A multimillion-dollar vote of confidence in Israel’s startups

In December, OurCrowd’s Israel Resilience Fund announced its first eight startup investments and its first closing, with $13 million of committed capital – just weeks after we announced its launch.

The fund aims to focus on 50 or more startups directly affected by the current crisis in Gaza, or developing critical solutions related to the security situation, including environmental impact, emergency medicine, food security, cybersecurity, media monitoring, reconstruction, and other verticals.

I believe we may have set a record for the shortest time between a VC fund being announced, raising its first tranche of capital and deploying its first investments. (Do please correct me if I’m wrong about that).

If that were not remarkable enough, these millions are being committed and deployed in a country facing its greatest wartime crisis in 75 years.

Full transparency: I have skin in this game – though I hasten to clarify that OurCrowd is taking neither management fees nor carried interest from this fund – but I am convinced that the fund’s investors are making a wise decision they are unlikely to regret.

(L-R) Jeff Kupietzky, Jon Medved, Alon Tal, Maya Zachodin Koren, team members of the Israel Resilience Fund (Alice Ben-David)

It may seem odd to invest in a country in the middle of a crisis, but one constant of venture capital investing in the 21st Century is that we have rarely had a period without a crisis – and they seem to be accelerating. From the Y2K dot-com bubble, to the 2008 global financial crash, to Brexit, to the multiple challenges of the past four years, the one constant of our era is that a crisis lurks around every corner.

Whether it’s a global pandemic, a supply-chain tangle, or election disputes in the US, Latin America, Africa or Europe; whether it’s a looming or actual confrontation in the DRC or Sudan, between China and Taiwan, Ukraine and Russia, Armenia and Azerbaijan, the US and Islamic State, or Israel and Hamas; whether it’s a series of extreme climate events in Australia, Pakistan, Canada, the US, France, Greece, Iceland, the Amazon or anywhere else – venture investors must price in unforeseen events.

The question is not how to avoid a crisis, which is impossible, but how to invest in an ecosystem and people who know how to navigate them. Time and again, Israel has proved to be adept at responding to these crises, and is now doing so again.

Israel’s strength in deep technology – in AI, semiconductors, quantum, health, cyber, agriculture and more – will continue to be extraordinarily important in the years to come.

Investors’ reaction

Startup Nation has not had an easy time of it recently. About 90 percent of investment in Israeli high tech comes from abroad, which is usually a great vote of confidence, but that means Israel shared in the global slowdown in venture capital investment following the end of the pandemic, the rise in interest rates and Russia’s invasion of Ukraine. Now Israel finds itself in its own military conflict, delivering a further blow.

The reaction of many investors encountering a war is usually to stand off, put down their pens, postpone decisions, and wait until the conflict is resolved before returning to reengage.

However, startups by and large are not profitable and can be far from break-even. They do not have the luxury of putting their business on ice for very long because they will simply run out of cash. And if an Israeli startup has its key people pulled into duty on the frontline, the company’s very survival could be in question.

In most other countries, this fragile situation could sound the death-knell for any startup. But Israel is different. That is why we called our effort the Israel Resilience Fund. Israel’s high-tech economy, which owes much of its technological and philosophical foundation to the resilience of this tiny country in the face of overwhelming odds, has repeatedly shown that it can not only weather such crises, but emerge strengthened from them.

Israel’s benchmark stock index has rebounded stronger from conflicts with Hamas

I predicted more than two months ago that, despite the steep drop in Israel’s currency and stock market immediately following the Hamas attack on Oct. 7, they would quickly bounce back, as happened in previous crises. Guess what – they have.

Source: Bank of Israel

Both the shekel and the Tel Aviv Stock Exchange have recovered to their pre-war levels. On Oct. 7 the shekel was trading at $0.26 (3.86 shekels to the dollar), a level it regained on Nov. 9. By Dec. 27 it had risen to $0.28 (3.62 shekels to the dollar). On Oct. 5, the last trading day on the Tel Aviv Stock Exchange before the attack, the benchmark TA-35 Index was at 1830.65, a level it regained on Dec. 19 before rising still further.

Source: Tel Aviv Stock Exchange

The benchmark TA-35 index of Israeli stocks is trading above its Oct. 5 close and higher than the 2023 average

If only I had listened to my own investment advice, I might have made a handsome profit on both.

These two indexes offer a window into the formidable strength underlying Israel’s tech-based economy. Its fundamentals are firm and it remains resilient. I believe Israel’s startups will follow the pattern of the currency and the stock market and show a similar return to pre-crisis levels. I expect to see a chart of Israel’s startup economy showing the same V-shaped recovery as the shekel and the TA-35.

Living in Israel since the brutal Hamas attacks on Oct. 7 has not been particularly easy. In addition to those murdered, wounded, kidnapped, bereaved and driven from their homes, the entire country has been suffering from a greater or lesser degree of collective PTSD. Thousands of our children, spouses and parents face life-threatening dangers on the frontlines of battle with Hamas in Gaza and Hezbollah in Lebanon. Citizens far from the fighting are under frequent rocket barrages, forcing them to evacuate homes, schools and businesses at a few seconds’ notice to seek protection in shelters. The effect on the most vulnerable, particularly the elderly and young children, is of great concern.

Determination

The impact on Israeli society is significant, especially on the tech sector, where 10 to 30 percent of most companies’ workforce are away on reserve duty.

However, Israeli companies are used to working with key people away on reserve duty. They have built-in redundancy, expertise in multi tasking and an excess of grit and determination. There is a slogan in Israel today, that Israeli tech delivers #NoMatterWhat. It is not just a statement of intent, but of reality.

What will the knock-on effect of the war on Israel’s economy be?

Over the past three years, more than $50 billion has been invested in Israeli high tech, which currently employs about 14 percent of the nation’s workforce, accounts for 18 percent of total GDP and earns some 50 percent of Israel’s exports.

So the future of Israel’s high-tech sector is crucial to the nation’s economy, as are the venture-backed startups that are the engine of its modern economic miracle.

Sophisticated investors will see that, for now, prices of Israeli companies are cheap and there is a lack of capital, so investors are not only buying the dip, they can also influence prices in their favor. The trough has already recovered in the stock market and in the shekel and those who made post-October 7 bets on stocks did well. I believe the venture capital arena will enjoy a similar recovery and that those who make a longer term bet on private market startups in Israel’s tech sector will not be disappointed.

Snowball effect

I understand why investors are wary, so we created the Israel Resilience Fund to provide a catalyst and the leadership to encourage others who may not be aware of Israel’s track record.

The strategy of the fund is to create a snowball effect by investing a relatively small amount – we are currently investing $350,000 in each company selected – and using it to leverage an additional 2, 3 or even more millions of dollars of additional capital to assure the 12-month or longer runway that companies need to get through this crisis and eventually raise more money in an easier climate.

By the simple fact of us taking a stand and leading an investment, we cause insiders and other investors to stand alongside us, so that our relatively small investment acts as a multiplier, creating a snowball effect that keeps growing.

Matching funds are also being deployed by the government-backed Israel Innovation Authority. It has launched a 400 million shekel ($110 million) fast-track fund, with more rumoured to be coming soon, for Israeli startup companies with significant technological assets and short runways who are struggling to raise funds from their existing investors during these challenging times.

OurCrowd is not alone. I am delighted to see several other VC-backed initiatives to support Israel’s startups and entrepreneurs, including Iron Nation headed by Chemi Peres and Gil Friedlander, Safedome headed by Hilla Haddad Chmelnik and Ehud Schneorson, Startup Shield established by the Trendlines Group, and the Frontline Initiative led by AnD Ventures.

I expect that all these initiatives together will create an additional snowball effect that will inspire even more people to join us. We are already seeing new investors join OurCrowd’s Israel Resilience Fund, which has a global advisory board of leading VCs and other experts.

None of this is easy, and there will be more challenges along the way – but no-one becomes a venture investor because it’s easy. Remember that great venture opportunities are often found by those who act boldly in times of crisis.
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For more information about OurCrowd’s Israel Resilience Fund, please click HERE