OpinionUnleashing potential: A collective call to support Israeli startups
Opinion
Unleashing potential: A collective call to support Israeli startups
“This is a critical moment for Israel's economic and technological future. The recent decrease in international backing should serve as a wake-up call: it's time for a unified investment strategy that bolsters our startup ecosystem,” writes Avichay Nissenbaum of lool Ventures
The recent report by Calcalist paints a stark picture: international investments in Israeli startups have plummeted by 23%. This disturbing trend highlights a challenge and a critical juncture for our nation’s economic and technological future. In times when external uncertainties loom large—be it due to geopolitical tensions or the echoes of recent conflicts—the need for robust local support for our startups is imperative.
Our startups are more than economic entities; they are the lifeblood of our national innovation and resilience and a strong and major driver for the ongoing prosperity of the Israeli economy. The success of our tech sector also provides critical funds to support Israel's security needs in an increasingly turbulent region
As we well know, there is a long roster of investors who have a strong affinity to Israel, not only because they appreciate the innovation, talent, and resilience of the Israeli tech sector. But, first and foremost they have had great returns, and as we know returns are what drives and motivates investors.
Nevertheless, many investors who are less familiar with Israel's tech landscape, as well as some who have only occasionally invested in Israeli startups, are potentially taking a step back to wait and see how the current events unfold. The political “judicial reform” throughout 2023, followed by the war over the last 6 months, has created uncertainty that is causing these investors to hesitate. This poses a risk for the VC community, specifically at the early Seed stage as it threatens the seeding of the next generation of Israeli startups.
As international interest waivers, the onus falls squarely on the Israeli Government, the Israeli institutional investors, venture capitalists, and angel investors to fill this void. Together, they must form a solid foundation on which our technological prowess can continue to grow, even in the face of political and security headwinds.
Why should the government step in?
In light of the challenges posed by declining international investment, the Israeli government must take a proactive role in nurturing the nation's hi-tech startup ecosystem. Here's why government intervention is particularly essential for maintaining and enhancing the pivotal role of the high-tech sector in Israel’s economy:
1. Sustaining economic growth:
The high-tech sector is a cornerstone of the Israeli economy, renowned globally as a "Start-Up Nation." This sector not only drives innovation but also contributes significantly to GDP and exports. With the recent faltering of international investments, government action is crucial to maintain this momentum and ensure continuous growth and development.
2. Stabilizing the investment climate:
Government policies are needed to reassure international investors and to create a more stable and attractive investment environment, essential during times when investor confidence might be shaken by external uncertainties such as geopolitical tensions or economic fluctuations. This can include tax breaks, streamlined regulations, and direct investment funds that encourage both local and foreign investors to engage with Israeli tech startups.
3. Bridging the early-stage investment gap:
The decline in early-stage funding is particularly detrimental to the nurturing of innovations that have kept Israel at the technological forefront. Government-backed venture funds can provide the necessary capital to support these startups through their vulnerable early stages, ensuring that they have the opportunity to mature into stable, profitable enterprises.
4. Promoting sectoral strategic interests:
The Israeli government can target support to sectors that are strategically important for national interests which was done in the past for cybersecurity. One clear area where Israel is at risk of being behind is AI, which is evolving at light speed. AI is driving further inflections in many other areas such as Robotics, Digital Health, industrial automation, Biotechnology, Space tech - many of these sectors often require intensive R&D and long-term investments that might not be immediately attractive to private investors due to their risk profile but are critical for Israel’s strategic economic and innovation leadership goals.
The critical role of institutional investors
Israeli Institutional investors such as leading insurance, pension, and savings investment funds manage immense sums of money, yet their investment in Israeli venture capital remains modest relative to their abilities, and far below the common allocations typically done by their peers in the USA. The Israel Innovation Authority reports that in 2023, Israeli institutional investors contributed an estimated $143 million in direct investments in Israeli tech companies, a stark decrease of 70% from $486 million in 2022. The number of deals also dropped by 55%. This reduction is particularly concerning when bolstering economic resilience through technology and innovation is more crucial than ever.
These institutions are uniquely positioned to reverse this downtrend and drive substantial growth within the startup ecosystem. By increasing their investments in venture capital, institutional investors can serve as a beacon of confidence, encouraging other investors to commit. Their involvement would bring much-needed financial stability and increase available capital, as well as enable startups to scale operations, enhance their technological advancements, and accelerate market entry. This kind of support is crucial for maintaining the vibrancy and dynamism of our tech landscape, particularly in challenging economic times. It's also an opportunity for these institutions to cultivate a portfolio that includes high-growth potential businesses, fostering a healthier, more diversified economic environment. Here, again, the role of government is crucial in incentivizing institutional investors to take an active part in the Tech sector. This time, the focus should be on the early stage, and the incentive should be aligned accordingly. It looks like the government is working on such programs which are in the pipeline but have not been made clear yet.
Venture capitalists and angel investors: Catalysts for growth
The vibrancy of Israel’s startup scene is sustained not only by institutional backing but also through the dynamic contributions of venture capitalists and angel investors. Since October 7th, according to data from Startup Nation Central, there have been 220 private investment rounds, with an impressive total of approximately $3.1 billion raised. This highlights the critical role investors play in driving our nation's entrepreneurial endeavors.
Venture capitalists and angel investors are often on the front lines, identifying and nurturing high-potential startups at their most vulnerable stages. Their investments go beyond capital; they provide strategic guidance, mentorship, and access to international networks that are essential for scaling businesses globally. In a time when external investment fluctuates, the continued commitment of these local investors stabilizes our startup ecosystem and propels it forward. Towards that, the government has issued a call for proposals for Angels clubs and approved last year the so-called “Angels Law”. These are positive actions, alas time will tell if they will make the necessary impact at the necessary pace.
As much as we are concerned about the continuous inflow of international investments because of the geopolitical situation, We, at lool ventures, remain confident and bullish on Israeli innovation, and we are actively investing from our third fund. We recognize and embrace our role in this ecosystem to continue to nurture Israeli innovation, whilst generating top returns. Over this uncertain period, we have issued two term sheets since October 7th and closed another investment at the same time. Our actions exemplify our belief that supporting pioneering technology ventures is crucial, now more than ever. We aim to inspire our peers—both VCs and angel investors—to continue their engagement, driving growth and innovation that not only lifts individual companies but bolsters the entire Israeli economy.
A unified front
This is a critical moment for Israel's economic and technological future. The recent decrease in international backing should serve as a wake-up call: it's time for a unified investment strategy that bolsters our startup ecosystem. The Israeli government has a pivotal role to play. Stepping in, not only fills the immediate void left by decreased foreign investment but also sets the stage for sustainable growth and resilience in the high-tech sector. This strategic involvement can ensure that Israel’s tech ecosystem continues to thrive, driving the nation’s economy forward in the face of global uncertainties.
Government, Institutional investors, VCs, and angel investors must collaborate more closely, creating a robust support system that can withstand global fluctuations in investment.
Every facet of our investment community plays a unique and pivotal role. By aligning our strategies and intensifying our commitments, we can ensure that our startups not only survive but thrive. The actions we take today will determine the strength and success of our national economy tomorrow.
Avichay Nissenbaum is a General Partner at lool Ventures, an Israeli early-stage fund
