Can Israel capitalize on its AI strengths? Report reveals key areas of opportunity
Can Israel capitalize on its AI strengths? Report reveals key areas of opportunity
Israel’s top AI sectors—vertical applications and AI infrastructure—are showing signs of growth, but retaining talent and securing funding will be essential to maintain a competitive edge.
A recent report highlights Israel’s potential to emerge as a global leader in artificial intelligence (AI) by leveraging its strengths and addressing critical challenges. Conducted by Deloitte Israel, F2 Venture Capital, and Google Cloud Israel, the report underscores that Israel is in a strong position to be a leader in the transition to autonomous enterprises, thanks to its strong focus on business solutions and enterprise software, as well as a dense population of highly skilled talent.
According to the report, titled “Future Forward: Israel's AI Expansion Blueprint 2024,” there are several specific areas where Israel is particularly well-positioned to excel in the AI market, including Vertical AI, AI & Data Ops, and Autonomous Enterprise. However, the report finds that the Israeli startup ecosystem is uniquely positioned to lead in the development of AI Robotics and AI Agents.
The report emphasizes that focusing on areas where funding is currently strong will be crucial for Israel to maintain its competitive edge in the global AI market. The data suggests that while Israel is well-positioned for success, strategic investment and talent development will be essential to navigate the rapidly evolving landscape of AI.
The report stresses that Israel faces some challenges in the AI market and that Israel needs to develop strategies to retain and attract top AI talent, sustain strong funding levels, and focus on the areas where it has the greatest potential for success.
Based on the report, the segments with high potential for emerging Israeli hubs are Vertical AI, which has drawn roughly 50% of private funding for AI companies in Israel since 2022. Israel has strong domain expertise in several industries, including defense, life sciences and healthcare, and banking, financial services, and insurance, making these promising sectors for vertical AI applications.
Within Vertical AI, Life Sciences & Healthcare area leads with ~42% of the investments in this category, receiving about $2.9 billion in funding, and Banking, Financial Services, and Insurance attracting ~24% of the investment, totaling ~$1.6 billion.
AI & Data Ops, which is the largest sub-category within the AI Foundation layer. The Israeli ecosystem excels in developing and maintaining infrastructure to support AI and data operations, which is a crucial need as companies worldwide seek to enhance their operational efficiencies.
Autonomous Enterprise applications, particularly in the cybersecurity, IT, marketing, and product development sectors. Israel is well-positioned to capitalize on the growing global demand for advanced computing power and specialized hardware to support AI models.
According to the report, private investments in Israeli AI startups totaled $13.5 billion from 2022 to mid-2024. This significant investment highlights the growth and potential of Israel's AI sector. Despite a general decrease in the absolute value of investments in the Israeli market, the AI sector demonstrated notable resilience. In 2023, the share of AI investments increased from approximately 40% in 2020 to 50%. Around 50% of AI investments in Israel from 2022 to mid-2024 went to vertical applications, totaling ~$6.9 billion in funding directed toward industry-specific AI solutions.
The report is based on an analysis of artificial intelligence investments in Israel and globally, as well as interviews with AI experts from Israel and abroad. Through this analysis, the report aims to identify areas where Israeli companies have a greater potential for success compared to areas where their potential is more limited.
According to Maor Fridman, General Partner at F2 Venture Capital, and one of the authors of the report, while there are legitimate concerns about an AI investment bubble, Israel is strategically positioned to become a global leader in the industry.
Fridman emphasizes Israel's "mature tech ecosystem filled with founders who have the deep industry-specific knowledge" and the "dense population of engineering talent" as key advantages. He encourages both founders and investors to seize this opportunity and build companies that will drive innovation and create significant value.
Fridman believes these strengths will allow Israeli companies to excel in two key areas: Vertical Applications and AI Infrastructure.
Vertical Applications are AI solutions tailored to specific industries, and Fridman points to companies in his own firm's portfolio such as Darrow (legal tech) and 4M Analytics (underground mapping), which he sees as examples of Israeli companies leveraging "deep industry knowledge" to "drive real change and create tangible value."
In the AI Infrastructure sector, Fridman notes the increasing demand for computing power and specialized hardware as AI models become more complex. He believes that Israel, with its strong engineering talent base, can play a crucial role in developing this infrastructure.
Fridman acknowledges the current debate about an AI bubble. He notes the massive investments in foundational models and questions whether they will yield returns that justify their valuations. However, he ultimately believes that, "in the long run, we may be vastly underestimating the transformative potential and returns that AI could deliver." He envisions a future where AI models handle increasingly complex tasks, leading to significant economic value.
For Israeli startups to capitalize on these opportunities, Fridman stresses the importance of capital efficiency, especially given the current post-correction market environment. He believes that "the potential for Gen AI to unlock new and unexpected markets is vast," but startups must be strategic and judicious in their spending to build lasting companies.
