Investment in Israeli startups is set to decline in 2023, down 55% compared to 2022, according to a report by the Israel Innovation Authority.
The report, “The State of Israel’s High-Tech Sector 2024,” is an annual overview of the sector published by the Authority, a government agency that promotes the development of industrial research and other innovations in Israel.
The official said the sharp decline in investment in the sector mainly affected subsequent funding rounds for Israeli companies, raising concerns about the future of Israeli high tech.
The high-tech sector is central to the Israeli economy, the report states, with its contribution to Israel’s GDP set to reach almost 20 percent in 2023. The sector will also account for a large share of Israeli exports, reaching 53 percent of exports in 2023, totaling approximately $73 billion.
The share of high-tech exports has been consistently high in recent years, with the sector’s exports accounting for more than 50 percent of Israel’s total exports in three of the last four years.
The report also noted that job growth in the sector will slow to 2.6 percent in 2023, slightly outpacing population growth. Continued job growth outpacing population growth is essential for the sector to continue to have a positive impact on Israel’s GDP, the report said.
The global shift of Israeli startups
Local instability is also affecting decision-making among Israeli startups: Around 40 percent of venture capital funds surveyed by the agency reported that at least one company in their portfolio had transferred intellectual property abroad because of the instability.
According to the report, about 25% of these venture capital firms estimated that more than 30% of their portfolio companies “had relocated significant operations overseas in the past year or planned to relocate in the next year, and this was due to more than just organic growth.”Failure to meet targets, delayed product development, and slowed business activity were the main impacts of the October 7 events on companies, according to the report, with companies reporting that they scaled back their hiring plans for the coming year during the war.
The report also found that the number of job openings has decreased since October 7, mainly in central Israel. In the first quarter of 2024, the number of job openings recovered to pre-war levels, but it was still the lowest since early 2019.
The official said the industry was “highly sensitive to Israel’s international relations” and any damage to Israel’s reputation could jeopardize the industry’s future.
“The downgrade of Israel’s credit rating already reflects foreign investors’ concerns about the future of the Israeli economy,” the report said.
The report also noted that 65% of employees are Jewish, non-Haredi men, and there had been no significant change in diversity in the area.
Officials called for additional government funding to be allocated to the high-tech sector.
“Despite the central position of high tech in the Israeli economy, government investment in Israeli high tech is lower than that of countries that rank higher than Israel on the Innovation Index, such as the United States, the United Kingdom and South Korea,” the report said.
“The industry is highly dependent on foreign investment and may struggle to weather the crisis as it lacks a strong domestic safety net,” he added.
“Most high-tech investment comes from non-government sources, with a significant share coming from foreign investors. Therefore, to address market failures and reduce dependency on external investment, we need to strengthen the resilience of the high-tech sector through diversified budgetary additions, including from government budgets,” said IIA President Aron Stopel.
“Significant additional government investment in the ecosystem is needed in the coming years to ensure the continued growth of Israel’s economic engine,” said IIA Executive Director Dror Bin.
Asked what this government funding should consist of, Bin told The Jerusalem Post that government investment could reduce Israel’s reliance on foreign capital.
“The government funding has two purposes. Firstly, it will provide a means to overcome the current downturn by injecting capital into businesses that need it to continue their growth trajectory,” he said.
“Furthermore, when considering strategic growth, government investments will be focused on higher-risk areas (those lacking private sector funding) as well as encouraging local institutional investors to invest in Israeli tech venture capital firms and companies, which will result in greater market stability in the long term,” he explained. Authorities have proposed several investment plans over the past year to bring more funding to the sector, including the launch of a startup fund and incubator program, he said.
Officials also recommended creating greater certainty for the sector through a multi-year government investment program signaling long-term support, and investing in “quality education” for all Israelis to strengthen the sector.
Overall, the report finds the tech industry at a crossroads: After rapid growth since 2018, “the question now is whether the tech industry will return to growth, enter a period of stagnation similar to the 2001 dot-com bust, or even worse, enter a period of contraction,” it said.
