Sarit Firon.

Israeli tech in 2024: Emerging stronger from this crisis is up to us

“If we manage to resolve the disagreements between us, and ensure that Israel’s high-tech has the best possible environment to allow it to thrive, then this magnificent backbone of entrepreneurs and technologists will be able to create the right conditions for the high-tech sector to emerge stronger from the crisis and put the entire Israeli economy back on a path of growth,” writes Sarit Firon, Managing Partner of Team8

With the start of 2024, the State of Israel is facing one of the most challenging periods in its history. In the wake of the events of October 7th, the primary focus has been on restoring security and addressing concerns for the hostages, soldiers and civilian population. However, we must also pay attention to the Israeli economy, which serves as the "iron dome" that safeguards and provides economic resilience during the war and after. It is therefore critical that we prevent any lasting damage to the economy, and especially to the high-tech sector, which for years has been the strongest driver of economic growth in Israel.
The high-tech crisis began even before the war, with the announced judicial overhaul in January 2023 coinciding with a global economic crisis marked by inflation and subsequent interest rate hikes, alongside geopolitical events, including the war in Ukraine and the trade war between the United States and China. In the backdrop of this fragile situation, the judicial overhaul pushed the Israeli economy into a spiraling crisis, surpassing the dimensions of the global crisis. For the first time, foreign investors became apprehensive that Israel - which for years enjoyed a stable democratic government and an independent and strong judicial system - is now heading towards judicial instability. Government stability has always been one of the strongest foundations that drew capital from all over the world to the Israeli economy, and the uncertainty caused foreign investors, including large institutional bodies, to stay away from Israel.
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שרית פירון Team8
שרית פירון Team8
Sarit Firon.
(Photo: Adi Lam)
The combination of the global crisis and domestic instability led to a significant decline in high-tech investments in Israel. Although the last quarter of the year has just ended, preliminary annual data already indicates that 2023 saw a year-over- year drop of over 60% in the volume of investments, a sharper decline compared to the rest of the world. In the United States and Europe, for example, the tech industry also suffered a drop in the total amount of capital raised, but the decline was about 30% and about 40% respectively.
And then the war erupted. Tens of thousands of entrepreneurs and employees in the high-tech sector were mobilized to join their reserves units, causing scores of companies to operate with a reduced workforce. This forced companies to shift their focus and prioritize existing obligations over making long-term plans. Those high-tech employees who were not mobilized are now determined to demonstrate to overseas investors and clients that Israeli technology can be relied on even in emergency situations, upholding the adage that Israeli Tech Delivers, No Matter What.
With the start of 2024, we can already say that the effort is paying off. Foreign investors have a high regard, and even admiration, for our high-tech talent. To a large degree, the world's trust in Israeli high-tech is only growing. Unlike the judicial overhaul which shook investors’ perception of the Israeli government’s foundations, the war is actually viewed as a singular temporary event that will end in the foreseeable future. What's more, the Israeli economy has already demonstrated in the past resilience in withstanding the impacts of wars without enduring lasting damage.
There is also room for optimism that the war effort may lead to the acceleration of innovation and technological developments. In fact, since the war erupted, it is estimated that the IDF, which has always served as an incubator and technological accelerator, is expediting technological projects that would have otherwise taken years to roll out, similar to the accelerated digital transformation experienced during the Covid pandemic. Fields, such as cyber security and artificial intelligence (AI) are currently experiencing a boom, with the military collaborating with high-tech companies to develop breakthrough capabilities. However, this innovation is not limited to security related areas alone. Fields, such as fintech, digital health, and agricultural technology will also benefit from this wave of innovation, as the underlying technologies intersect with multiple fields. Israel’s standing in these fields has risen in recent years, presenting an opportunity for it to stand out even more in the years to come.
Yet, despite the promising opportunities on the horizon, the current high-tech crisis is unprecedented and poses significant risks. First and foremost, foreign investors, who redirected investments away from Israel due to the judicial overhaul, are in no rush to return. With plenty of attractive alternatives, it will be difficult to get them to prioritize Israel again, certainly as long as the specter of judicial overhaul continues to loom. In this sense, regime instability was and remains the primary threat to the Israeli high-tech sector. There is also the risk that the war could be prolonged or intensified, leading investors to fear that this time it is an event with the potential for long-term damage. The flight of investors could deal a significant blow to the high-tech sector and the Israeli economy as a whole. Currently, the high-tech sector accounts for about 40% of Israel’s GDP, and its contribution is critical to the state's tax revenues, foreign currency balances, the strengthening of the shekel and protection against inflation. Therefore, without a robust high-tech sector injecting substantial resources into the state coffers, Israel might struggle to provide the level of infrastructure and social services citizens are used to.
Addressing these threats requires more responsible management of the Israeli economy. Fiscal responsibility should involve learning from the mistakes of the past year and implementing a cohesive policy and budget while achieving broad consensus among all parts of Israeli society. The ongoing war has already caused substantial strain on the state budget, one that cannot be overcome without diverting budgets that politicians have promised to narrow sectoral issues to providing broad assistance to businesses, to the rehabilitation of communities and infrastructure that have been impacted, re-equipping the army, and more.
While the global economic crisis is already showing signs of easing, Israel’s emergence from its domestic crisis largely depends on us. Israel is blessed with extraordinary talent and women and men of action, creativity and vision, who have built a thriving startup nation. If we manage to resolve the disagreements between us, and ensure that Israel’s high-tech has the best possible environment to allow it to thrive, then this magnificent backbone of entrepreneurs and technologists will be able to create the right conditions for the high-tech sector to emerge stronger from the crisis and put the entire Israeli economy back on a path of growth.
The author is Sarit Firon, Managing Partner of Team8