Survey: Israeli tech executives report severe damage to investor confidence due to judicial overhaul

Data collected by Start-Up Nation Central from senior managers in the Israeli high-tech industry presents a grim picture of the industry's strength and the economic risks facing the entire economy due to the government’s plan to advance legislation to overhaul the judiciary.

Managers in the industry are already reporting cancellations of meetings with investors and admitting that fear is growing regarding the ability to raise capital. The survey, which included 1,142 senior executives, representing 873 companies, reveals that about 84% of investors feel that the judicial overhaul will negatively impact the companies in which they invest, and about 80% of startups predict a negative impact on their companies.

High-tech protest.

The goal of the survey was to understand the ecosystem’s feelings towards the impact of the judicial legislation and subsequent civil unrest, and what they plan to do in response. While the survey questions were focused on the government’s judicial legislation efforts, it should be noted that the survey was also conducted amidst the global recession impacting the high-tech sector.

There has been widespread concern expressed not only by investors in Israeli tech companies, but also multinational corporations (MNCs) who have offices and relationships in Israel. According to the survey, 69% of multinational corporations (MNCs) have expressed a negative sentiment regarding the judicial changes on their activity in Israel. 65% of MNCs expect a negative impact of the judicial changes on their interest in piloting, buying, or commercializing Israeli innovation.

There is also tremendous fear among Israeli companies that the judicial overhaul will impact their business activity and access to customers, with 50% of startups saying that the judicial legislation will result in difficulty in acquiring customers abroad, and 63% of investors believe it will have a negative effect on their portfolio companies’ ability to acquire customers.

Since Israel’s tech industry is enormously impacted by foreign investment (approximately 90%), it is especially concerning that 77% respondents expect that it will be difficult for them to raise capital from foreign investors. 79% of companies currently raising capital have reported cancellations of meetings with investors since the judicial overhaul and subsequent unrest began and 31% have reported a total halt in investor meetings.

Planned actions

Due to the fear within the Israeli high-tech industry at the moment, reflected by this data, there are many proposed actions that tech companies are planning in response, including an aggressive diversification of their cash holdings outside of Israel resulting in potential massive cash outflows. Nearly half of Israeli tech companies at 46% are planning to extract cash reserves outside of Israel. 58% of them plan to move more than 50% of their cash reserves. This is despite the global banking crisis. 92% of companies stated that the collapse of Silicon Valley Bank and other foreign banks’ turmoil has limited to no impact on their plans or policy to allocate funds outside of Israel.

Many companies are also looking at changing Israeli companies’ HQ jurisdiction to other countries, with 78% of investors expecting a change in their portfolio companies’ HQ jurisdiction.

There is also expected to be a planned reduction of the workforce across the ecosystem, due to both planned company layoffs as well major interest in relocation expressed by Israeli employees. 72% of investors believe the judicial changes will result in increasing their portfolio companies’ layoffs (34% expect a significant increase); 27% of companies are considering relocating their employees outside of Israel (of those, 35% are proactively planning to offer relocation packages to employees); and 37% of companies expressed concern in retaining talent in light of the judicial legislation. Of those, 51% plan to lay off over 20% of their workforce.

Start-Up Nation Central CEO Avi Hasson said: "The survey clearly shows the positions of Israeli tech and the expected future activities of the various parties in the sector, alongside the possible additional damage to the Israeli economy. Unfortunately, the confidence of investors in Israel has been damaged in a very short period of time."

However, according to Hasson, if the talks between the representatives of the coalition and the opposition under the auspices of the president of the country bear fruit, "the Israeli innovation industry will also succeed in the current crisis - as it has succeeded in many crises in the past." He notes that in order for Israeli high-tech to continue to lead in the world, a restoration of the partnership between the private sector and the government is required through a real dialogue that will enable economic recovery.

The Israeli high-tech ecosystem represents about 16% of Israel’s GDP, and consists of over 7,300 companies, over 400 venture and investment funds, and approximately 500 MNCs’ innovation and R&D centers. It employs about 400,000 people, representing 11% of the Israeli workforce, and contributes more than 25% of the total income tax collections by the Israeli government.

The survey was conducted before the announcement of the sacking of the Minister of Defense on March 26, the nation-wide strike on March 27, and the Prime Minister’s announcement of suspending the judicial legislation to enable discussions with the opposition on the evening of March 27.