The Israeli hi-tech industry confronted an array of challenges in 2023, grappling with the triple threat of a global economic downturn, local political instability, and the repercussions of the Israel-Hamas war, according to the annual report released by the Start-Up Nation Policy Institute (SNPI).
The report unveiled a troubling scenario, with a staggering 60% drop in investments and foreign venture-capital funds exhibiting a noticeable hesitancy toward Israeli start-ups.
While the global technology sector felt the impact of the economic recession, Israel’s hi-tech industry witnessed a more pronounced decline than its European and American counterparts, the report said.
Venture-capital investments in Israeli hi-tech nosedived by 60%, reaching $7.3 billion in 2023 and reverting the industry to investment levels last seen in 2018. The conclusion of the year witnessed a substantial 40% decline in fundraising rounds, totaling 624, compared with the preceding year, the report said.
The Israel-Hamas war has left a profound mark on Israeli start-ups, leading to a dismal $1.3b. raised in the final quarter of 2023 – the lowest quarterly amount since 2017.
The year-on-year investment decrease in Israel stood at 58%, almost doubling the drop observed in the United States (30%) and significantly surpassing that in Europe (44%). Seed funding experienced a 50% decrease, compared with the total amount raised in 2022.
In a dramatic shift, 42% of foreign venture-capital firms chose not to invest in Israeli start-ups in 2023, signaling a growing reluctance from previously active players.
New Israeli Shekel banknotes are seen in this picture illustration taken November 9, 2021. (credit: REUTERS/Nir Elias/Illustration/File Photo)
Prof. Eugene Kandel, the chairman of SNPI, highlighted the severity of the situation.
“In the wake of an exceptionally tough year characterized by a global economic downturn, judicial reform, and an ongoing conflict, the Israeli hi-tech sector confronts significant challenges,” he said in a press release.
Kandel stressed the need for a strategic and unified government response to prevent a potentially irreversible decline. He urged policy-makers to establish a comprehensive task force in collaboration with the hi-tech industry and civil society.
Uri Gabai, CEO of SNPI, emphasized the pivotal nature of 2024.“Amid accelerated global competition alongside local instability, the challenges faced by Israeli hi-tech are growing more substantial and intricate,” he said.
Gabai warned of the risks of missing out on the AI revolution and underlined the importance of a world-leading hi-tech sector for economic and national resilience.
Four critical questions shaping the future
As the hi-tech industry confronts the uncertainties of 2024, the SNPI report outlines four critical questions poised to determine its trajectory:
1. How much will the security and geo-political situation affect the hi-tech sector?
The war in Gaza and tensions in the North have cast a shadow over the Israeli hi-tech sector for 2024. A key concern is the potential influence of ongoing security instability on an industry heavily reliant on foreign investments, with its primary markets situated outside of Israel.
While the industry has displayed resilience in previous security crises, the persistent uncertainty and enlistment challenges due to the conflict raise worries about sustained foreign investment. A critical factor is how multinational corporations perceive their continued presence in Israel, despite the conflict.
Although there have been instances of active support during challenging times, the prevailing uncertainty in the geopolitical landscape poses a significant risk to the sector’s stability and growth.
2. Will Israel keep its technological edge in the age of artificial intelligence?
Israel’s hi-tech industry, known for its software orientation, is at a crossroads as it grapples with integrating into the AI revolution. The report underlined the potential advantages stemming from the start-up culture, multinational corporations’ involvement, and a historical track record of adaptability to new technologies.
However, concerns loom large due to early-stage limitations in the AI wave, a delayed national AI strategy, and uncertainties regarding the availability of crucial technological infrastructures. The report emphasized the need for Israel to overcome these challenges to ensure its continued leadership in the global innovation race.
3. Can we further increase the industry’s human capital?
An advanced hi-tech industry is intricately tied to the talent driving it, and the report delved into the complexities surrounding human capital in the Israeli hi-tech sector. Optimism arose from the untapped potential in underrepresented populations, non-software-based sectors, and the increasing demand for nontechnical roles.
However, deep-seated worries emerged regarding the limited potential of the current workforce, slow integration of underrepresented groups, governmental disinterest, and the pivotal role of education in nurturing the next generation of innovators. Addressing these concerns is essential for sustained growth and competitiveness in the evolving global hi-tech landscape, the report said.
4. Will Israel’s innovation policy rise to the challenge?
As Israel faces a period of change and uncertainty, the report underscored the critical role of governmental policy in shaping the trajectory of the hi-tech sector. Optimism arose from a sense of solidarity, the historical partnership between the private sector and the government, and the leadership of relevant civil servants.
However, concerns surfaced due to a growing disconnect between the government and the hi-tech industry, outdated legislative frameworks constraining the Innovation Authority, and intensified global competition.
The report advocated for a recalibration of Israel’s innovation strategies to adapt to the current global reality and stressed the importance of a collaborative and dynamic approach between the public and private sectors.
As Israel stands at this critical juncture, the report serves as a clarion call for prompt and comprehensive action to secure the recovery and long-term success of the Israeli hi-tech sector, the SNPI said. The future hinges on strategic policy-making, industry collaboration, and a resilient response to the challenges at hand, it said.
