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Israel’s tech sector shows resilience despite challenges post-Oct. 7

It is curious why the government’s judicial reform proposals should have sparked fears of a tech collapse.  

A sign displayed at the Nasdaq in New York City, Nov. 9-10, 2023. Credit: Startup Nation Central.
A sign displayed at the Nasdaq in New York City, Nov. 9-10, 2023. Credit: Startup Nation Central.

Israel’s high-tech sector has weathered the catastrophic Hamas onslaught of Oct. 7 and the ensuing war with surprising resilience, especially given the false warnings a year ago that it faced potential collapse from the government’s judicial reform program.

Startup Nation Central, a nonprofit promoting Israeli high-tech on the global stage, issued a report on March 31 showing that Israel’s tech industry has overcome Oct. 7 obstacles, including 16% of its workforce being called up to the army reserves.

“Despite recent challenges, Israel’s tech industry is not just surviving; investment flows and VC activities have remained robust, proving the sector’s unflagging innovation excellence. In fact, when compared to the U.S. market, Israeli tech investment trends mirror those of its American counterpart, reaffirming its global standing even in turbulent times,” the report said.

Avi Hasson, CEO of Startup Nation Central, told JNS, “You really see a significant amount of funding activity taking place and also a significant amount of M&A (mergers and acquisitions).”

Since Oct. 7, 220 private investment rounds were announced with some $3 billion raised. M&As totaled $3.7 billion.

There are several reasons for tech’s ability to withstand the blow. First, the sector serves a global market and the demand side hadn’t been affected by the war. Israel’s global customers are just as keen for Israeli products now as they were before the Hamas attack.

“Multinational companies have been quite supportive,” Hasson said, noting that about 450 international firms have innovation and research and development centers in Israel. Intel announced in December a $25 billion investment in another Israeli chip factory, and in November, Nvidia revealed that its Israel-based AI supercomputer was completed nearly two months ahead of schedule.

Secondly, about 90% of Israeli high tech focuses on software, making issues of supply chain disruption a non-issue. The Houthis can’t stop bits and bytes traveling over cloud infrastructure, Hasson noted.

Most vulnerable to the shock of Oct. 7 were startups. Here, Israel moved quickly to shore up funding. Eleven emergency funds were set up. “We didn’t want to have dozens of good companies that could have been successful fail only because they needed that bridge funding,” he noted.

Given Israeli tech’s resilience to an existential crisis like Oct. 7, it is curious why the government’s judicial reform proposals should have sparked fears of a tech collapse.  

When the Netanyahu government announced a sweeping plan for judicial reform in January 2023 to rein in the court system, which it argued had gained too much power and upset Israel’s system of checks and balances, months of protests swept the country.

Hundreds of economists signed a letter warning that judicial reform “could cripple the country’s economy.” Bank of Israel Governor Amir Yaron cautioned that the reform could drive away investment and lead to a brain drain as high-tech leaders took their business elsewhere. Several Israeli CEOs, like Papaya Global’s Eynat Guez, and Riskified’s Eido Gal announced they were pulling their company’s cash out of Israel.

But Hasson says that judicial reform only impacted the behavior of Israeli investors, some of whom took capital out of Israel, registered as Delaware-based firms, and even considered relocating. Global firms, on the other hand, took a wait-and-see approach.

Amatzia Samkai, CEO of Samkai Global Strategy, an economics consulting firm, argued at the time that the fear-mongering over judicial reform was not based on reality. The anti-reform protest movement actually wanted high-tech to fail. It was conducting a kind of BDS campaign, he told JNS.

“Look at the graph showing a decline in private investment presented in the latest Startup Nation Central report. It includes the period of judicial reform. Only it links it to the general global downtrend in high-tech investment. So, it wasn’t the reform or the protest. It was the global trend,” Samkai said.

Of those sending out warnings, motivations differed. “Some of them declared that they wanted to harm the Israeli economy,” Samkai said. “They declared, ‘We’re giving you [the government] an ultimatum. Stop this reform or we’ll pull out our money and you will collapse.’ It was a bit stupid because they were saying ‘you will collapse’ when it was their country, too.”

Of those who acted on their threats, the effect on the Israeli economy was minimal. “Even if they pulled out their money, they still needed to pay salaries here in Israel,” Samkai said. “So, at the end of the day, it didn’t really matter where they kept their money. It was a non-story but, of course, the media emphasized it.”

“The citizen, whether in Israel or the United States, should understand that everyone has an agenda. And just because someone has a high rank or title and access to a microphone doesn’t mean they are correctly describing reality,” he said.

“The best thing I can say is to do your homework and find an expert that you trust,” he added.

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