By Sara Miller, NoCamels -
In the days following October 7, when Hamas terrorists stormed into southern Israel from Gaza and murdered 1,400 people, it became clear that the high-tech sector – one of the most vital cogs in the Israeli economic engine – had begun to feel the impact of the all-out war triggered immediately by the massacre.
A survey of 500 startups about a week after the attacks highlighted two pressing issues: a sudden lack of manpower triggered by Israel’s mass emergency callup of its reserve troops (Tzav 8) and a drop in investment for companies still in their earliest stages of development.
The survey was jointly carried out by the Israel Innovation Authority (IIA), a branch of the government dedicated to promoting the high-tech sector on the international stage, and the independent think tank Start-Up Nation Policy Institute (SNPI).
And while the responses signaled a worrying decline in the state of the sector, IIA Chief Economist Assaf Kovo tells NoCamels that the results only offer a preliminary snapshot of the situation, given the immediacy of the survey.
“The main takeaway that we have right now is that everything is unclear,” Kovo says. “This survey was a quick one, 10 days or even less after October 7, and I think everybody was in shock.”
A more in-depth survey of the sector is planned for the coming weeks, which he says should provide a clearer picture of the true situation, with the fog of war lifting somewhat.
Jon Medved, the founder and CEO of OurCrowd, a Jerusalem-based online global venture investing platform that has offices across the world, believes that the “highly resilient” sector will not only be able to survive but will even thrive during the conflict, and points to Israel’s ability to overcome a multitude of challenges throughout its existence.
“Companies in Israel are really adept at managing through crises of various sorts,” he says. “We proved this many times in prior wars, and with COVID, where Israel really led the world in our quick and agile response.”
Natalie Refuah, general partner at leading technology investment group Viola Growth, agrees – arguing that both natural Israeli “agility and speed” in adapting to shifting situations, and the country’s experiences during the pandemic, have helped keep the sector on track.
“Israeli tech companies are already close to being back to full operation mode,” she tells NoCamels.
“Offices are open, the vast majority of the workforce is active, except for the military drafted workers, and companies have made the necessary adjustments in order to continue delivering their service at the highest level to customers worldwide.”
Steady Investment
An extended conflict would require government assistance, according to Kovo, not only to help to rebuild but also to regain the trust of investors. And for this, he says, there is a plan for 2024. This plan would see the state approach what Kovo calls “certain foreign investors” with an investment tool designed specifically for them.
The details of this scheme have not been finalized, Kovo says, adding that the IIA is working with the Finance Ministry on “different plans for the different scenarios.”
Indeed, the state has already put a financial assistance plan into motion, with a fund of 100 million shekels for early stage startups, which swiftly became 400 million.
Kovo says that some of that funding can at least partially alleviate the issue of manpower, bringing in subcontractors in Israel and abroad.
Refuah also believes it is too soon to form a complete assessment of the situation. Nonetheless, she says, there are signs that investors from abroad have not lost their faith in the Israeli high-tech sector.
“We have seen foreign investors submitting term sheets [preliminary, non-binding investment agreements] and transferring capital into Israeli tech companies during this time frame,” she says.
“It might be that some foreign investors will postpone their investments into Israeli companies, however we believe the vast majority understand the strength and resilience of the Israeli tech [sector] and will continue to invest, during the conflict and afterwards.”
Medved also says that while short-term investment could be affected, the long-term prospects for the sector are rosy.
“While I expect near-term financing will be hit in the short run, past performance indicates that the ecosystem (as defined by investment, stock market and more) actually grows and goes up in the months following war,” he tells NoCamels.
According to Medved, there are three main responses in the investment market.
Firstly, some new investors have expressed the desire to wait and see, before they close these new investments. Secondly, existing investors – especially venture capital funds – are taking a proactive approach to funding to shore up company finances with internal support.
And finally, he explains, new investors are expressing interest in “deals” and how to support Israeli companies as the country weathers this crisis.
“Those investors who are pulling back at present are in some cases being replaced by others who actually want to support Israel now and are becoming more active,” he says.
Veteran Israeli entrepreneur and angel investor Alon Arvatz attributes much of this sustained foreign faith in the sector to a major, positive shift in the international perception of Israel and its economy since the second intifada erupted a little over two decades ago.
“Twenty two years later, people – investors, customers – understand that Israel is here to stay, that Israel is strong,” he explains.
“Every time something like that happens to us, we just become stronger right after. I think people understand that we’ll get out of it and they don’t want to miss the opportunity to invest in the great companies that are being built here.”
Recovery Mode
The IDF has warned that the fight to eradicate Hamas from Israel’s southern border will likely be a costly, drawn-out one. This will inevitably impact on the sector that accounts for almost 20 percent of the national GDP.
According to Kovo, the length of the war will have a significant impact on how and when the industry recovers.
“If the war ends in weeks then I’m guessing that the bounce back would be quite quick,” he says. “But if it takes three months or four months, then I think we’re in a different ballgame.”
For Medved too, economic recovery is tied to how swiftly – and successfully – Israel meets its stated military objectives.
“The most important factor is: how long will the fighting last and what will be the ultimate result,” he says.
“If this war does not extend to many months of conflict and the victory is complete and obvious, then the recovery will be faster and more dramatic.
“But even if it is a delayed and longer conflict than we are used to – ending with more of a mixed result – I do believe the recovery will ultimately come, but it will take longer and will be more gradual and uneven.”
Refuah points out that there are 450 multinational companies operating in Israel, including industry titans Google, Microsoft and Amazon, whose presence will contribute to any revival that is needed in the postbellum period.
“Their ongoing support and commitment highlights the confidence they have in our ability to always deliver,” she says.
Refuah also highlights the innovative local tech community and the scores of homegrown venture capital and growth funds that provide continuous investment in them, as well as the government’s financial support.
New Ingenuity
As Israel moves into the post-war period, the experts believe the nation’s tech sector can expect to experience a renaissance, with an outpouring of innovation and a host of new startups.
Medved predicts that “Israeli excellence in deep tech” will claim more of the global market share as the world begins to focus on areas where the country is strong: cybersecurity, artificial intelligence, digital health, foodtech, agritech and more.
“Long term – three to six months and beyond – Israel tech and its economy will experience dramatic growth as we return to stability [and] investment begins to flow,” he says.
Both Refuah and Arvatz expect that the technology used in the current fighting will also play a role in the wave of new companies appearing after the war.
“There is a rich history of transformative companies and products that have grown out of the Israeli tech ecosystem during and after periods of crisis,” explains Refuah.
“We’re seeing a lot of innovation in the usage of artificial intelligence and virtual reality applied to security and army products that will probably be transformed for civilian usage post the war,” she says.
Arvatz, a former member of the IDF’s cyber intelligence unit 8200, also highlights the Israeli use of AI in the current fighting, in particular to analyze footage of the battlefield or to identify the victims of the massacre on October 7.
“You need very, very advanced capabilities in AI,” he says, adding that work in this field will now be accelerated.
And this is not the only way in which the war will have spurred technological development, he surmises, although he says it is hard to conceive of what that innovation might be.
“We’ll only find out in five to 10 years, when these people get out of the military and start building their startups.”
