Theoretically, that could also mean relocating employees or shifting activities.”
Looking ahead, about one-third of the surveyed tech firms said that they were considering shifting some of their business operations outside of Israel to mitigate risks. Meanwhile, the surveyed companies expressed optimism about their business operations going forward as 54% said they expect to grow in the coming year, particularly those operating in the cybersecurity and business software sectors.
“We are going to grow, but we are going to grow elsewhere – these are discussions, which are right now being conducted at company board room meetings and by management teams as the level of uncertainty over the extent and duration of the war is so high,” said Hasson.
Hasson said that one of the biggest worries for the local tech industry is the risk of lagging behind, as the war drags on and major global tech hubs, including the US market recover. He also raised concerns about the closure of good local startups and tech firms – that are not developing cybersecurity or defense technologies – as they go out of business because of the challenging environment.
“It took us 20 years to get to a situation where everybody felt confident and comfortable doing business and growing companies in Israel,” said Hasson. “If we see a reversal of that trend, which is driven by founders and investors doing whatever is needed, and the world will say in order to be a successful global company, you can’t be headquartered in Israel, that has a very significant implication on the Israeli economy.”
“We are not seeing that happening, at least not in a significant way, but the questions are being asked, which is an early warning sign,” he cautioned.
