Isranomics

Navigating turbulent waters: Israeli high-tech grapples with declining investments amidst the push of judicial reform

by | Jun 28, 2023 | Economy | 0 comments

The Israeli high-tech industry is dealing with a decline in key metrics and a downturn in start-up fundraising at a difficult and uncertain time. The Innovation Authority’s annual report, published amidst these challenging circumstances, raises concerns about the industry’s future and its ability to recover from the ongoing crisis in the near term.

Global high-tech experienced a cooling-off in 2022, with funding for start-ups declining in innovation hubs worldwide. While Israeli high-tech initially followed a positive trend in 2022, the situation changed in the second half of the year, leading to a more than 50% decrease in investments compared to the previous year. Despite this decline, the total investments in Israeli start-ups still exceeded those of 2020, a record year for capital raised.

Early figures for 2023 indicate a continuation of the negative trend during the first two quarters, further deepening concerns about the decline in investments in Israeli start-ups. This decline primarily stems from the drop in large funding rounds that support the growth of mature start-ups. These companies play a crucial role in high-tech by creating high-salary employment opportunities and contributing significantly to the economy.

Another significant concern is the decline in the establishment of new start-ups in Israel, which has been a multi-year trend. The report highlights the need to pay attention to the difficulties faced by young companies in their early stages, as they represent the next generation of Israeli high-tech.

Several factors, both global and local, contribute to the state of Israeli high-tech. The ongoing war in Ukraine, financial market instability, inflation, and increased interest rates have influenced investor behavior. However, local factors unique to Israel, such as judicial reform, are also impacting the industry. Foreign investors have expressed concerns about continued investment in Israel due to the legal uncertainty stemming from the reform.

The report reveals two concerning phenomena observed in Israeli high-tech since the beginning of the year. Firstly, there has been a decline in the registration of new start-ups in Israel, with more entrepreneurs choosing to register their companies overseas. In a recent statement, Amir Yaron, the Governor of the Bank of Israel, highlighted a significant increase in the number of high-tech firms registering abroad, ranging from 50% to 80%, compared to just 20% the previous year. This decline reflects a lack of trust in the stability of the Israeli business environment, attributable to the ongoing momentum driving judicial reform in the country. Secondly, there is concern about Israel’s detachment from global capital movements and a decline in its share of international venture capital investments. This concern arises from the ongoing decline in investments in Israel, while other locations have already witnessed a reversal of this trend.

Discrepancies between Israeli high-tech and other innovation hubs further highlight the need to address these challenges. Israeli technology companies traded on the Tel Aviv Stock Exchange underperformed compared to their counterparts on the NASDAQ. At the same time, fundraising by Israeli start-ups in the first quarter of 2023 declined significantly compared to the previous year, surpassing the decline observed in other markets.

The employment landscape in Israeli high-tech is also changing, with job dismissals impacting the industry after years of growth. The number of high-tech employees has declined, which is expected to have wider implications for the Israeli economy. Lower employment numbers may result in reduced tax revenue and decreased expenditure by technology companies, affecting various sectors.

The Israel Innovation Authority views the coming months to be critical for the local high-tech scene. Previous recovery periods on Wall Street have often been followed by an increase in capital and employee recruitment in Israeli high-tech. However, indicators suggest that Israeli high-tech may become detached from global trends, posing a genuine cause for concern.

In conclusion, the Israeli high-tech sector stands as a pivotal and expanding industry, making substantial contributions to the nation’s economy. Notably, it accounted for 18% of Israeli GDP in the past year and an impressive 48% of the country’s total exports. However, what sets this thriving sector apart from other innovation hubs is its reliance on foreign investments. Consequently, it becomes imperative to address the current downward trajectory in investments and personnel recruitment to avert any adverse effects on the Israeli economy. Therefore, taking proactive measures by Israeli authorities to reverse this declining trend will be of utmost importance.

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