Quiet Boycott: Will Declining Investments in Israeli Tech Push Companies Abroad?

Local instability is harming the global perception of Israeli startups. Some Israeli companies are relocating operations and intellectual property outside of the country to survive

There are no anti-Israel encampments on Wall Street. However, investors may be quietly steering clear of Israel, as reflected in declining investment numbers that could soon significantly impact the country’s economy.

To save themselves, some Israeli companies are simply choosing to move abroad.

Data from 30 Israeli venture capital funds, gathered by the Israel Innovation Authority (IIA) and the Israeli Advanced Technology Industries and released this week, showed that nearly 40% of these funds have at least one portfolio company moving its intellectual property abroad. Additionally, almost 25% of these funds estimate that over 30% of their portfolio companies have relocated significant operations outside of Israel in the past year or plan to do so in the coming year – not just because of organic growth.

Assaf Kovo, the IIA’s chief economist, told The Media Line that local instability is harming the global perception of Israeli startups. As a result, some Israeli companies believe that relocating operations and intellectual property outside of the country may be crucial for their sustainability.

Titled “The State of the High-Tech Sector in Israel,” the IIA report revealed a 55% drop in investments in Israeli startups during 2023, with later-stage funding rounds being the hardest hit.

It noted that fundraising rounds decreased throughout 2023 and into early 2024, hitting the lowest quarterly figure since 2017. Venture capital fundraising in Israel fell by 70% in 2023 compared to the average from 2018 to 2022; meanwhile, other global hubs saw a decline of only 30% to 40%.

The report also said only 39% of Israeli startups raising capital are highly likely to successfully secure needed funds. Moreover, surveys for the report, which included responses from 500 tech companies, indicate a growing concern about the future, with around 40% of Israeli startups expecting lower valuation rounds during fundraising.

Kovo added that the downgrade of Israel’s credit rating already reflects foreign investors’ worries about the future of Israel’s economy.

When we talked to investors [and startups], we saw that some of these companies are having trouble identifying themselves as Israeli companies to raise new funds.

“When we talked to investors [and startups], we saw that some of these companies are having trouble identifying themselves as Israeli companies to raise new funds,” Kovo said.

Yoel Israel, the founder and CEO of WadiDigital, which represents numerous high-tech brands, shared that many of his clients are losing business because they are Israeli. He has also experienced potential leads ignoring him on LinkedIn.

Last week, French authorities announced that Israeli defense firms would be banned from exhibiting at the Eurosatory 2024, the international land and air defense security trade fair, because “the conditions are no longer right to host Israeli companies at the Paris show, given that the French president is calling for the cessation of IDF operation in Rafah.”

While the decision to ban Israeli companies was direct and bold, Israel noted that many companies are facing what he describes as a “quiet boycott.” Companies are opting not to work with or invest in Israeli firms because, as Israel puts it, “it’s not worth the headache” or potential backlash when they can choose another technology, even if it’s inferior.

Kovo added that another impact of October 7 on tech companies has been a slowdown in business activities, delays in product development, and the inability to meet company goals.

According to Kovo, 7% of high-tech employees were on reserve duty in the fourth quarter of 2023. This week, the government increased the number of reservists the military can call from 300,000 to 350,000 in preparation for a potential conflict with Hizbullah in northern Israel. This move could further hinder the high-tech industry.

At a Crossroads

Israel’s high-tech sector accounts for around 20% of the country’s gross domestic product (GDP), compared to only 9% in the United States and 13% in South Korea. For comparison, in Russia, where the oil and gas industry is the primary sector, it only composes 16% of the country’s GDP. Between 2018 and 2023, high-tech accounted for more than 40% of Israel’s GDP growth, the report said.

According to the IIA, Israel is home to around 9,200 tech companies, including 600 that were established last year. There are also 515 multinational research and development centers that employ around 90,000 workers and 843 active venture capital funds in Israel—foreign and Israeli—that raised $1.52 billion in 2023.

The report indicates that Israeli high-tech is now at a crossroads: Israel’s excellent fundamental data has not changed; the country still has top-tier entrepreneurs, investors, and researchers. However, the high dependency on foreign investments and the increasing competition, backed by massive government investments in other global innovation hubs, require a reassessment of how the Israeli government invests in this sector.

Moreover, the country’s high-tech sector accounted for $73.5 billion in Israeli exports last year – 53% of total exports. According to IIA, high-tech exports were above 50% of Israel’s total exports in three of the previous four years.

However, as some are starting to fear, “past success does not guarantee future success,” said IIA CEO Dror Bin. “The report indicates that Israeli high-tech is now at a crossroads: Israel’s excellent fundamental data has not changed; the country still has top-tier entrepreneurs, investors, and researchers. However, the high dependency on foreign investments and the increasing competition, backed by massive government investments in other global innovation hubs, require a reassessment of how the Israeli government invests in this sector,” he added.

Building Up a Better World

Despite the report, Izhar Shay, high-tech entrepreneur and former minister of science and technology, told The Media Line that Israel’s “optimism, resilience, and entrepreneurial spirit” will beat the odds.

Shay’s son, Yaron, was killed defending the country on October 7. During the seven-day mourning period, his family started thinking about how to commemorate him. They thought of the Jewish tradition of planting trees. “But we are a very high-tech family,” Shay said, so they decided to “seed” new companies instead.

We wanted to seed a company on behalf of Yaron’s memory. We wanted to seed many companies – as many as needed to commemorate all the fallen soldiers and civilians who protected us on that tragic day.

“In high-tech, we say you seed companies, provide financial resources, the needed headcount, to start a new company,” Shay explained. “We wanted to seed a company on behalf of Yaron’s memory. We wanted to seed many companies – as many as needed to commemorate all the fallen soldiers and civilians who protected us on that tragic day.”

Based on this conversation, the Next October initiative was born. Next October “stands for optimism, resilience, entrepreneurship, and the belief that next October will really be better than last October,” Shay explained.

The concept is to create and fund around 1,500 companies – one for each victim of the October 7 massacre and subsequent war. Shay and his team are already working with hundreds of new or young companies, and more are being formed.

“We are focusing on early-stage companies in the formation process all the way to those who have raised a few million dollars,” Shay said. “We want these companies to incorporate and play a significant role in restarting the Israeli economy. In the past, the Israeli high-tech ecosystem of innovation provided the measures needed for our economy to restart. It happened after the 1991 Gulf War, the Second Intifada, the Second Lebanese War, the 2008 economic crisis and COVID-19,” he continued.

A major focus is attracting international investors to return to the Israeli market. So far, Shay has held major international investment summits in London, Berlin, and New York to encourage investors to invest their money in Israeli innovation opportunities. Shay told The Media Line that, at least for the Next October initiative, the concept is working successfully.

He also said that the Israeli high-tech community is returning from the battlefield and to the drawing board with new ideas that will make it a significant player in the tech economy in the coming years.

“It is an era of creativity and entrepreneurship, and this is an opportunity to get involved with exciting companies,” he said. “We strongly believe that this is not only about commemorating; this is about creating and starting something that will support Israeli high-tech.”

Hamas came to destroy. We are responding by building up a better world.

Shay continued: “Next October is our national response to the atrocious attack on our livelihoods and lives on October 7. We are building 1,500 new companies. Each will create a new service or experience that will be distributed globally and make for a better world. Hamas came to destroy. We are responding by building up a better world.”