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The coming months will be ‘critical’ for the Israeli high-tech sector, report
warns

In annual study, Israel Innovation Authority raises serious concerns about
underperformance of Israeli tech firms and prospects for industry recovery

By [48]Sharon Wrobel 27 June 2023, 12:13 am [49]Edit
* [50]Facebook
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Sharon Wrobel is a tech reporter for The Times of Israel.
*

[55]Tel Aviv's financial business district skyline, June 2022. (Elijah
Lovkoff via iStock by Getty Images)
Tel Aviv's financial business district skyline, June 2022. (Elijah
Lovkoff via iStock by Getty Images)

While Israel’s high-tech sector continues to be the largest and fastest
growth engine in the Israeli economy over the past decade, the coming
months will be “critical” for the industry, the Israel Innovation
Authority (IIA) cautioned in a report released Tuesday.

In its State of the High-Tech Industry in Israel 2023 report, the
Israel Innovation Authority, in charge of directing the nation’s tech
policies, set out the serious challenges that Israel’s tech ecosystem
faces that could threaten its position as a global leader of
innovation, and a major contributor to the country’s economy.

One of the central questions raised in the report is whether the
Israeli high-tech industry will fall in line with the signs of recovery
that can already be seen in the US technology sector’s bounce-back this
year, or whether there is cause for concern of a deep ongoing crisis
with uniquely local characteristics.

“The global macroeconomic slowdown, the war in Europe, the tension
between China and the US, the inflation and interest rate environment —
all of those have changed dramatically in the last 18 months, resulting
in a sharp decline in venture fund investments,” Israel Innovation
Authority CEO Dror Bin told The Times of Israel. “When you have such a
high degree of uncertainty, investors tend to put their money in safer
places than a risky startup, and we see this decline in all global tech
hubs, but in the last quarter the Israeli tech hub is a little bit more
affected.”

Last year was rough for Israel’s tech industry, as the uncertainty
surrounding borrowing costs and high valuations pushed entrepreneurs
and investors into a wait-and-see mode. The financial environment and a
slowing global economy saw tech shares take a battering in global
markets in the second half of 2022, pushing company valuations down
both in the public and private sectors. The market downturn has seen
thousands of workers laid off, triggering funding pullbacks and
creating a bear market for new tech offerings. In total, in 2022,
investments in startups in Israel dropped by almost half compared to
the previous year, amounting to $15.9 billion.
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The negative trend in the Israeli high-tech industry has intensified in
recent months amid growing uncertainty surrounding the government’s
proposed judicial overhaul and a slowdown in foreign investment.
Dror Bin, CEO of the Israel Innovation Authority. (Courtesy/Hanna Teib)

In the first quarter of this year, Israeli tech companies raised $1.7
billion in capital, down 70% from the $5.8 billion in the first three
months of 2022, according to a report by IVC Research Center and
LeumiTech. The quarter marked the lowest figure in four years. That
compares with a decline of 55% in the US, it was noted in the report.

“The political situation in Israel is creating some additional
uncertainty for entrepreneurs for investors,” said Bin. “We would like
to see the political instability go away as fast as possible, as this
is not a good situation.”
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The Israeli high-tech industry is contributing 18% to local GDP, versus
less than 10% in the US, and about 6% in the EU. About 14% of all
employees work in the high-tech sector and in tech jobs in other
sectors. The Israeli economy relies on high-tech products and exports,
which make up about 50% of total exports, as well as high-tech taxes.

“The Israeli economy’s dependence on the high-tech sector has
significantly grown in the past decade, therefore, we must do
everything necessary to preserve the industry and continue nurturing
its competitiveness in the global market,” Bin urged.

Bin noted that “91% of investments in Israeli high-tech are funded by
the private sector — there is no parallel to this anywhere else in the
world.”

Israel has the lowest percentage of government funding for R&D among
OECD countries, with only 9% of national R&D expenditure funded by the
government. In addition, about 80% of venture capital investments in
high-tech were generated from foreign funds in the years 2021 and 2022,
according to the report.
Tech workers protest against the government’s judicial overhaul ‘time
is running out for Israeli high-tech,’ in Tel Aviv, on March 23, 2023.
(Avshalom Sassoni/Flash90)

“The Israeli high-tech industry is unique and different, and such a
model does not exist in any other market worldwide,” Bin remarked. “The
entire Israeli economy is highly reliant on the behavior of this sector
and the preservation and cultivation of trust from foreign investors in
it.”

Since the start of the year, Israeli tech companies have shown negative
returns compared to technology companies traded on the Nasdaq. In the
first quarter of 2023, the return on the index of the top 100
technology companies traded on Nasdaq was close to 24% pointing to
signs of the start of a recovery, while the Tel Aviv Technology Index
fell 1% during the same period.
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“The coming months will be critical for the Israeli high-tech sector,”
the Israel Innovation Authority warned in the report.

“The past teaches us that, usually, two quarters after the recovery
begins in the stock market, as reflected in the rise of the Nasdaq
index, there is also an increase in capital-raising and employment in
the Israeli high-tech industry,” said Bin. “Given the rise in the
Nasdaq since the beginning of the year, under normal circumstances, one
could expect an increase in fundraising and employment in Israel during
the summer months.”

“We don’t want to see Israel getting out of correlation to other tech
hubs in the world in terms of fundraising,” he said.

However, according to preliminary data for April and May data, “there
is a genuine concern of a separation trend between the Israeli
high-tech industry and global trends,” the report cautioned.

“These trends are worrisome, especially considering the significant
dependence created on the high-tech sector in Israel as a central and
growing industry that contributes to the economy, and in light of this
sector’s substantial dependence on foreign investors – more than other
innovation hubs,” it was added.

Tech hubs

As of April 2023, there were 9,093 tech companies, ranking Israel’s
startup ecosystem as the third largest globally after San Francisco and
New York, according to the report.

“We are facing a different situation to the one that we saw a decade
ago when most of the startups were formed either in the Silicon Valley
or in Israel,” noted Bin. “Today we’re looking at multiple tech hubs
rising across the world with which we are competing for the same
resources.”

“Venture funds are moving very fast, from one tech hub to the other,
tech hubs are competing for workforce and entrepreneurs are becoming
more selective about where they want to form their startup and what is
the optimal ecosystem for them to do so,” he added.
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In this global environment and amid heightened competition from other
tech hubs, the Israel Innovation Authority recommended a strategic plan
to develop a number of areas to sustain and improve the competitiveness
of the country’s tech ecosystem.

First, the Israeli government needs to identify new growth engines and
channel resources and financial investment to new markets in which
there will be demand for new technologies, such as climate tech and
health tech. In these areas, Israel could become an exporter of global
solutions helped by removing regulatory barriers.

“A lot of the innovation that we saw in the last decade was riding the
wave of the digital economy but humanity’s challenges are different
today,” said Bin. “The digital economy will not help feed the planet’s
population; it will not help in producing enough clean energy, or smart
transportation.”
A row of solar panels on display at the first Climate Prize Solutions
Festival, a climate tech gathering honoring Israeli innovation, October
26, 2022. (Studio Thomas)

“A lot of human challenges are now residing in places where software
alone is not enough. You need a combination of some tangible product or
electronics together with software and artificial intelligence,” he
said.

There are about 516 climate tech companies in Israel out of which about
24% operate in the energy sector, and 37% are involved in agriculture,
food, and water. The pace of fundraising for climate tech companies has
grown threefold from less than half a billion dollars in 2018-2019 to
over $2.5 billion in 2021, according to the report.

Second, Israel needs to strive to increase the demographic and
geographic diversification of its high-tech industry from the center of
the country to other areas around the country and promote the
integration of significantly underrepresented groups of the population.

Third, the government needs to create incentives to encourage Israeli
entrepreneurs to form new startups, which have been declining in recent
years, by providing a supportive framework for them to grow as Israeli
companies and to succeed globally.

“Innovation is intensifying exponentially and will determine which
countries lead in national and economic resilience,” Israel Innovation
Authority chairman Ami Appelbaum stated. “We are at the threshold of a
period in which three domains of innovation are poised to transform the
world as we know it: Generative AI, quantum computing and
communication, and innovation in climate-related fields.”

“The need to preserve Israel’s national resilience does not allow the
country to slow down innovation in any of these areas and lag behind.
It is a period of deep economic and social crisis, but also a period
that presents opportunities if we can navigate wisely,” Appelbaum
remarked.
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read more:
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* [83]venture capital VC funds
* [84]climate tech
* [85]health tech

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‘reasonableness’ of elected officials’ decisions; deputy Gil Limon
warns of ‘serious harm to basic democratic values’
[226]Deputy Attorney General Gil Limon attends a Knesset Constitution,
Law and Justice Committee hearing, June 25, 2023. (Yonatan
Sindel/Flash90)
[227]MK Simcha Rothman, Head of the Constitution, Law and Justice
Committee, leads a committee meeting on the planned judicial reform, at
the Knesset in Jerusalem, on June 25, 2023. (Yonatan Sindel/Flash90)
ToI podcast[228]Daily Briefing June 26: Reasonably or not, here comes
the renewed judicial overhaul
By [229]ToI Staff
[230]MK Simcha Rothman leads a Knesset Constitution, Law, and Justice
Committee discussion, June 25, 2023 (Yonatan Sindel/Flash90)
[231]Knesset restarts judicial overhaul with bill to broadly outlaw
‘reasonableness’ test
By [232]Carrie Keller-Lynn
[233]Authorities fast track plans to extend Tel Aviv-Jerusalem train
into capital’s center
By [234]Sue Surkes
[235]Initial plans submitted to National Infrastructure Committee call
for 2 Jerusalem stations – one near intersection of Jaffa Road and King
George Street and a second at Khan Theater
[236]Architects' impression of the planned entrance to the Jerusalem
Center railway station, close to the intersection of Jaffa Street and
King George Street in Jerusalem. (Peleg Architects)
[237]The Israeli Special Olympics women's soccer team poses with their
silver medals at the games in Berlin on June 23, 2023. (Courtesy)
[238]Israelis bring home 25-medal haul from Special Olympics in Berlin
By [239]Amy Spiro
[240]35 athletes who competed in judo, swimming, athletics, tennis,
table tennis, cycling, bowling and soccer win nine gold medals, eight
silver and eight bronze
[241]Israel's artistic swimming team pose with their gold medals at the
European Game, in Krakow, Poland on June 23, 2023 (Israel Swimming
Federation)
[242]’10 minutes from Auschwitz’: Israel’s artistic swimmers win gold
at European Games
By [243]ToI Staff
[244]Wagner mercenary leader taunts Russian military in defiant audio
after mutiny
By [245]AP
[246]Yevgeny Prigozhin says he marched on Moscow over ‘injustice’ to
his soldiers, but gives no details on what his group is doing now,
adding to swirling uncertainty
[247]In this handout photo taken from video released by Prigozhin Press
Service, Yevgeny Prigozhin, the owner of the Wagner Group military
company, records a video addresses in Rostov-on-Don, Russia, June 24,
2023. (Prigozhin Press Service via AP)
[248]Yevgeny Prigozhin, the owner of the Wagner Group military company,
right, sits inside a military vehicle posing for a selfie photo with a
local civilian on a street in Rostov-on-Don, Russia, June 24, 2023,
prior to leaving an area of the headquarters of the Southern Military
District (AP Photo)
Analysis[249]With Russia revolt over, Wagner future and direction of
Ukraine war uncertain
By [250]AP
[251]In this photo taken from video released on June 26, 2023, by
Russian Defense Ministry Press Service, Russian Defense Minister Sergei
Shoigu is on board a military helicopter on his way to inspect a
command post of Russian troops in Ukraine (Screen grab/Russian Defense
Ministry Press Service)
[252]Russian defense minister makes 1st video appearance since Wagner
Group rebellion
By [253]AP
[254]Katharina von Schnurbein speaks at a European Jewish Congress
event in Vienna, in this undated photo. (Courtesy)
Interview
[255]How the EU antisemitism warrior became a defender of kosher
slaughter, circumcision
By [256]Canaan Lidor
[257]The bloc’s point person for fighting Jew-hatred, Katharina von
Schnurbein, is an influential advocate for Jewish customs many consider
controversial in Europe
[258]German far-right party wins its first county leadership post,
rising in polls
By [259]AP and [260]ToI Staff
[261]Center-right Mitsotakis wins 2nd term as Greek PM; small far-right
parties surge
By [262]Agencies
More Headlines
[263]Supporters of the Palestinian group Hamas gather during a protest
in Gaza City, on June 19, 2023. (MAHMUD HAMS / AFP)
[264]Dutch arrest father, daughter, for sending millions of dollars to
Hamas
By [265]AFP
[266]President Isaac Herzog attends the President's Award for
volunteering at the President's Residence in Jerusalem, June 14, 2023.
(Noam Revkin Fenton/Flash90)
[267]Herzog helps secure release of Israeli held in Dubai on drug
offense
By [268]ToI Staff
[269]Joonko founder & CEO Ilit Raz. (Courtesy)
[270]CEO of Israeli-founded AI recruitment startup hit with fraud
allegations
By [271]Sharon Wrobel
[272]Illustrative. A British Royal Air Force (RAF) Typhoon jet fighter
departs Gioia del Colle air base, Italy, March 22, 2011. (Donato
Fasano/ AP)
[273]Russia says it intercepted British warplanes over Black Sea
By [274]AFP
[275]US President Joe Biden walks out to talk with reporters on the
South Lawn of the White House in Washington, Friday, May 26, 2023, as
he heads to Camp David for the weekend. (AP/Susan Walsh)
[276]Poll finds US Jews overwhelmingly back Biden over Trump in 2024
rematch
By [277]Ron Kampeas
[278]File: A Cyprus police van carrying an Azeri national suspected of
taking part in an alleged plot to attack Israelis on the Mediterranean
island is pictured outside the criminal court in the capital Nicosia,
on December 6, 2021. (Iakovos Hatzistavrou / AFP)
[279]After Cyprus plot, Israel vows to thwart Iran terror ‘wherever it
raises its head’
By [280]ToI Staff
[281]Illustrative picture of a Chabad center on Cyprus, September 2005,
in the port city of Larnaca (Marina PASSOS / AFP)
[282]Iran said to target Israeli businessman, Chabad House, hotels in
Cyprus terror plot
By [283]ToI Staff
[284]Palestinian youths brandishing fake rifles parade during a
military-style summer camp organized annually by the Palestinian
Islamic Jihad terror group during the school holiday, in Khan Yunis in
the southern Gaza Strip, on June 22, 2023. (SAID KHATIB / AFP)
Photo Essay[285]‘Ensuring jihad will continue’: Gaza summer camp
teaches youth to fight, hate Israel
By [286]ToI Staff
[287]Israeli Ambassador to Ukraine Michael Brodsky in Kyiv on his first
day back since before the Russian invasion, May 16, 2022. (Courtesy)
[288]Israel tells Russia to not lecture it on Holocaust memory, in spat
over envoy remarks
By [289]ToI Staff
[290]President Isaac Herzog and his wife Michal meet with Arab women
who have lost loved ones to violent crime, the President's Residence in
Jerusalem, June 25, 2023 (Haim Zach/GPO)
[291]‘A terrible war’: Herzog meets with Arab women who lost loved ones
to violent crime
By [292]ToI Staff
[293]Israelis attend a protest against military service exemptions for
ultra-Orthodox yeshiva students and the government's planned judicial
overhaul, outside the Kol Torah yeshiva in Jerusalem, May 4, 2023.
(Noam Revkin Fenton/Flash90)
[294]Cabinet shields Haredi youth from military draft, 5 days before
exemption law expiry
By [295]Carrie Keller-Lynn
[296]Robbie Keane attends an LA Galaxy David Beckham statue MLS soccer
ceremony at Legends Plaza in front of Dignity Health Sports Park in
Carson, California, March 2, 2019. (AP Photo/Ringo H.W. Chiu)
[297]Ex-Ireland, Tottenham soccer star Robbie Keane joins Maccabi Tel
Aviv as head coach
By [298]ToI Staff
[299]Top Ops
[300]Shuki Friedman
[301]Shuki Friedman
[302]The worst possible way to appoint local rabbis
[303]A contemptible new bill would create a patronage system for
appointing rabbinic functionaries with no religious authority
[304]Daphne Lazar Price
[305]Daphne Lazar Price
[306]The Rebbe’s last dollars
[307]See that picture of me with the Lubavitcher Rebbe? He’d never have
allowed the erasure of women. If only more rabbis had his moral courage
and will
[308]David Nataf
[309]David Nataf
[310]Roman Abramovich’s tangled Portuguese roots
[311]Documents filed in his citizenship case show the validity of his
claims and reveal the complexity of Sephardic heritage
[312]Kally Rubin Kislowicz
[313]Kally Rubin Kislowicz
[314]Cherkessia-ing outside my comfort zone
[315]Or how Israeli dance reminded me to try new things, from netball
to yoga at sunrise and whatever comes next
[316]E.J. Hare
[317]E.J. Hare
[318]The Democratic Party’s anti-Zionist wing is growing. Here’s how
[319]Israel supporters should look carefully at the New York political
scene – and they should be alarmed. Very alarmed.
[320]David Sedley
[321]David Sedley
[322]Mermaids
[323]Not too long ago, almost everyone believed in merfolk, from
philosophers and scientists, to clergymen and rabbis
[324]Dan Perry
[325]Dan Perry
[326]Dislodging Likud voters from the right can save Israel
[327]Can they be coaxed to disengage from the West Bank and curtail the
burden Haredim are placing on the economy?
[328]Amir Fuchs
[329]Amir Fuchs
[330]What’s wrong with criminalizing anti-Haredi incitement?
[331]Yes, Israel’s anti-racism laws need to be extended to vulnerable
groups –including women and the LGBTQ community
[332]Amichai Eliyahu
[333]Amichai Eliyahu
[334]I had good reason to criticize the Bank of Israel governor
[335]Prof. Yaron is welcome, and even obligated, to make tough
statements about government policy – just not on CNN
[336]Donniel Hartman
Yehuda Kurtzer
[337]Donniel Hartman and [338]Yehuda Kurtzer
[339]On the need for pluralism and the dangers of demonization
[340]The pro-democracy protest movement must recognize that thoughtful,
decent, and moral people can disagree on policies
[341]Naomi Sussmann
[342]Naomi Sussmann
[343]Occupation is what drives Israel’s anti-democratic forces
[344]Without addressing 56 years of undemocratic practices used to
control Palestinians and expand settlements, the protest can’t win
[345]Ilan Cohn
[346]Ilan Cohn
[347]On World Refugee Day, Jews must stand in solidarity with refugees
[348]In the name of the European Jewish community., HIAS helped 280,000
Ukrainians and 1.35 million people worldwide last year
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* [439]Brig.-Gen. (res.) Yossi Kuperwasser, the former head of the
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[479]Christina Aguilera promises ‘unforgettable night’ for 1st
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Bird in the hand
[494]Smuggler nabbed at airport with dozens of parrots in his
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Willie Harris during the second inning of a baseball game Tuesday,
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accordance with Clause 27a of the Copyright Law)
Not her time
[536]Ecuadoran woman wakes in coffin 2 days after being declared
dead
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