It’s easy and sometimes fashionable at the moment to focus on the negative aspects of the economy in Israel, especially as it relates to hi-tech. There is certainly enough going on to mean any serious analysis must be sober, and I’m not discounting or denying for a moment the emotional impact of the current very challenging time, which can make it difficult for people to feel positive.
At the same time, it’s important to maintain a sensible perspective. Examining the situation, at Maverick Ventures Israel we see both important signs of strength and resilience in the present, and signals of ongoing durability and success in the future.
The Challenges Are Real; So is the Context
A well-rounded view of the Israeli hi-tech environment has to include the difficult realities of this period.
- Many companies, including in hi-tech, have been grappling with the effect of the large scale reserves duty callup that happened as part of the war, with averages of a reduction of 10%-30% of the workforce in many cases, particularly in the first two months.
- It’s important to appreciate the difficulties faced by employees with family members who have been called up, as well as those directly affected by the attacks.
- There’s a psychological toll that is unavoidable across every level of society, and it’s not possible to understand anything about the reality in Israel today without taking that into account.
- Investment is down: Israeli tech startups raised less funding in Q4 2023 than in any quarter since 2017.
Although all of these factors are serious individually, and even more so in combination, they also come with further context:
- Many of those called up for reserve duty are now back at work, either full-time or part-time. Moreover, despite the challenges of a reduced workforce, companies have overwhelmingly continued to meet deadlines and hit milestones as planned.
- Support from communities and from companies for those affected has been considerable, and has contributed to a sense of purpose and unity in the country, companies and the tech ecosystem.
- The Israeli response to trauma has been driven by determination to keep going, hold each other up, and hold things together. This has led, among many other things, to the hi-tech mantra of Israeli Tech Delivers #NoMatterWhat.
- While investment is down, the fact is that Israel is not far off from global trends; Q4 was particularly weak internationally as well, and 2023 was the lowest for venture funding globally since 2018.
Signs of Resilience and Confidence
Midway through November, Nvidia announced that the Israel-1 supercomputer had already become operational. This was a case in which the Israeli team hadn’t just made their milestones as promised – they had exceeded them, despite the war. The supercomputer went live two months ahead of schedule.
Amit Krig, SVP software and NIC Product line at Nvidia, was asked why his company was so committed to Israel, particularly given that they don’t have manufacturing plants in the country.
He answered, “In one word – the people. Without Israeli entrepreneurship we would not have reached where we are as a company.”
He also highlighted Israeli culture as significant – something that he said had become even more obvious during the war: “The social structure and mutual responsibility that we have here is also important, most of the workers will not want to move from here. The war actually sharpened this, Jensen Huang (CEO and founder of the company) also sees the durability of Israel and Nvidia’s activity here, and the global headquarters really appreciate it.”
In December, Intel announced that it would be building a $25 billion chipmaking factory in Israel. The move had been discussed earlier in the year, but it’s impossible not to see the timing of the confirmation in the context of a recent statement by Intel CEO Pat Gelsinger, who said that:
“The Israelis are the most resilient people in the world. They have not missed a single wafer commitment or product commitment despite the war.
“There is no tech community in the world more adaptable, more incredible than this one. I’m telling you now that those of you who are worried that capital will not invest in Israel because of this or because of that, don’t worry. I’ll tell you why. This very morning, I got an email from one of the leading venture capital funds, one of the single largest funds in the world. And what are they doing? They’re bringing a delegation of investors back to Israel.
This anecdote is reflected in the data as well. Since the start of the conflict, 75 Israeli companies have raised an aggregate of over $1.4 billion in private funding from local and global VCs. Acquisition has slowed but by no means disappeared; Palo Alto announced the intent to acquire two Israeli companies, Talon and Dig Security, for a combined ~$1 billion.
The Time is Always Now
Something else Safra Catz said at the same excellent conference created by Calcalist stuck with me. She said, “We believe now is a very good time to be right here in Israel.”
Israeli hi-tech has been working extremely hard to prove that it continues to deliver no matter what. This period will be difficult for many individuals and companies, and not every company will make it through this testing time.
Long-term, though, the Israeli hi-tech ecosystem has what it takes not only to recover, but to exceed expectations and go from strength to strength. In fact, while the OECD is pessimistic about the Israeli economy in 2024, it predicts a strong recovery in 2025.
There are a number of factors that are worth bearing in mind:
- Israeli companies overwhelmingly have audiences outside the country, meaning their success is cushioned from domestic events.
- Resilience, and pride taken in it, is something that drives a powerful determination to grow and create in more stable times. This, united with the already visible desire to build and rebuild, should make for an ideal mindset after the war.
- Looking at the most recent previous serious conflict with Gaza, Operation Protective Edge in 2014, it is noteworthy that almost 30% of the companies that raised capital during the quarter in which the conflict took place, have already had a successful exits compared to an average 25% in the other quarters of 2014. Struggle supports success.
- Israel’s hi-tech ecosystem has a huge amount packed into a small space, with strong degrees of interconnectedness and collaboration. Academia, research institutions, global companies, startups and venture funds all work together and these connections create fertile ground for novel and innovative ideas.
- It is essential for the government to invest in hi-tech and take powerful steps to support it now and in the future. The Israeli Innovation Authority (the CEO of which also spoke at Calcalist’s TechTLV) is well aware of this need, and focused on ensuring that the needs are met.
It is impressive and essential that Israeli hi-tech has shown, and continues to show, that it can deliver even in the most challenging of circumstances. The qualities that make this possible are the same ones that ensure that longer term as well, Israeli hi-tech has what it takes.