Recovery in tech investment leaves Israeli startups behind

TEL AVIV, Israel – Israel’s tech industry is lagging behind the U.S. and Europe in attracting venture capital amid breakthroughs in artificial intelligence that are generating renewed investment in startups, according to three new reports.

Companies in Israel raised $3.7 billion in the first six months of 2023 – the lowest amount of technology investment at the midyear point since 2018, according to a survey by the Start-Up Nation Policy Institute. That represents a 68% drop in financing from the same period last year.

Drilling down further, a report by the IVC research center, an industry group, and Bank Leumi’s LeumiTech unit indicated that the 100 fundraising deals recorded in the second quarter of 2023 represented a 48% decline from the corresponding period last year. Second-quarter funding was down 65% from the same quarter in 2022.

The SNPI report suggested that perceptions of instability in Israel stemming from government efforts to overhaul the judicial system and widespread protests against the proposals continue to chill investment.

“We are concerned that local unrest could cut off Israel’s high-tech industry from the global technology sector’s recovery, making it less competitive during this crucial time,“  the policy institute said.

The government’s Israel Innovation Authority added its own note of caution in a midyear report, citing a recovery by technology stocks in the U.S. that has not included Israeli companies. The Nasdaq 100 technology sector index rose 23.7% in the first quarter, compared to Israeli companies on the Nasdaq that increased only 10.8%.

“In light of the increase in the NASDAQ since the beginning of the year, the normal expectation would have been for an increase in fundraising and employee recruitment in Israel already during the summer months of 2023,” the government report said. “However, according to indicators presented so far, and which are reinforced by data for April and May, there is a genuine concern that Israeli high-tech will become detached from global trends.”

Israel’s success in spawning technology companies was enshrined in a 2009 book by Saul Singer and Dan Senor called Start-Up Nation. Technology has anchored Israel’s economy for the past three decades, now accounting for 15% of GDP, 50% of exports and 25% of tax income.

Tech company founders have been among the leaders of the protest movement against the proposed judicial measures, arguing that foreign funds are afraid their investments won’t be safe in Israel if the court system is the government controls the courts.

Moody’s Investors Service downgraded the country’s credit outlook in May from positive to stable, citing a “deterioration of Israel’s governance.” A month later Standard & Poor’s maintained its ratings for Israel after Netanyahu slowed down the judicial overhaul and said it would be moderated to reflect public concerns with the legislation.