Tech investors are waiting for ‘sanity’ to return to Israel, says JVP founder

Israeli entrepreneur and investor Erel Margalit says tech workers’ protests show that the government will not succeed with judicial overhaul push

Sharon Wrobel

Sharon Wrobel is a tech reporter for The Times of Israel.

Erel Margalit, founder and chairman of JVP at a protest against the judicial overhaul in Haifa. (Micha Brickman/Courtesy)
Erel Margalit, founder and chairman of JVP at a protest against the judicial overhaul in Haifa. (Micha Brickman/Courtesy)

As Israel celebrates the 75th anniversary of its independence, Israeli entrepreneur and investor Erel Margalit says Israel’s democracy, the nurturing ground for the creativity and coexistence that has turned the country into a technological powerhouse, is at a crossroads.

The founder and executive chairman of Jerusalem Venture Partners (JVP), one of the oldest and most established venture capital companies in Israel, with $1.75 billion in assets under management, says it is the democratic and pluralistic character of the country that has provided a tailwind to high-tech innovation over the past 25 years.

Margalit, a former Labor party MK (2015-2017), is one of a group of serial entrepreneurs leading vocal protests of tech professionals and startup heads in Jerusalem and elsewhere against the government’s proposed changes to the judicial system which, they argue, represent a major threat to democracy. The main concern is that the proposed legislation will undermine the independence of the judicial authority and erode the vital checks and balances that have supported Israel’s democracy.

Tens of thousands of Israelis have for the past 16 weeks taken to the streets in protest of planned legislation that would grant the government total control over the appointment of judges, including to the High Court, and severely limit the High Court’s ability to strike down legislation.

Hundreds of tech startups, venture capital funds, law firms and other private sector companies have allowed tens of thousands of their employees to attend nationwide protests during work hours as the first rounds of voting on the legislation were held.

“The economy and the high tech industry is threatened by people who still want to attack the status of the judicial system,” Margalit told The Times of Israel. “On the other hand, we also find ourselves in this rare, unifying moment where, in addition to trying to build great companies and finding investors, we are also finding ourselves with a set of values that we stand for and speak up against together.”

Demonstrators wave flags during a rally to protest the Israeli government’s judicial overhaul plans, in Tel Aviv, on April 22, 2023. (JACK GUEZ / AFP)

“This is a defining moment, which comes from a difficult moment in time, but I think that once we overcome this, it will have great foundations to go forward for the next generation of company creation,” he added.

Founded in 1993, JVP has invested in more than 160 companies in Israel, the US and Europe in the areas of cybertech, enterprise & AI, fintech & insurtech, foodtech and most recently climate tech.

Following large-scale demonstrations and massive protests against the firing of Defense Minister Yoav Gallant after he warned of harm being done to national security by the government’s unilateral moves on the judiciary, the advancement of the judicial plans was paused last month to allow for dialogue and compromise. (He was later reinstated.)

“The high-tech industry has shown one major thing: they [the government] are not going to succeed. When they stepped over the lines with the firing of the defense minister, Israel said no to Netanyahu and stopped him right there,” Margalit noted. “The flames have somewhat gone down a nudge even if it’s temporarily.”

“I think that a lot of us, by the protests we are making sure that things are not going to become worse, and by action we are trying to make them better,” he said.

The prospect of the judiciary system being weakened has been fueling uncertainty threatening to undermine Israel’s standing as a stable hub for investments from abroad, on which the local high-tech ecosystem largely relies on for its existence. The tech industry, touted as the main growth engine of the economy, generates about 17% of GDP and is responsible for over 50% of exports and about 25% of payroll taxes.

File: Workers from tech sector protest against the government’s planned judicial overhaul, in Tel Aviv, on March 9, 2023 (Tomer Neuberg/Flash90)

In the first quarter of this year, Israeli tech companies raised $1.7 billion, down 70% from the $5.8 billion in the first three months of 2022, according to a report by IVC Research Center and LeumiTech. The quarter marked the lowest figure in four years.

The current financial environment of high interest rates and a slowing global economy has seen tech shares taking a battering on global markets, pushing company valuations down both in the public and private sectors. The market downturn has seen thousands of workers laid off, triggering funding pullbacks and creating a bear market for new tech offerings.

A recent survey by Start-Up Nation Central, which tracks the local tech ecosystem, found that 80% of Israeli startups and 84% of investors fear that the planned changes to the judicial system will have a “negative impact on them and their portfolio companies.” About 84% believe the government’s plans will have a negative effect on their ability to raise capital from abroad.

Margalit’s JVP operates a cybersecurity innovation hub in downtown Manhattan, and last year launched a climate tech center in partnership with the city of New York as well as with key sponsors such as German luxury automaker BMW. It previously launched innovation hubs in Israel – a food tech center in the Galilee and a digital health center in Haifa.

Now when talking to investors outside of Israel, Margalit says they are wondering why an “administration is acting against itself.”

“Israel was the number one country that we — in Singapore or in France, or in the US, or in Sweden, or in the UAE, or even in Saudi Arabia — that we wanted to deal with as far as innovation is concerned. What the government is doing now and where they are taking this is unclear, they [investors] are telling us,” Margalit recounted.

“At a time of crisis internationally, where there’s both a financial crisis and geopolitical crisis, clarity is important. For so for many of us, it is important that they are seeing that the high-tech sector is standing up in the streets, and in the piazzas around Israel.”

Margalit added that investors are “impressed” by the fact that the judicial overhaul was stopped for now, showing the strength of the entrepreneurs, but they are also waiting to see a change among lawmakers.

“We are finding ourselves as the ambassadors for the democratic Israel, for the pluralistic Israel, for the kind of Israel that they knew that they were investing in and that we are claiming strongly will be maintained, even if the struggle needs to continue,” he remarked.

“It is a challenging environment for raising capital, but as a VC, a CEO and entrepreneur you got to put your head down and work hard and in many cases we are succeeding, but the government obstacles are still there.”

Israel at 75 is notable for its technological prowess and is embarking on some of the most interesting innovation that the world needs in areas of cybersecurity, climate tech and food tech, according to Margalit.

Israeli cybersecurity startup Coro last week raised $75 million in capital from investors, led by Energy Impact Partners. The latest round takes its total funding raised over the past year to $155 million, including from investors such as JVP and Balderton Capital.

“Independence Day is a time not only to celebrate the existence of the state, but it’s also a time to say what character the state will have: we want a democratic state, we want a pluralistic state, and we want a creative society where there is more than one voice. We want Israel to use its technology and its strength, not to isolate itself from the world but to connect it all.”

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