As the globe begins to worry more about the environment than cybersecurity, IT industry leaders are pessimistic about the future.
The Startup Nation of Israel is not having a joyful time right now. The second year of the global tech downturn has begun, and there is no indication of an end in sight. Entrepreneurs and investors are alarmed by the government’s proposed judicial makeover because they believe it will undermine the liberal-democratic foundations of the internet industry. The state budget for 2023–2024 eliminates financing for high-tech research and development while increasing support for Haredi schools that do not bother to offer math and scientific classes by billions of shekels.
However, there is growing concern inside the sector that even if Prime Minister Benjamin Netanyahu decides to scrap the judicial reform, Israeli tech’s problems will not go away when the global tech sector recovers and venture capital starts to flow once more.
An increase in government R&D funding or requiring Haredi schools to teach the core curriculum would be beneficial, but only marginally.
The reality is that much more serious issues than changes in economic conditions or political objectives are endangering the entire phenomenon of Startup Nation. This depressing atmosphere was evident last week during the Israel Democracy Institute’s roundtable discussion on “The Future of Israeli High Tech” at the Eli Hurvitz Conference on Economics and Society.
• The cost of the judicial reform will continue to be paid for by the shekel.
• One of Israel’s greatest achievements after 75 years is at danger.
• A tragicomedy in two acts about Israeli economics
Tal Barnoach, a general partner in the Disruptive VC fund, told the conference, “For the first time in the last 30 years that I have been involved in high-tech, I am afraid that we could destroy everything we have here.” “If people believe that foreign investors will instantly return at the touch of a button whenever conditions improve, they can forget about it. The State of Israel is entering a perilous area if we do not swiftly come to our senses.
Israel is suffering more.
There is more pessimism than just general gloom. Sadly, there are other statistics that attest to the industry’s problems; the most of them were provided in a speech by Alan Feld, the founder and managing partner of Vintage Investment Partners, a venture capital firm that oversees $3.6 billion in assets.
Conventionally, the global tech crisis is blamed for the dramatic decline in tech investment that started in the middle of last year, with the consequences of the judicial reforms possibly making matters slightly worse.
Feld demonstrated that the decline in startup fundraising has really been far more severe in Israel than it has been in the US or Europe.
Compared to the same period in 2022, Israeli tech funding is down 60% this year, vs 40% in the US and 50% in Europe. That can be a result of the conflict over the judicial reform. However, the fall was also greater last year (far before most Israelis had even heard of the judicial selections committee): 34% in Israel, compared to 29% in the US and 16% in Europe.
Why is Israeli technology experiencing a more severe slump than any other?
The emergence of environmental, social, and governance, or ESG, investing, which considers social responsibility considerations when appraising a company instead of just attempting to maximize returns, is one of the bad trends noted by Feld.
ESG is a rising issue that Israel can not simply escape, but it has become a pet peeve of the American right. According to a joint survey conducted by Bain and the Institutional Limited Partners Association, 70% of investors weigh assets using a “ESG approach.” Only 7% of investors indicated they would never pull out of a deal if it did not meet ESG standards. ESG poses two issues for Israeli technology.
One is the makeover of the judiciary, which according to ESG principles may be considered as compromising democracy and the independence of the judiciary. “Big international investors have told me directly that they use an ESG lens to observe political developments in the State of Israel. That could partially account for the fall in fundraising in the first quarter of 2023, and it will probably have an impact on future efforts, according to Feld.
The second is more basic. Due of Israel’s failure to share in the rapidly growing interest in climate technology worldwide, ESG investors searching for green investments are forced to turn elsewhere.
Last night’s game
According to data gathered by Feld, Israeli climate-tech entrepreneurs raised $4.1 billion in capital in 2020–2022, compared to $13.1 billion raised by cybersecurity startups.
The absence of basic research, which is an even more fundamental issue the IT industry is facing, is at the root of the question of why Israel is not investing more in climate technology.
Israel spends more per GDP on research and development than any other country in the world, yet it is almost exclusively conducted by private corporations with offices in Israel. On the other side, government expenditure is frugal and largely favors the military.
Since the Israel Defense Forces invest heavily in cybersecurity research and development, Israeli firms formed by former soldiers are industry leaders. However, there is a lack of funding for civilian R&D: According to the Israel Innovation Authority, the government accounts for only 9% of all civil R&D expenditures in Israel, which is much less than the 23.8 percent average among OEC&D member nations.
As a result, even though climate-, health-, and ed-tech startups are emerging as the new growth sectors, there is not enough university and hospital research for them to build on. As a result, cybersecurity, whose best days as a growth industry may well be over, is heavily overrepresented in Israel.
Israel is essentially “playing yesterday’s game,” according to Feld.
There are further significant issues. According to IVC estimates, the number of new tech businesses founded each year—the lifeblood of Startup Nation—has decreased by more than half since 2015 to roughly 630 last year. Israeli universities have been losing ground in recent years; according to the most recent U.S. News & World Report rankings, not a single one of them ranks in the top 100.
Many Israelis with degrees, particularly those with PhDs, have emigrated to the United States.
Entrepreneurs and investors in high technology are well aware of the issues, but their capacity to address them is constrained. Although it possesses the authority, there is little evidence that the government is motivated to use it. Because of its prominent role in the protests, technology has come to be seen as belonging to the “post-Zionist” left in the debate over the judicial reform. It is being viewed less as the economic engine and more as the enemy.
