Investors see tough times persisting for Israeli startups

Amid global slump in tech industry, VC executives call on Israel to invest heavily in computer education and stem the brain drain

Israel Democracy Institute

Eli Hurwitz Conference on Economy and Society in Jerusalem

Israeli venture capitalists see little chance in the next year of relief from the ongoing drought in investment that has forced many startups to cut staff or close down.

“This may be the worst year for fundraising since the 2008 economic crisis,” Alan Feld, co-founder of Vintage Investment Partners, told the Eli Hurvitz Conference on Economy and Society in Jerusalem on Wednesday. “It’s true, there is a global crisis, but the decline in Israel is sharper than the one in the U.S.”

Feld, whose firm manages $3.6 billion in assets, led a succession of Israeli investors who expressed deep pessimism about the technology industry, which has been Israel’s banner of success for the past three decades as a spawning ground for startups. At the same time, they called on the government to spend more money on science and math education to be competitive with China, India and other growing tech hubs. The conference, sponsored by the Israel Democracy Institute, provides an annual review of the country’s financial performance and featured speeches by Finance Minister Bezalel Smotrich and Bank of Israel Governor Amir Biron.

Echoing Feld was Yossi Vardi, a serial entrepreneur and elder statesman of Israel’s startup culture, whose assessment of the industry these days is dark. Much of the problem, however, is self-inflicted, Vardi argues, coming from the ferocious political battles over government efforts to overhaul the judicial system.

“We are facing a terrible crisis — there will be no high-tech and there will be no foreign currency, there will be no money for anything,” should the judicial changes become law, Vardi said. “Put aside the quarrels and toxic talk. If we find a logical way to conclude the current national debate, we have a bright future.”

First-quarter investment in Israeli technology companies sank 71% to $1.7 billion from the same period last year, according to a study by the IVC Research Center, an industry group, and LeumiTech. Moody’s Investors Service downgraded the country’s credit outlook last month from positive to stable, citing a “deterioration of Israel’s governance.”

“The economy and the high-tech industry need trust, stability and certainty,” said
Tal Barnoach, a co-founder and general partner in Disruptive VC. “Today we are suffering from both the global crisis and the government conflict, which may be causing irreversible damage to the industry in its early stages.”

While nursing its wounds during the current slowdown, Israel needs to invest in science education to make sure it recaptures its edge when the economy warms up.

“Israeli academia is not competitive globally,” said Eugene Kandel, chairman of the Start-up Nation Policy Institute and former chief economic adviser to Prime Minister Benjamin Netanyahu, who led the panel discussion on tech investment. “Israel can’t depend on second-rate brains. Very quickly, to my regret, we’ve stopped being competitive on first-rate brains.”

Michael Eisenberg, co-founder of the Tel Aviv-based VC fund Aleph, said Israel can increase its pool of skilled technology workers by investing in training programs for underemployed populations such as Arab citizens and Haredi Orthodox Jews. He said the government must also heavily increase funding for math and science education in all schools. “We have to make sure that within a decade, every child in the eighth grade knows how to program,” Eisenberg said.

Yifat Oron, managing director in Israel for New York-based Blackstone, the world’s largest alternative assets manager with $991 billion under management, said the firm is still bullish on Israeli technology companies. “It is important that Israel will continue to be the right place for high-tech companies both in good and in difficult times,” she said. “Israeli governments have known how to do this for decades, and it is important that we do not take our foot off the gas.”

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