Upon the release of the Startup Nation Central annual report on the Israeli tech sector, The Media Line spoke to its CEO Avi Hasson, who shared his insights and lessons learned from 2023 and his expectations for 2024.
The Media Line: The report you just released states that Israel’s tech sector has remained robust despite the judicial reforms and the October 7 massacre. What were the findings and why do you think the tech sector’s private funding withstood the impact from politics and the war with Hamas?
Avi Hasson: We must remember that, besides the two Israel-specific shockwaves that you talked about, the most important factor for the health of the tech sector every year, and in 2023 as well, is the global macroeconomics. And 2023 was a rough year for tech companies and venture capital firms, not just in Israel, but everywhere else, obviously a continuation of the second half of 2022 as a reflection of the high interest rate and the economic downturn. That was the most important component of such.
The Media Line: How is Israel faring on a global scale? I mean, if you dive deeper into 2024, and what the outlook is?
Avi Hasson: If we try to compare 2023, I think maybe the main difference is that in Silicon Valley, as the leading innovation hub, we are already seeing in the past two quarters, definitely last quarter, Silicon Valley is coming, coming back to life, both in terms of new companies creation as well as in terms of level of investment, and we’re not seeing that in Israel yet.
The Media Line: Can you give an example please of some of the sideline startups?
Avi Hasson: Examples could be with regards to the sectors, but I think what I talked about was not necessarily about sectors. I think a lot of people, forget from October, that’s obvious, but even in June, were not in the mood to start a new company, which is really like having a new baby. You do that in times of optimism and so on. And I think, and I’m going to answer your question in a minute, but I think one of the good things that I’m seeing as a result of the war is that unlike the judicial legislation, which brought somewhat a spirit of despair, and I was starting to feel concerned about the talent that might leave, the spirit that we are seeing right now is exactly the opposite, is the spirit of determination: “We are staying put. We are fighting it out. We are rebuilding the country.” That is the most important fuel for an entrepreneur to start a new company.
The Media Line: Are there any positive outcomes that you expect to see in the tech sector coming from the war concerning the geopolitical front?
Avi Hasson: It is really hard to try to guess how things will play out from the geopolitical diplomatic front. At Startup Nation Central, we have been involved a lot in what we call innovation diplomacy. I’ve been actively collaborating on the innovation fronts with a lot of the countries you mentioned (UAE, Bahrain, Jordan, Saudi Arabia). A lot of that activity is now, I don’t want to say cooled off because the channels are open, and the motivation is there. They are equally interested in collaboration and Israeli innovation, but it’s hard to do things in the public nature that we did.
Funny enough, sometimes it’s easier to maintain the same level of activity, let’s say with the Saudis, simply because it was under the radar. Whereas with Bahrain things were extremely public, and now it’s much more difficult to do that, and yet the motivations are there. So I’m pretty certain that we’re going to see that activity going down. That’s on the geopolitical front.
The Media Line: You mentioned Bahrain and you used the words “going down.” Can you elaborate?
Avi Hasson: I think the same would go for Morocco or the Emirates. It was just an example of a country where we had a lot going on, and it’s harder to do a lot of things right now. It did not stop in the sense that the channels of communication are still open and discussions are taking place, but the level of activity went down and the public nature of that activity extremely went down.
The Media Line: You said that private funding declined from the 2021 peak, reaching 7.9 billion to date. What is the current investment sentiment for 2024?
Avi Hasson: From our survey, and also we talk to the ecosystem all the time, I think there is a mixed picture. On the one hand, it is quite optimistic with regard to the capabilities of the local ecosystem. I’m reminding you that since there is a lot of dry powder in the pockets of Israeli investors, which I think will have to be deployed next year, that gives you a good robustness kind of metric. But I’m hearing interestingly enough, this is anecdotal, I cannot share the names, but I’m talking about multiple foreign investors, who told me something that might sound surprising. They said, “In 2021, we stopped investing in Israel, because the prices were so high, and the place was so crowded, that it just didn’t make sense. Right now, what we are seeing in Israel makes it much more interesting for us, both in terms of the type of innovation and the valuations in the marketplace.”
The Media Line: Avi, Israel has many sectors that sort of fall under the category of tech. Israel is known as the startup nation and your organization is the Startup Nation Central. The bottom line is, if you looked at the different categories, AI, cybersecurity, defense, and others such as health care, climate tech, and agritech, what is the one that you would bank the most on in terms of investments in the coming year?
Avi Hasson: I think cybersecurity has shown amazing resilience both in 2023 and I expect it to continue going back into 2024. I just think that Israel really acquired a well-deserved leadership position in that sector. If you’re investing in cybersecurity, if you’re looking to acquire cybersecurity companies, if you want to set up a cybersecurity center of excellence as a large company, you have to come to Israel. And I think that’s going to stay.
The Media Line: Where is most of the investment in Israel coming from, local or foreign, and can you please break that down?
Avi Hasson: Traditionally, and that has not changed, the vast majority of investment in Israeli technology companies is foreign capital. And that is directly from foreign investment vehicles. You can see in our report the exact composition of rounds where there are only foreign investors or there’s a co-investment of foreign and local investors or only local investment. You will see that the share of foreign investors has gone up and not down. And if you add to that, where do venture capitalists raise their money, you get to the point where understanding that 95% of the capital funding Israeli startups is foreign. It is a very strong positive representing the attractiveness of Israeli innovation to the global investment community.
The Media Line: Avi, before we let you go, what was the most interesting thing in terms of the report that you as chief scientist of Israel and now of course CEO of Startup Nation Central, what surprised you the most?
Avi Hasson: I just want to say that it’s hard to be surprised when you are part of the ecosystem. I mean, all year long, we monitor the data every day, and we talk to the ecosystem every day. So, we have a good feeling about what’s happening.