A few weeks shy of the first anniversary of the terrible October 7 attack on southern Israel by Hamas, and with the ensuing war still raging, Israel’s high-tech sector is still showing its resilience and its appeal.
A new official report on the state of the sector published by the Israel Innovation Authority – the government agency dedicated to promoting the national high-tech sector – finds that the ecosystem is largely holding its own after almost 12 months of fighting in Gaza and rapidly escalating tensions with Hezbollah in Lebanon.
The resilience of the sector came as a pleasant surprise to the IIA, its Chief Economist Dr. Assaf Kovo tells NoCamels.
“We had worse expectations,” he admits. “[But] it reflects the fact that the fundamental properties of the Israeli tech sector are good: The entrepreneurs are still good; the technology being developed here is still good; the companies are still good.”
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When it comes to investment, Israel’s high-tech sector still remains in its spot of third in the world for raising capital, behind New York and Silicon Valley in California, but outstripping London, Berlin and Singapore.
Furthermore, in real terms, the $8.8 billion in capital raised during the last two quarters of 2023 and the first two of 2024 – a period that includes the height of the war in Gaza – matches the amounts raised in preceding year.
In fact, the number of foreign venture capital firms operating in Israel over the past year has remained in line with the numbers in the period between 2018 and 2020, Kovo says. (He explains that the figures for 2021 and 2022 are not truly representative as that period is regarded as “a bubble” of extraordinary growth.)
One trend that is noticeable is the shift in investment to favor startups that are further along in the development process, rather than in their early stages, and towards companies in the field of cyber security, for which Israel has already achieved an international reputation.
This is to do with risk management, Kovo explains. For while investors are still placing their trust – and their capital – in Israeli companies, they prefer to do so in the most stable way possible, and that means startups closer to commercialization and in a field that has a proven track record.
“Investors don’t like risk, and if the risk at the macro level is increasing [due to the war], they’re trying to decrease the risk at the micro level,” Kovo says.
“So they’re investing in areas that are safer in Israel, like cyber security, which Israel is very known for, and they’re investing in late-stage companies, as opposed to early-stage companies.”
He stresses that the amount of money being invested in Israel has not lessened, even if the places in which it is being placed have changed.
Yet despite the overall rosy image, Kovo warns that there are some underlying currents that are less than optimal, albeit not solely related to the war, which will need careful future attention.
Of primary concern is the trend regarding employment in Israeli high-tech, which, while not shrinking, has not shown signs of growth since 2022. Today, the sector employs approximately 400,000 people, and that number has only increased over the past two years in line with the national population growth of around 2 percent.
This puts Israel on a par with the US in terms of employment in the high-tech sector, but behind Europe. But the fact that it has a higher birth rate than both the US and European nations means that in real terms, the Israeli stagnation in high-tech employment is more egregious.
Kovo is quick to stress that this phenomenon actually began more than a year before war broke out, has been a cause for concern since then, and has “a multitude” of possible causes. The data is currently being analyzed in an effort to understand more clearly the reasons for this.
One noticeable trend, he says, is that tech companies are reducing the number of staff who are not engaged in research and development, such as marketing and business personnel.
This means that companies can tighten their belts without losing the core of their operations, Kovo suggests, repeating that this is something that has been apparent since before the war began.
Similarly, tech companies that move abroad could be looking at staff from their new location to fill these kinds of non-R&D roles, rather than moving their Israeli personnel with them. Again, Kovo says, the IIA has not yet gathered the data on this, “but it’s one of the things that we think is happening.”
Kovo also puts forward the hypothesis that the sector has reached its limit on its dominant demographic – non-Orthodox Jewish males from the center of the country. This, he explains, is another ongoing issue that the state is tackling, although resolving it is a years-long endeavor.
“We need to increase the involvement of women, Arabs and Orthodox Jews,” he says, explaining that that begins with improving the education system for all children.
“There are no magic solutions. You can’t take someone who didn’t learn English and calculus and math in high school, and think that in six months you can turn him into a super R&D programmer. It’s not going to happen.”
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