Israeli Tech Sees 70 Percent Funds Drop Due To Political Fears, Global Downturn

Israeli tech companies are raising less capital - by several orders of magnitude - than is the rest of the global tech industry, primarily due to proposed changes to the country's judicial system supported by its extremist right wing government. 

The concern is that if the judicial changes are instituted, invested funds may be vulnerable due to Israeli technology used for potentially illegal purposes, such as privacy invasion, which could make both the invested funds and tech workers subject to significant legal liability. Tech workers have been prominent in protesting the plan. JL

Dov Lieber reports in the Wall Street Journal:

In the first quarter of 2023, Israeli technology companies raised $1.7 billion, a 70% drop from the first quarter of 2022 and the lowest quarterly fundraising level in four years amid  global economic trends and investor confidence hit by the political turmoil sparked by Prime Minister Netanyahu’s plan to overhaul the country’s judicial system. Globally, funds raised by technology startups decreased (only) 13% in the first quarter of 2023. Heads of tech companies say Israel’s internal instability has become a common topic in conversations with investors. 84% of investors believe the judicial changes will have a negative effect on their ability to raise capital from abroad. “It is a double catastrophe.”

Israeli technology companies are struggling to raise funds, recent data shows, amid a combination of global economic trends and investor concerns over how a proposal to overhaul the country’s judiciary could affect the sector, one of the world’s most vibrant hubs for startups.

Israeli technology companies were hurt harder in the first quarter than other global tech hubs, data shows, suggesting the reasons behind the decline in fundraising go beyond macroeconomic conditions.

 

The global technology sector has suffered as investors pull back due to higher interest rates, a trend Israeli venture capitalists and technology companies say they are also feeling. Some are also saying investor confidence has been hit by the political turmoil sparked by Prime Minister Benjamin Netanyahu’s plan to overhaul the country’s judicial system. The proposal—which aims to weaken the top court and give more power to lawmakers—has sharply divided the country and driven hundreds of thousands of Israelis to protest the initiative for months. 

“It is a double catastrophe, a perfect storm,” said Shlomi Uziel, the co-founder of Quai.MD, an early-stage health-tech company. Mr. Uziel said he recently took a funding deal that slashed his company’s valuation. “I’m considered lucky because I actually had an offer.”

 

In the first quarter of 2023, Israeli technology companies raised $1.7 billion, a 70% drop from the first quarter of 2022 and the lowest quarterly fundraising level in four years, according to a report released in April by the Tel Aviv-based IVC Research Center.

Globally, funds raised by technology startups decreased 13% in the first quarter of 2023 from the previous quarter, according to the analytics firm CB Insights. In Europe, fundraising fell by 12% in the same period and in the U.S. it declined by 1%, CB Insights found. In Israel, funds raised over the same period decreased by 20%, according to the IVC Research Center.  

Israel’s tech sector is one of the world’s largest technology hubs, especially for startups. Companies in Tel Aviv, the center of Israel’s tech industry, raised $6.9 billion from venture-capital firms in 2022, the third-highest of any European, African or Middle Eastern tech hub, according to Dealroom, a tech-analytics company. London, followed by Paris, topped the list. 

A dent to the tech industry in Israel—nicknamed Startup Nation—would also have an outsize effect on the country’s economy. The sector makes up around 16% of Israel’s gross domestic product and around half of its exports. 

“We are today in the middle of a global crisis, and it is still too early to know when and how it will end. Added to this is a local crisis that has created additional uncertainty,” said Dror Bin, head of the Israeli Innovation Authority, a government body tasked with growing Israel’s technology sector. 

Mr. Bin’s comments came in a paper released by the authority on Monday that warned Israel’s tech sector is endangered by a severe decline in funding, a growing negative gap between returns for Israel’s technological stock index in Tel Aviv and the Nasdaq, and an increase in Israeli-led companies being established abroad. 

“Even if the legal-judicial crisis is solved, it will take time to reach a solution, and even after this, it will take time to build confidence with investors once more,” Mr. Bin said.

Analysts, entrepreneurs and venture capitalists said the majority of the decrease in fundraising likely stems from the challenging macroeconomic environment. While it is difficult to determine the impact of the political situation, some entrepreneurs say investors explicitly cited the upheaval as a reason for pausing or decreasing the size of investments. 

Many in the industry said the second and third quarters will provide a clearer picture because deals reported in the first quarter may have been in the works before the judicial overhaul was announced. 

The sudden collapse of Silicon Valley Bank in March could also hurt future fundraising for Israeli technology companies.

The bank was one of the most prolific lenders in Israel’s tech industry, and its absence will create even rougher conditions for companies by forcing them back into the challenging equity market, said Adam Fischer, a partner at venture-capital firm Bessemer Venture Partners. 

Ilan Samish, chief executive of Amai Proteins. PHOTO: JACK GUEZ/AFP/GETTY

Ilan Samish, the chief executive officer and founder of Amai Proteins, a food-tech startup that produces an artificial protein sweetener, said his recent fundraising efforts had been hit by multiple factors. 

He said his company was in the final stages of closing a $100 million funding round in December when the lead investor pulled out due to global economic uncertainties. 

At the end of January, Mr. Samish said he brought an investor to Israel who had little knowledge of the country, but was interested in his company. But at the time, Israel was engrossed in internal upheaval caused by opposition to the overhaul. 

“Things are turbulent, so I’m closing my pocket until things settle down,” Mr. Samish said he heard from the investor. 

Israel’s technology sector has become a prominent actor in the movement against the judicial overhaul that has produced some of the largest protests in the country’s history. The heads of many tech companies have said Israel’s internal instability has become a common topic in conversations with investors.

Mr. Netanyahu has paused the judicial legislation to give time for negotiations with the opposition. Meanwhile, demonstrations against the overhaul have continued, drawing over 100,000 weekly protesters in Tel Aviv. 

In April, Moody’s Investors Service joined prominent economists in the U.S. and Israel, including from the country’s central bank, in warning that the government’s proposed judicial overhaul could harm the country’s economic outlook. The agency reaffirmed Israel’s A1 rating, but revised its outlook from positive to stable, a sign it could downgrade the country’s rating in the future. 

Some Israeli tech executives say the country’s politics haven’t affected their business. 

Didier Toubia, CEO of Aleph Farms, a leading food-tech company in Israel, said that current challenges boiled down to the global macroeconomic environment. 

“There might be some perception of Israel-specific risk by some investors. But it is a misperception. The polarization we see in Israel isn’t different from what we see in the U.S. or in France,” said Mr. Toubia, who is originally from France.

Didier Toubia, chief executive of Aleph Farms PHOTO: AMIR COHEN/REUTERS

Start-Up Nation Central, a Tel Aviv-based nonprofit that tracks tech investments, released a survey in April that found that 84% of investors believe the judicial changes will have a negative effect on their ability to raise capital from abroad. 

Israel’s tech industry has shown resilience in the past, including weathering the hit of the dot-com bust at the turn of the millennium, which coincided with a yearslong bloody battle with Palestinians known as the Second Intifada. 

Avi Hasson, head of Start-up Nation Central, said the current crisis, which he also called a “perfect storm,” poses a risk to the long-term health of the technology ecosystem because companies are starting to move capital, intellectual property, and talented employees outside of Israel. 

The Start-up Nation Central survey found that 78% of investors want their portfolio companies based outside of Israel. It found that 27% of companies are considering relocation packages to move employees outside of Israel, and 35% of those are actively planning to do so. 

Erel Margalit, founder and chairman of Jerusalem Venture Partners. PHOTO: JALAA MAREY/AFP/GETTY

“The most important ingredient to Start-up Nation is talent. We need to protect it at all costs,” he said. 

Erel Margalit, founder and executive chairman of one of Israel’s largest venture-capital firms, Jerusalem Venture Partners, said Israel’s political turmoil is a challenge for the technology sector, but the move to incorporate or move employees abroad will make the firms more global. 

“When it comes out of the political crisis, it will be even stronger, and it will be more international,” he said.