What’s Next for Israeli Hi-Tech: Rosier Than You Think

With all the upheaval and enormous changes that have happened in Israel in the last year or so, it’s easy to miss that things are changing outside as well. 

Within hi-tech especially, there’s been a focus on tracking to see that the Israeli ecosystem is showing resilience and continued strength despite the many challenges it faces. It is, which is enormously encouraging. 

However, too much emphasis on this (admittedly important) trend makes it harder to see how things are changing in hi-tech in the rest of the world – and the opportunities emerging for Israeli startups as a result.

In my view, Israeli startups are particularly well positioned to succeed and thrive in the emerging industries that will be central to the next generation of startups worldwide.

An Ecosystem With Strong Foundations

Things are hard for many in the Israeli hi-tech world right now, especially for mid and late stage companies. The situation is especially difficult for those outside hot industries such as AI and cybersecurity. I’m not discounting the difficulties of those experiences, and I’m not denying that some companies which in other circumstances would likely have gone on to success will sell at a loss or close their doors through no fault of their own. 

The reality of those challenges can obscure the fact that this tremendously taxing period has highlighted the strength of the ecosystem as a whole. 

It is truly remarkable that during the painful and lengthy conflict since October 7th, with all of the complexity that has brought to hi-tech and Israeli society more widely, Israel maintained its position as the third-largest global hub for capital raised, following Silicon Valley and New York. 

According to the IVC-Leumi-Tech Israeli Tech Review Q3 2024, “the number of new Israeli unicorns (start-up companies with a valuation of over one billion dollars) is growing again after decreasing since 2021. In Q1–Q3/2024, we counted six new unicorns, compared to only four new unicorns for the whole of 2023.” In fact, Israeli companies represent about 10% of global unicorns. (Bear in mind that if you look at population, Israelis are 0.125% of the global population!)

Startup Nation Central’s Q3 2024 report found that the Israeli hi-tech ecosystem was, broadly speaking, remaining parallel as usual with the US. When funding declined in Q3 2024, it declined 27% in Israel – and 37% in the US. Despite this the US achieved a 10% year-on-year increase, mirroring Israel’s 13% year-on-year growth.

It’s important for investors, entrepreneurs and observers to bear this in mind. Aside from the many hardships it has brought with it, the conflict has in fact shone a light on the robust, strong foundations of the Israeli hi-tech ecosystem. 

Poised for Strength in Emerging Industries

Strong foundations are a great base to build on, and Israel is ripe for a clutch of new and very relevant startups. 

The global hi-tech environment has changed significantly in the last few years, and the industries that are emerging as fresh dominant fields are ones Israeli startups are especially likely to be able to lean into. 

Defense

Until recently, defense was an area that venture capital preferred to avoid. That changed with companies like Palantir and Anduril, and now the rising geopolitical tensions have fueled an explosion of interest in defense innovation. 

The startup model is particularly well suited to the pressing needs of the present. While the large scale and expensive traditional types of defense projects and solutions have proven valuable in conflicts, they are also outmaneuvered by cheap drones and alternative solutions which can in some cases be made with off-the-shelf parts. Years-long development cycles are not practical for this fast-paced evolution, with the result that many are looking to startups instead.

During 2024 (until mid-November), defense tech startups internationally have raised nearly $3 billion in 85 rounds, according to Crunchbase. The sector has taken in more venture dollars than ever before and investment interest remains high.  

There are a number of factors that make Israeli hi-tech well positioned to fit into the defense innovation picture:

• Local talent. Israelis have experience with the challenges involved in defense through their mandatory military service and due to the surrounding culture. This experience has no match in any other country with any startup density. The combination of this with the Israeli can-do attitude is ideal for creating innovations for existing problems – as we are already seeing coming out of the current conflict. 
• Place in the existing industry. Israel was one of the top 10 of the leading exporters globally of major weapons between 2019 and 2023, so there is already a strong Israeli presence in the industry with all of the knowledge and connections that it brings with it. 
• Famously agile. The disruptive discovery of the last few years is that defense solutions and approaches need to be able to move quickly and adjust fast to changing attack methods and technology. Israeli hi-tech is known around the world for its agility and resourcefulness. 
• Geographic diversity. Defense is an area in which sensitivity to the different logistical, security, legal, compliance and other local needs of each country is essential. The Israeli population reflects a wide range of cultural, linguistic and geographical backgrounds. 
• Strong relationships. Israel has strong relationships with many of the countries that are increasing their defense budgets and represent attractive target markets, including Germany, the Czech Republic, India, the USA and others. 
• Battle tested. Israelis excel at leveraging challenges to create opportunity, and the fact that both many Israelis and Israeli defense solutions are indisputably battle tested is an advantage in terms of ensuring market fit and relevance, compressing R&D times and building a trusted brand.

AI Applications

There’s still a lot of buzz around AI, and there are certainly reasons for this excitement. A lot of the attention has focused on LLMs and their applications, but in Israel a new group of startups are emerging working on non-LLM applications. You could think of these as applications that can’t be implemented by building a second layer on top of Chat GPT. 

The long-term impact of these in terms of disrupting traditional industries is huge, as we are seeing already with portfolio company Fairgen. Fairgen is the first mover in statistically verified synthetic data production, revolutionizing what’s possible for insights teams and research and survey firms. One company in this field has just launched their own in-house version, showing how timely this solution is, and as first mover Fairgen naturally has an advantage. The same dynamic is available in many fields.

There are also many companies kicking off that fall into a category I would call “AI infrastructure” that provide the supporting frameworks, tools and additional technologies needed to bring out the potential of AI and make it applicable to real world problems. 

Quantum/Alternatives to Quantum

The ultimate goal of quantum computing is to be able to compute at a higher volume with fewer resources. While there is no doubt that eventually quantum computing will answer that need, there are other technological approaches to this problem. 

There are several sorts of modifications to currently available computer chips to increase their speed and performance. There are also innovative alternatives to quantum computing based on lasers, without any electronic components involved in computing. 

We believe that the backbone of the next 10 years of technology will rest on the speed and efficiency with which companies adopt alternative compute solutions that protect the privacy of data and enable enterprises to compute more, faster. 

Israel is poised to succeed in both quantum and quantum alternatives, drawing on the impressive research from Israel’s world class institutions, from the hardware expertise which is home-grown here as well, and the density of software experts – all gathered in one small country, connected on many personal, professional and entrepreneurial levels. 

Cybersecurity

Cybersecurity is by no means a new industry, particularly in Israel where it has been a glowing success story for many years, but it is worth noting in this context as well.

Cybersecurity pressures have been growing in tandem with defense concerns, bad actors have been empowered by AI technology and other technological developments, and since the Covid-19 pandemic many companies have been increasing their budgets to meet cybersecurity needs.  

Cybersecurity represents about a third of all investments in Israeli startups, and it is noteworthy at the moment the extent to which experienced second-time founders are creating new startups within the industry. There’s a virtuous cycle at work.

Israel is known globally for its cybersecurity prowess, and international companies continue to be active in investing, acquiring and using the products of Israeli cybersecurity startups. As the need for cyber defenses continues to evolve and grow, Israel is strongly positioned to lead.

The Qualities That Matter

Dan Senor and Saul Singer coined the phrase “startup nation” back in 2011, and the truth of the moniker has only become more marked over time. Israel now has the greatest density of startups per capita anywhere in the world. 

Hi-tech is also something in which the country is deeply invested, culturally, socially and economically. Israel has the highest level of R&D investment as a percentage of GDP globally, and the contribution of hi-tech to the economy is considerable, with more than 50% of exports and more than 20% of income tax coming from the sector. Israel has every reason to continue to invest in the right ways in this vital industry. 

The resilient, goal-focused, creative Israeli mindset and culture, combined with cross-industry relationships that span higher education, research, industry, hi-tech and more, mean that Israel continues to embody all the qualities that made it into the startup nation in the first place. 

With the relevance of emerging technologies and areas, the dynamic new concepts coming out of contemporary challenges, and the startup nation energy, the possibilities for Israeli hi-tech aren’t just better than you might think. They’re extremely exciting.