Moran Massad.

Startup crossroads: Navigating the risks of dual identities in Israeli innovation

The allure of setting sail from Israel to anchor a startup in foreign soils has never been more compelling. However, this very decision meant to secure our future might also place it at risk, explains Moran Massad of Deloitte Israel

In the ever-evolving landscape of innovation, Israeli startups are facing a paradoxical challenge—one that demands immediate attention and a deeper understanding. The allure of setting sail from Israel to anchor a startup in foreign soils has never been more compelling. Silicon Valley's siren call or the tech pulse of Boston seem irresistible, especially in the current geopolitical climate. However, as we embark on this journey, we must confront a paradox: the very decision meant to secure our future might also place it at risk.
According to an IATI report, 45% of the new Israeli startups that opened in the first half of the year did so abroad. This marks a two-fold jump compared to the corresponding period last year.
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Moran Massad Hadar
Moran Massad Hadar
Moran Massad.
In my role at Deloitte Israel, I've witnessed this sentiment firsthand. Many of my clients are either inquiring about incorporating in the U.S. or seeking to flip their existing Israel-based setups to U.S. parent companies.
The objective behind this shift is often more than just global expansion; it is predominantly a search for a safety net. Yet, in this pursuit, numerous facets of the decision remain underexplored. While the appeal of an American parent company is palpable, there are aspects that require more consideration. For instance, such a shift can significantly affect shareholder profits during an exit. Transferring intellectual property abroad can trigger immediate tax events, impacting both founders and investors alike.
Further, establishing a startup in the U.S. while keeping R&D anchored in Israel might expose the company to tax challenges from the outset. These aren't just administrative concerns; they're pivotal decisions that can redefine a startup's trajectory.
In navigating these waters, I found it pertinent to validate my observations with insights from another industry stalwart. Nimrod Vromen of Consiglieri, known for business and legal consulting to startups, shed light on some of the broader implications.
Obviously hesitant to express his full concerns about the political turmoil in Israel and its potential long-term implications, Nimrod did point out that "while incorporating abroad might offer the short-term sense of insulation from potential judicial or legislative challenges in Israel, the reality might still prove to be quite different in the longer-term future. For example, if a startup's core operations remain in Israel, it's plausible that any major disputes will be settled here, irrespective of its registration." Nimrod was concerned that the government might try and eventually call the bluff on founders who only flaunted a facade of relocation without actually moving out, by eventually imposing different legislative and judicial jurisdictions on them.
The ramifications of the current trend aren't just confined to the startup realm. They have the potential to deter the next wave of innovators. As the tech scene in the U.S. exhibits signs of resurgence, Israel's internal metrics suggest that we might be losing ground in the global innovation race.
However, challenges also present opportunities. In our democratic ethos, expressing opinions, attending demonstrations, and advocating for change are integral. Yet, we must also acknowledge the hurdles our tech community faces and harness these challenges, turning them into stepping stones. Through Israeli innovation, we can aspire not only for growth but also seek the ties that bind our diverse nation.
For all trailblazers charting the future course of the Startup Nation, the appeal to you is clear: pause, reflect, and choose your path with discernment. Let's prioritize informed decisions, setting a benchmark for the next generation of innovators, ensuring the legacy of the Startup Nation remains intact and thriving.
Moran Massad is a partner in the high-tech department of Deloitte Israel.