Hi-Tech leaders urge government support amid war-driven uncertainty

 

The credit rating downgrades could "tarnish Israel’s reputation as a thriving start-up nation—a brand image that could take years to rebuild," VC partner Omer Schloss notes.

By EVE YOUNG DECEMBER 3, 2024 15:50

Israeli flags flutter at a business park housing hi-tech companies, at Ofer Park in Petah Tikva. (photo credit: RONEN ZVULUN/REUTERS)

Israel's leadership must take steps to support the hi-tech sector and to create certainty to support the sector through the challenges posed by the Israel-Hamas war, tech leaders said this week.

The hi-tech sector is central to Israel’s economy, and in 2023, its contribution to Israel’s GDP reached almost 20%, according to the Israel Innovation Authority (IIA). This sector’s share of Israeli exports is also huge and stood at 53% of exports in 2023 – totaling around 73 billion dollars.

Investments in Israeli start-ups dropped in 2023, declining 55% when compared to 2022, according to a report by the authority. The war, which broke out at the end of 2023, has also posed significant challenges to the sector.

The sector relies heavily on foreign investments, according to the IIA.

"At the beginning of the war, we witnessed significant solidarity in support of Israel from most investors and countries worldwide. However, as the war continued, and given that investors prefer stability, we saw a decline in the number of investments in Israel, particularly from foreign investors who lack a connection to or understanding of Israel," said Maya Schwartz - CEO of the Israeli High-Tech Association, which is part of the Manufacturers' Association.

Illustration of Israeli shekels, September 24, 2023 (credit: HADAR YOUAVIAN/FLASH90)

Shlomo Landress, partner, and head of Technology at law firm Gornitzky, said that a report by Gornitzky written in collaboration with KPMG and IVC found that the war has had a significant impact on the hi-tech sector.

Venture capital investments dropped 

Venture capital investment from foreign investors dropped significantly in terms of both the number of deals and total funding, he explained. These investments usually comprise over half of the investments in Israeli start-ups, he added.

"Foreign investors are concerned about Israel’s security, economic, and political instability. Specifically, there is deep unease over the operational challenges faced by start-ups, as many key employees have been drafted for extended service, and company facilities are exposed to ongoing missile attacks," he said.

This has led to "a decline in the formation of new Israeli start-ups and an increase in the number of start-ups forced to scale down operations or shut down entirely," he added. Advertisement

Omer Schloss, a senior partner at Titan Capital Partners, said that in spite of challenges to funding, the "VC industry remains a long-term game and is less susceptible to short-term shocks."

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Asked how recent credit rating downgrades impacted companies' abilities to raise capital, Landress said that "credit rating downgrades have diminished investor confidence and are an additional factor behind the decrease in foreign investment in Israel's high-tech sector."

"These downgrades have also coincided with reduced economic growth projections for Israel, impacting borrowing costs, growth prospects, and fiscal stability," he added.

The ratings also have impacts beyond the financial, he explained. "These downgrades tarnish Israel’s reputation as a thriving start-up nation—a brand image that could take years to rebuild."

Schwartz also commented on the ratings drops and said that, of course, it has impacted not only the economy but the "pocket of each and every person in Israel."

"But this is the reality, and we will deal with it. The downgrade will not lead to the collapse of the state, so the only option left for us is to continue opening up the Israeli economy and work to raise the rating back up," she added.

Schloss countered that the impact on the private sector has been far less significant than on the overall economy.

"Investors typically adopt a long-term perspective, and Israel's economic fundamentals remain strong," he said, citing Israel's current account surplus, natural gas reserves, and robust foreign exchange.

When asked how the country's leadership can counteract the negative impacts of the war on capital-raising, Landress Schloss said that, "'Uncertainty is bad for business,' as the saying goes, and Israel's government must strive to be an island of stability in turbulent times."

"A clear and actionable game plan for both the current conflict and the day after is essential to maintain confidence and direction," he added.

The government should also increase support for startups, he added.

Schwartz also called for increased government funding of budgets for startups and for hi-tech in general, highlighting that the focus should be on those who are just starting out.

"Unfortunately, we do not expect the government to be able to bridge the gaps needed to support Israeli high-tech. As has happened so far, the high-tech sector will manage and grow based on private investors—both Israelis who have made their fortunes and will reinvest in new ventures and foreign investors, with or without a connection to Israel," she added.

Merlin Ventures Managing Partner Shay Michel said he anticipates "a quick recovery and increased growth of Israeli startups."

"Already, we see an increase in the number of companies successfully raising capital and making exits. Companies have adapted to a state called 'war routine' – where they adjust to challenges and manage to continue functioning and growing," he explained.

"Beyond that, the Israeli entrepreneurial spirit and innovation continue to be a long-term advantage. Israel has always known how to reinvent itself; its entrepreneurial DNA, alongside community support and professional resources, provides a strong foundation for continued success in the tech industry."