War eroding investment in Israeli tech, study finds

Tech offices credit: Shutterstock luchunyu
Tech offices credit: Shutterstock luchunyu

Research institute RISE Israel reports that investment in Israel's tech sector has declined by about 30% since the Swords of Iron war broke out.

The end of the first quarter of this year also marks six months since the outbreak of the Swords of Iron war. Even before the war, 2023 was not an easy year for Israel’s tech industry, which had started to be affected by the internal instability caused by the government’s judicial overhaul program, according to policy and research institute RISE Israel (formerly SNPI).

A new report released by RISE today surveying the local tech industry in the shadow of the war presents data that reveal several worrying trends, among then a 30% drop in investment in comparison with the six months preceding the war. The rate of investment was the lowest since 2017, and, allowing for dollar inflation, the lowest since 2015. The number of local and foreign investors is also in decline, as is sentiment towards Israel on the part of workers and investors in the global tech industry.

The report finds that technology companies in Kiryat Shemona, Israel’s most northern city, most of which are in life sciences, agritech, foodtech, and cleantech, have been harmed on several levels, among other things because of high unexpected expenses and the absence of a designated government aid program for them, leaving the companies having to compete for the budgets of the Israel Innovation Authority and of private aid funds that have arisen since the war began.

In general, no Israeli company reported that it had managed to return to the level of activity it had before the war.

Declining investment

According to the figure in the report, investment in the final quarter of 2023 totaled $1.7 billion, and in the first quarter of 2024 $1.6 billion. This represents a decline of 31% in comparison with the two quarters that preceded the war that broke out on October 7, and of 34% in comparison with the final quarter of 2022 and the first quarter of 2023.

The figures were buttressed by a small number of very large investments. 50% of the total invested in the first quarter of 2024 went to just six companies, each of which raised $100 million or more. Without these companies, investment in the first quarter would have reached just $864 million.

The decline in tech investment is a global phenomenon, but since the war started the decline in investment in Israel has been sharper than the global decline. The 31% decline from the level in the six months to the end of September 2023 compares with a 22% decline in Europe in the same period and a slight rise in the US.

In 20% of the funding rounds held by Israeli companies during war period there was no participation by venture capital funds, local or foreign, but only by private investors, technology incubators, and other companies. That is to say, during the war period, only 80 companies have managed to raise funds in the "traditional" way, from venture capital funds.

The decline in the number of both local and foreign investment entities active in Israel continues. According to the report, in the first six months of the war, the number of foreign entities active in Israel was 23% lower than in the six previous months, while the number of active local entities fell even more steeply, by 30%.

By "investment entities", the report refers to venture capital funds (VC), corporate venture capital funds (CVC), institutional investors, and corporations.

Negative world sentiment liable to be very damaging

According to RISE, almost half the financing of research and development in Israel comes from overseas, which sharply contrasts with the OECD average of 10%. Together with Stoic, a company that monitors and analyzes social networks, RISE set out to measure sentiment towards Israel on the part of employees of technology companies around the world. The initial findings are that in the months before the war sentiment towards Israel was in moderate decline. In the weeks following the October 7 attack by Hamas there was spike in positive sentiment towards Israel, but the trend changed about two months into the war.

The measurement is made using an AI model that identifies posts by technology employees and translates them into a sentiment score. The initial findings are to the end of January 2024.

RISE CEO Uri Gabai said, "The Swords of Iron war has worsened the crisis in Israeli high-tech sector, which began with the global slowdown and deepened with the local instability. The data indicate stabilization at a very low level that puts Israeli high-tech back years, with growing dependence on a small number of companies that are raising substantial amounts of capital.

"Among the main causes for concern are the considerable damage to Israel’s image as manifest in the decline in sentiment on the part of investors and employees in the global technology sector after October. If investors fear to invest in Israel, we are liable to deteriorate to a low from which it will be hard to recover."

Published by Globes, Israel business news - en.globes.co.il - on April 8, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Tech offices credit: Shutterstock luchunyu
Tech offices credit: Shutterstock luchunyu
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