Whatever your political views are, it’s hard to deny Israel’s oversized impact on the global tech industry. There is hardly a significant technology in computing, automation, productivity, robotics, cybersecurity, data storage, telecommunications, digital imaging, and water technology that does not owe something of its existence to Israeli tech. As an early-stage tech investor with a stake in multiple Israeli companies, I’ve become intimately acquainted with the so-called “startup nation.” And I can say, Israel’s achievements really are a technology tour de force.
Israel’s critics have sought to isolate it from the world economy through initiatives like the BDS movement. But, despite support for BDS from college campuses and outspoken influencers like Roger Waters, Israel’s economy has been unstoppable for at least a decade, boasting an annual GDP growth rate as high as 6.9% in 2021. There are more than 100 Israeli companies listed on the US stock exchanges, representing a collective 150 billion dollars in market cap. (Only the USA, Canada, and China have more). And, even amidst a dry season of venture capital and internal political discord, Israeli startups raised over $5 billion through Q3, 2023.
Not bad, for a country of just under 10 million people.
Then, on October 7, Hamas achieved in a day what years of grassroots campaigning could not. The Tel Aviv stock exchange suffered double-digit declines. The shekel is at an 8-year low. Investment and M&A deals that looked like a sure thing a few weeks ago are now frozen. Amidst a call-up of 360,000 reservists, tech companies have lost 10-25% of their workforce, including founders. Those staff who remain struggle to perform through home displacement, shock and anxiety, childcare woes, and incessant rocket barrages from Gaza.
Over the past couple of weeks, I have spoken regularly with the founders of my portfolio companies, as well as with venture investors in the USA and Israel. The problems are very real. A survey by the Israel Innovation Authority (IIA) revealed that 70% of Israel’s tech firms now face operating difficulties. 40% of those worry about cash flow, as investment opportunities vanished overnight. Large Israeli tech companies typically have it better, with fully-staffed offices in New York or Silicon Valley and relatively large coffers. For early-stage startups, however, this is an existential fight closely mirroring that of Israel itself.
Is this the beginning of the end for Israel’s vaunted tech machine? I wouldn’t bet on it. Israelis personify resilience. And this unfortunate war has, at least for the time being, centered and united the country like nothing else could. Within hours of the attacks, tech founders and others had set up facilities where thousands of volunteers packed supplies for soldiers. Reservists at my portfolio companies and others are answering emails when they have downtime in the field. Other staff are stepping up to take over duties of the missing. Volunteers with needed skills are contributing their time and talents, free of charge, to shorthanded companies—sometimes even to competitors. Some startups have hired temporary developers from Ukraine, whose own conflict eliminated their jobs and provided a pool of talented, moderately priced labor. The IIA launched a $25 million dollar emergency fund to help cash-strapped startups weather the storm. At least one new fund was established specifically to invest in early-stage Israeli tech ventures. Another was announced specifically to support startups from the southern region, affected most by Hamas’ attack. 500 global VCs signed a statement affirming their support for Israel and its tech ecosystem. And the Israeli government itself is covering up to 75% of reservists’ salaries and 22% of affected companies’ fixed expenses, freeing up funds for cash-strapped startups to hire temps.
There is a real chance of this war becoming a regional or even a global conflict. Even if not, it may yet drag on for months and require the continued participation of reservists indefinitely. It’s hard to say right now what the outcome will be—will the war lead to regime change in Gaza, or merely a ceasefire and restoration of the previous status quo? How will Israel’s unpreparedness affect the confidence of global investors? Will deals get back on track, or will VCs reconsider what acceptable risk looks like? Will valuations agreed upon before the war remain the same when the dust settles? Most of this will probably remain unclear for some time to come.
It seems far from obvious that the current crisis will help restart the long-dormant peace process, or instill any fresh hope for lasting co-existence. Risk will probably continue to hound Israeli tech for years to come. But Israel survived multiple past wars, crippling inflation in the 1980s, two brutal intifadas, the COVID pandemic, and the economic correction of 2022, and bounced back stronger each time. The Israelis I have spoken to are wounded and worried, but almost universally feel that the country will come out of this, stronger than ever. Israelis and Palestinians alike face unspeakable tragedy and dark days ahead. But what is clear is this—while the Israeli tech ecosystem is certainly down, it is far from out.