"There is a concern that VC funds and high-tech in Israel will be split off from the world"

The Israeli Innovation Authority is warning that the Israeli high-tech sector is splitting from the global industry, according to a report it prepared for the Ministry of Innovation, Science and Technology.

"There is a concern that venture capital funds and high-tech in Israel will be split off from the world. The government must be active, reduce uncertainty and take economic action," Innovation Authority CEO Dror Bin told Calcalist.

Dror Bin with Nasdaq in the background.

"In the last few weeks, following conversations with funds, entrepreneurs and companies, we have seen very worrying signs. As soon as we collected the data, we published a report to wake up the government. We see that many investment funds are starting to run out of money and it is going to be difficult for entrepreneurs as well,” he added. “It is difficult to know which has greater influence - the global crisis or the local crisis. The situation is not clear. There is no data that demonstrates Israel's splitting from the world, but when you see the stock performance in Israel and the establishment of Israeli companies abroad, it is clear that we are at the threshold of a possible crisis.

“Our report will not change the political map, but we must lower the uncertainty. It is possible as a first step to pass the high-tech law passed by the previous government which has very relevant tax incentives for this crisis. There are incentives for growing companies to make acquisitions, gain support form angel investors etc.”

According to the report, there are two alarming phenomena. Firstly, in recent months there has been a significant negative gap between the technological stock index return on the Tel Aviv Stock Exchange and that of Nasdaq. The position paper indicates that this gap is increasing the fear that we are on the verge of a situation in which there will be a "splitting" between the global and Israeli markets. If this is the case, many Israeli hi-tech companies will find it very hard to raise investment and will be forced to close or move to other countries.

In addition, a survey of the industry revealed that there has been a significant increase in the number of companies established abroad – today 80% of companies are already opened overseas. This phenomenon could have far-reaching consequences on the Israeli economy in the medium and long term. While it's true that companies mainly register abroad for technical reasons, the survey shows that the companies also intend to register their future intellectual property overseas. As a result, companies that aren't located in Israel will pay significantly fewer taxes, resulting in severe harm to the state's income.

During the first quarter of 2023, investments in Israeli high-tech stood at only $1.7 billion – the lowest quarterly figure since 2019, while in parallel there is a decline in the number of investment rounds in startups and in the range of deals.

If this trend continues, the forecasts show that investments in 2023 will be significantly lower than in recent years. For sake of comparison, private investments in high-tech reached a peak in 2021 with investments of around $26 billion and in 2022 they were around $15 billion.

In 2019, prior to the corona crisis, investments stood at $8 billion. These figures can be added to the continued and significant decline in the number of startups being opened in Israel each year, from a record 1,386 in 2015 to 728 in 2021 and an estimated 630 in 2022.

The position paper argues that removing the uncertainty soon is the most significant step that the government can take to reduce the problems that have been detected. It is preferable that this will be done as quickly and decisively as possible in a way that will allay the fears of investors and entrepreneurs in the medium-long term and will create long-term certainty and stability. This should be conducted alongside specific steps that the government can consider that will strengthen the industry.

Minister of Innovation, Science and Technology Ofir Akunis said: "The findings of the study by the Israel Innovation Authority require the government to take rapid action in order to reverse the worrying trends it highlights. The fact that the deceleration in human capital investment in hi-tech is an international trend and has continued for a year does not prevent the Finance, Innovation, and Economy ministries from taking action that will preserve and strengthen hi-tech as the jewel in the crown of the Israeli economy."