Israeli tech sector holds strong, raises billions during war despite uncertainty

In the turbulent landscape of Israeli high-tech, an impressive resilience emerges amidst adversity. Despite the upheaval of attempted judicial reforms and the relentless Gaza conflict, Startup Nation Central (SNC) paints a nuanced picture of the industry's performance. While initial impressions hint at a reassuring trajectory, hidden currents reveal potential long-term perils lurking beneath the surface.

VC investors, defying doomsday predictions, remained steadfast, injecting $3.1 billion into local startups. This influx, averaging half a billion dollars monthly, underscores a remarkable tenacity in the face of historic challenges. Notably, cyber investments reached $1.1 billion.

High-tech employees.

Yet, beneath the veneer of success lie troubling trends. Achievements were attained with a diminished workforce, portending potential layoffs. Meanwhile, the prevalence of small exits threatens to stifle aspirations for larger successes, risking a regression to a time of self-doubt.

The question remains: can Israeli high-tech maintain its identity amidst shifting tides, or risk losing its competitive edge in the global arena?

According to the report, there were 220 fundraising rounds announced since the start of the war with an average amount of $19 million, a number that for countries like Germany or France is an achievement. For Israel, we are not talking about the numbers of 2021 nor of 2022, but considering the October 7 attack and the longest war in Israel's history that followed and has been going on for six months, one can breathe a sigh of relief.

Even deals of $100 million and more were registered over the past six months. Some of them, such as Next Insurance, Axonius or VAST Data's fundraisings, were indeed closed before the outbreak of the war, but those of the likes of Silverfort or FundGuard were closed in the midst of the war, when in the case of Exodigo, which raised $75 million, it was probably even due to the war.

Moreover, apparently one can also be proud of the continued interest in Israeli cyber despite the intelligence failure on October 7th. Israeli cyber companies have raised $1.1 billion since the outbreak of the war and are leading the long exit train. M&As by Israeli companies totaled $3.7 billion in the last six months, with six of the nine companies sold being cyber companies.

But two troubling signals emerge from the seemingly reassuring picture. The first is that all these numbers were achieved with only 80%-85% of the workforce, with an average of 15%-20% of the industry's employees serving in the IDF reserves. The younger the startup companies, the higher the reserve rate. In the larger companies, with an emphasis on the international companies, the rate of reservists is lower because the workers there tend to be older.

In recent months, a wave of layoffs has already been felt among quite a few high-tech companies, but it may increase in the near future. The reason for this is not necessarily problems in the companies, but the insight that the managements have recently come to, and especially the boards, that if everything worked and Israeli high-tech "delivers", as was coined in the slogan at the beginning of the war, why not do it permanently with 15% less manpower. Of course, it will not be a matter of firing those reservists who return, but a horizontal cut. The hidden unemployment in the high-tech industry is an open secret and the current period gives motivation to address it.

The second disturbing signal is the multitude of small exits. In recent years, we have gotten used to the sayings of startup founders that they "want to build a big company." As spoiled as it sounds on the surface, in practice in recent years, since 2015, there has been a feeling that large companies of the type of monday.com, Wix or Global-e can be built in Israel, and this has raised local tech to a new level.

The aforementioned reputation brought the really big and important international players here, who led large fundraising rounds and contributed to the creation of the next avenue of companies that are just waiting for the opening of the window on Nasdaq. Flash sales of young companies with cool technology sets Israel back twenty years, when we didn't believe enough in ourselves and our ability to compete against the American giants. Israeli tech must not lose the DNA change of Israeli entrepreneurs, the audacity and arrogance - this would be a deep blow to the Israeli economy's ability to recover and the future of its growth engine.