It is time to rethink StartUp Nation

2023 was not an easy year for the Israeli hi-tech industry. The combination of a poorly conceived and executed judicial reform plan, a barbarous terrorist attack and the subsequent war with Hamas, and a global slowdown in venture capital funding resulted in a strong drop in investment in Israeli startups in 2023. 2024 will be a watershed year for the Israeli hi-tech ecosystem and therefore the Israeli economy. For Israel to remain a global hi-tech hub, significant and crucial changes must be made.

Israel has deservedly gained a global reputation in cybersecurity and business software. Some outstanding companies and world leaders have been created in these sectors. However, both these sectors are undergoing dramatic consolidation, and buyers of these technologies are facing more constrained budgets and want to buy from fewer vendors. It will be increasingly difficult to build very large companies in these areas.

At the same time, there are enormous opportunities to build massive companies in other spaces due to breakthroughs in artificial intelligence and climate technologies and the needs of the fundamentally broken global education and healthcare sectors. For example, healthcare represents an unsustainable 20% of the United States’ GDP. The US population is aging; by 2030, 20% of the country’s population will be 65 years or older. As the US does not have enough hospital beds even for today’s needs, it will have to re-invent its healthcare system to shift care outside hospitals to patients’ homes in order to serve its aging population. There is only one way to solve that challenge: dramatically better technology than we have today.

However, Israel is simply not a significant or leading player in the healthcare technology industry or any of these other sectors. Why?

First, to be a player in these areas, a country needs to have its best minds conducting world-class research, and for this one needs meaningful research budgets. Unlike cybersecurity, where innovation takes place in the military and is funded by Israel’s large defense budgets, the research in these other areas is conducted at universities. Yet, Israeli university research budgets are woefully underfunded. The combined research budget of all of Israel’s universities is less than that of the University of Michigan. Canada and Australia, whose universities are also, in the majority, public, invest $12.7 billion and $8.7 billion respectively in research each year compared to Israel’s pitiful $1.7 billion. Not surprisingly, of developed countries, Israel is one of the largest per capita “exporters” of PhDs. Our great minds are moving to where the research budgets are. This explains why in the most recent US News and World Report ranking of universities, there were eight Australian universities, three Canadian universities and no Israeli universities in the top 100.

Second, we as a country continue to invest the vast amount of venture capital in the business software and cybersecurity industries. More is invested in cybersecurity companies each year than in climate, healthcare and educational technology companies combined. In contrast, in the US, ten times more is invested in healthcare and climate technology companies combined than in cybersecurity companies. As a country, we are putting all our eggs in the very small basket of cybersecurity.

Third, we have done little as a country to develop and attract managerial talent in these areas. All these sectors require deep domain expertise that does not come out of military technology units.

What can be done?

First, the Israeli government has to reset its priorities and start investing in our universities, particularly in university research budgets. But, beyond that, with the rise of antisemitism on US and other international campuses, Jewish donors who have decided to cease funding their alma maters could redirect their university philanthropy budgets to Israeli universities. Not only would a boost in budgets improve the situation of our resident researchers, leading Israeli (and some Jewish) researchers at foreign universities would readily move back to Israel if their research was properly funded. A campaign of this kind by the Israeli Government and Jewish foundations would have a dramatically positive effect on the country.

Second, we have to invest far more as a country and a community in Aliyah. A specifically targeted effort to bring managerial talent in the healthcare, education and climate technology spaces to Israel would dramatically strengthen our economy. Similarly, both the Israeli government and industry must find ways to integrate underrepresented communities into these sectors, including from the Arab Israeli, Haredi, Ethiopian and physically challenged communities; we need the best minds in the country from all communities to play a key role in these industries in order for us to stay competitive.

Finally, we in the venture capital community have a key role to play as well. It is time that we start thinking about investing in what will be big in the next five to ten years and not just what is “hot” today. A concerted effort by the Israeli and global venture industries to play our part in building these spaces in Israel would not only provide returns to our investors but to the country as a whole.

Israeli hi-tech showed incredible resilience in 2023. The industry, the Israeli government, and the broader Jewish community need to show the foresight, the vision, and the courage to do in 2024 what is crucial to build our economy for the future.