"Israel is becoming a pariah state, a hated country, and it’s trickling down to high-tech"
"Israel is becoming a pariah state, a hated country, and it’s trickling down to high-tech"
High-tech executives point to the depth of the crisis in the industry: from the more extensive recruitment of employees from abroad at the expense of workers in Israel to the difficulty of raising money due to criticism of Israel.
"I'm the VP of development at a startup. I enlisted on October 7, and since then, I've been in the reserves on and off. The company informed me that the situation is no longer possible, and they are looking for someone who can give 100% because they are suffering (and that's true). I understand them completely, and we came to a joint conclusion that I should leave." This tweet was published last week on @FeedTechILUncen on X. Although it is a very personal tweet, it reflects what is happening below the surface in the Israeli high-tech industry in recent months. These underground currents are manifested beyond heavy personnel costs and pose a real threat to the continued success of the industry in Israel. More and more companies, including early-stage startups, prefer to "spread the risk" and recruit more workers abroad to avoid shutting down operations or damaging development, as has been the case in the last eight months.
"In large companies, there has always been a dispersion of personnel across different countries, but today there is a tendency to be more strict about this to ensure continuity in situations of massive reserve recruitment or regional instability," says Micha Kaufman, co-founder and CEO of Fiverr, which employs 770 people in Israel and around the world and is traded in New York at a value of $1 billion.
Kaufman was one of the signatories of the high-tech letter sent last week to the Prime Minister, the Minister of Finance, and the Minister of the Economy, warning against the flight of high-tech jobs from Israel to abroad. "If this is not enough, it becomes more difficult for Israeli companies to raise money due to pressure on funds to reduce exposure to Israel," explains Kaufman. The letter, which was sent with the escalation in the north already in the background, but mainly ahead of the discussion that began this week in the High Court on the law concerning the ultra-Orthodox exemption from military service, warned against the abandonment of high-tech jobs abroad.
"Managers of high-tech companies that face a real threat to the continued functioning of their companies will be painfully forced to start prioritizing jobs abroad over jobs in Israel. This process, unfortunately, started quietly in the last few months, and over time it could transfer potential jobs amounting to about 20% of the workforce from the local industry to different parts of the world. The results of such a move will be a fatal blow to Israeli high-tech. The tax loss to the state will be immediate, and worse, it may lead to the migration of a strong population from Israel in the near term," the letter said.
Extensive call-ups to the North
Following October 7, mobilization was general and sweeping. Everyone rushed back on the first flight to enlist - from junior high-tech employees to development managers and, in many cases, entrepreneurs who had already moved to the USA. An average high-tech company found itself with 15-20% of its employees recruited, and in extreme cases, 80-90% of the workers in early-stage companies with a small number of employees were in the military reserves. Similar to the sympathy and compassion felt by the world towards Israel in the first period after October 7, high-tech investors also showed support. Moreover, quite a few said that, unlike the unexpected consequences of the judicial reform that caused them to pull back on investments in Israel, wars here are a familiar and predictable event. It was estimated that this would be a short military operation, after which the reservists would return with new ideas, but the campaign in Gaza has been prolonged without a clear end in sight. Now the situation is worsening with the escalation involving Hezbollah.
According to a report published on Tuesday by the Israel Innovation Authority, in the fourth quarter of 2023, 28,000 high-tech professionals served in the reserves, 60% of whom hold development positions in their workplaces. In February, this number was significantly reduced to 12,000 people, but the main concern today in the high-tech industry is extensive recruitment to the reserves and prolonged service due to the escalation in the north. This leads to pressure from investors to prioritize hiring outside of Israel to avoid harming company activities. There is also significant pressure on entrepreneurs to move abroad at much earlier stages to be closer to potential customers and American investors. Beyond the unexpectedly prolonged war (at least from the tech investors' perspective), they raise the possibility of a war in the north and the slower-than-expected return of airlines to Israel, some of which stopped flying since October 7, following the Iranian attack. All these factors make it difficult for high-tech companies to manage precisely when they are in critical early stages.
These trends, which cannot yet be quantified, are also supported by the results of a survey released this week by the Israeli high-tech association IATI. The survey, conducted in recent weeks among 30 Israeli venture capital funds that are members of the association, shows that 38% of them state that at least one of their portfolio companies has moved operations abroad due to ongoing instability in Israel. A third estimated that over 30% of their portfolio companies have already moved significant operations abroad in the past year or will do so in the coming year.
"The reality on the ground is different from what the numbers and headlines show for now. In practice, it is more difficult for Israeli startups to raise money today because of global criticism of Israel. There is no way to embellish it," Yoav Leitersdorf, Managing Partner of the venture capital fund YL Ventures, which specializes in cyber investments, tells Calcalist. "To overcome this, we 'Americanize' our portfolio companies earlier. Almost all new companies are registered in Delaware. Companies try to compensate for the lack of workers who are in the reserves by hiring workers abroad to spread risks. We see more hiring outside of Israel. It's not a sweeping trend, but it is definitely more common. There are also hirings designed to give legitimacy to the company - these are senior executives who give companies the opportunity to be perceived as more global and less Israeli," he explains, highlighting a process that poses a real risk to Israel's economy and pushes high-tech back 20 years.
"There is a problem, and it is huge. This is not 'panic,' but reality. Israel's economy is going to hit the wall because high-tech here is going to take a hard hit. The last few months have shown those who still had doubts that high-tech is not the elitists, the nerds, or the privileged, but it is every fifth person who is a reservist," says a senior official in the local venture capital industry. "Beyond the security challenges, the problem of recruiting the ultra-Orthodox must be solved, or there will be no high-tech. The internal threat to Israel is still more dangerous than the external threat."
Whispers in Israel, loud voices in the U.S.
What is still being whispered about in Israel has already been said out loud in the United States as dissatisfaction in the American government with Israeli conduct grows. Both clients and investors feel more comfortable stopping work with Israeli companies. For example, on Tuesday, OrCam, one of the Israeli unicorns, cut 100 employees against the backdrop of a procurement freeze from many Arab countries and a drop in sales. Additionally, Pagaya cut 100 employees, most of them in Israel. "The Americans feel that it is more dangerous to invest in Israel. They won't say it to our face, but fund investors ask me what the risk is in a company where some of its employees are in the reserves," Eyal Bino, a founding partner in the venture capital fund 97212 Ventures, which operates from New York and recently raised $20 million for investments in Israeli companies at very early stages, tells Calcalist.
According to Bino, "In the beginning, many people said that the war would end within a month or two, but now we see that it is far from that. If you are Jewish, you have an urge to help, and that also means investing. But if not, it is taking too many risks, and since investment in high-tech can be risky anyway, there is no reason to add more. In another case, a large institutional body that invests in venture capital vetoed investment in Israeli startups because this is the decision at the moment, not to invest in Israel." The American reluctance to invest in the country, as well as logistical challenges ranging from reserves to the scarcity of flights, push for a move to the U.S. "I was at an event for entrepreneurs and investors, and at least half of the Israelis, entrepreneurs as well, but also investors, told me they were thinking about moving to the U.S."
Another venture capital investor, whose portfolio includes many cyber and deeptech companies and who is currently at an international conference in Europe, tells Calcalist that unlike previous years, this time it was very difficult for him to schedule meetings. He reinforces Bino's claim that many investors in venture capital funds (LPs) limit investments in start-ups from Israel and estimates that the coming year will be "tough." Meanwhile, this is not yet felt in the scope of investments in Israel, but this is because of mega rounds in relatively mature companies that are already perceived as less Israeli and have established their position in the international market. These include a $1 billion round for the cyber company Wiz and rounds of $100 million and more in companies such as Weka, Island, Cyera, and Coro. Even the big exits made in the last month, such as the sale of WalkMe to SAP yesterday for $1.5 billion, reflect looking in the rearview mirror. The main threat and challenge today is to the future generation: the young start-ups from which the large companies of the next three to five years will grow. According to a senior official at one of the international companies operating in Israel, "We are becoming a pariah state, a hated country, and this trickles down to high-tech as well. Even our friends no longer want to be associated with Israeli technology."
