Resilient High-Tech Sector in Israel Amidst Conflict: A Comprehensive Analysis

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Eight months into Israel’s war against the Hamas terrorist organization in Gaza, the country’s high-tech sector is proving its hallmark resilience and innovation, continuing to attract investment and realigning itself to the current reality. Despite the challenging circumstances, the sector has shown remarkable stability and growth, underscoring the adaptability and strength of Israeli innovation.

A new in-depth report from the Israel Innovation Authority (IIA), the government branch dedicated to promoting the high-tech sector on the global stage, provides a detailed analysis of the sector’s performance amidst the ongoing conflict. The “State of the High-Tech Sector in Israel 2024” report reveals that the sector is not in the dire situation feared by industry leaders at the start of the war, sparked by Hamas’ attack on southern Israel on October 7, 2023.

Dr. Assaf Kovo, IIA Chief Economist, highlights the report’s findings, noting that despite the political instability over proposed judicial reforms and the war in the final quarter of 2023, Israeli high-tech managed to grow. The report, which polled hundreds of industry members, presents a generally positive outlook, reflecting the sector’s resilience.

Military Technology Thriving in Wartime

One field that has notably thrived during the conflict is military technology. Israel has demonstrated its technological prowess in fending off numerous aerial attacks from Hamas and its allies, including Hezbollah in Lebanon, the Houthis in Yemen, and Iran. In April, Iran launched an unprecedented 300-missile strike on Israel, almost all of which were intercepted midair, showcasing the effectiveness of the Israeli missile defense system.

Yair Shani, CEO of Sigma Investment House, emphasized the significance of this technological demonstration, noting that it serves as an excellent promotion for Israeli defense companies. The success of Israel’s defense technology has spurred new foreign collaborations, with countries eager to acquire Israeli innovations. Notable deals include the sale of Sentrycs’ counter-drone technology to multiple European military bases and a $50 million contract for Elbit’s new air defense system, Red Sky.

The UK has also recognized the value of Israeli technology, including Sentrycs’ capabilities in its National Protective Security Authority Catalogue of Security Equipment (NPSA CSE). Additionally, Israel Aerospace Industries (IAI) launched an innovation center in Virginia to expand its business activities in the US, further solidifying Israel’s global tech presence.

Strategic Responses and Government Support

The relative stability of Israel’s high-tech sector is partly due to proactive measures by industry leaders and the government. The IIA, for instance, made government funds available to startups with short runways and significant technological or business assets to help them navigate the war period. This support aimed to ensure these companies could secure private investments once the conflict ends.

Other efforts to support the sector include initiatives by OurCrowd, Israel’s largest online investment platform, which launched the Israel Resilience Fund in November 2023. By late March, the fund had received over $17 million in commitments and aimed to invest in around 40 companies. New York-based VC 97212 Ventures also closed a $20 million fund for investment in Israeli startups at the pre-seed or seed stage.

Investment Trends and Financial Data

Despite the downturn in investment since early 2023, Kovo points out that fundraising levels for the first five months of 2024 are comparable to those in 2018 and 2019. The significant investment boom of 2021 and 2022 is considered an anomaly, with current levels aligning more closely with historical trends. In May 2024 alone, the sector raised $1.46 billion, bringing the total funding for the year to $4.1 billion, with seven months remaining.

The boom in investment of 2021 and 2022 should actually be viewed as an anomaly, he explains. While it seems there has been a massive downturn in investment in the past 18 months, one can draw more or less a straight line from 2017 levels of investment to today – with a very visible spike for the boom years.

Employment Challenges and Workforce Data

However, the IIA report also highlights concerns about employment within the sector. While the industry employed an additional 10,000 people in 2023, the 2.6 percent increase barely outpaced population growth, raising potential red flags for future expansion. Kovo acknowledges that companies were more optimistic about workforce growth in Israel and abroad in November 2023, but attitudes shifted as the conflict persisted into Q2 2024. Despite this, the trend in hiring remains positive, albeit slower.

The high-tech industry is crucial to Israel’s economy, contributing nearly 20 percent of the country’s GDP and 53 percent of its exports in 2023. The IIA’s report underscores the need for increased government investment to ensure the sector’s resilience against future challenges. IIA Chairman Alon Stopel and President Dror Bin stress that Israel’s government budget for R&D is relatively low, with most investments coming from non-governmental sources, including significant portions from abroad.

Government Investment and Strategic Allocation

Stopel emphasizes the importance of strengthening the high-tech sector’s resilience through diverse budgetary additions, including government support, to address market failures and reduce dependency on external investments. Bin celebrates the sector’s resilience but warns that high dependency on foreign investments necessitates a reassessment of resource allocation.

Despite numerous challenges in 2023, Israeli high-tech continued to grow, but past success does not guarantee future stability. The ongoing conflict and political instability present significant hurdles, yet the sector’s adaptability and innovation offer hope for continued resilience and growth. The sector’s performance amidst adversity underscores the enduring spirit of Israeli innovation and its vital role in the country’s economy.

High-Tech Sector Growth Amidst Conflict

The resilience of Israel’s high-tech sector amidst the ongoing conflict is a testament to its foundational strength and adaptability. The proactive measures taken by both the government and private sector entities have been crucial in maintaining stability and growth. The IIA’s strategic allocation of government funds to startups with significant assets ensured that these companies could weather the storm and continue their operations despite the war.

OurCrowd’s Israel Resilience Fund and 97212 Ventures’ investment fund are prime examples of the private sector stepping up to support the high-tech ecosystem. These initiatives not only provided much-needed capital but also demonstrated the continued confidence of investors in the potential of Israeli startups. The substantial commitments to these funds underscore the belief in the long-term viability and innovation capacity of the Israeli high-tech sector.

Technological Advancements and Global Collaborations

The technological advancements showcased during the conflict have further cemented Israel’s reputation as a global leader in defense technology. The successful interception of the 300-missile strike by Iran is a clear demonstration of Israel’s advanced missile defense capabilities. This technological prowess has not gone unnoticed, leading to increased interest from foreign nations in Israeli defense technologies.

Sentrycs’ counter-drone technology and Elbit’s Red Sky air defense system are notable examples of Israeli innovations gaining traction on the global stage. The inclusion of Sentrycs’ technology in the UK’s NPSA CSE highlights the rigorous standards met by Israeli companies and their ability to deliver cutting-edge solutions for security challenges.

Economic Contributions and Export Data

The high-tech sector’s contribution to Israel’s economy cannot be overstated. In 2023, the sector accounted for nearly 20 percent of the country’s GDP, amounting to approximately $92.2 billion. Additionally, it represented 53 percent of Israel’s exports, valued at $73.5 billion. These figures highlight the sector’s critical role in driving economic growth and maintaining Israel’s competitive edge in the global market.

Investment Trends and Financial Data

Investment trends within the high-tech sector have shown resilience despite the challenging environment. The total funding raised in the first five months of 2024 amounts to $4.1 billion, with $1.46 billion raised in May alone. This level of investment is comparable to pre-boom years, indicating a return to steady growth following the anomaly of the 2021-2022 investment surge.

Workforce and Employment Challenges

Employment within the high-tech sector has also experienced challenges due to the ongoing conflict. While the industry added 10,000 jobs in 2023, the growth rate barely outpaced population growth, raising concerns about future expansion. The initial optimism about workforce growth in November 2023 gave way to more cautious attitudes as the conflict persisted into 2024.

Despite these challenges, the trend in hiring remains positive. The sector continues to be a significant employer, with nearly 400,000 people working in high-tech roles. However, the slower rate of growth underscores the need for strategic initiatives to attract and retain talent in the sector.

Government Investment and Strategic Allocation

The IIA’s report underscores the importance of increasing government investment in the high-tech sector to ensure its continued resilience. The relatively low government budget for R&D necessitates a greater focus on strategic allocation of resources to address market failures and reduce dependency on external investments. Stopel and Bin’s call for diverse budgetary additions, including government support, highlights the need for a coordinated approach to sustaining the sector’s growth.

Future Outlook and Strategic Considerations

Looking ahead, the high-tech sector’s future success will depend on its ability to navigate ongoing challenges and leverage its strengths in innovation and adaptability. The sector’s performance during the conflict underscores its foundational resilience, but sustained growth will require continued investment, both from government and private sources.

The high dependency on foreign investments demands a reassessment of how Israel directs its resources to support the high-tech sector. Strategic initiatives to enhance domestic investment and foster a supportive environment for innovation will be crucial in maintaining Israel’s competitive edge.

Israeli High-Tech at a Crossroads

The Innovation Authority’s 2024 annual report highlights the critical juncture at which Israeli high-tech currently stands. Over the past decade, particularly since 2018, there has been a significant surge in investments in startups and a notable influx of new employees into the high-tech sector. This period has seen high-tech solidify its role as the primary growth engine of the Israeli economy, contributing an average of 40% to the nation’s economic growth since 2018. Additionally, high-tech has played a crucial role in driving GDP growth during economic crises when the broader Israeli economy faced stagnation. The sector’s contributions are largely attributed to the expansion of high-tech employment, characterized by high salaries that boost tax revenues, enhance sectoral output, improve the national balance of payments through increased exports, and more.

However, the sector’s growth trajectory has encountered significant headwinds since 2022 due to global macroeconomic trends. While these trends have also affected other global innovation hubs, the situation in Israel has been exacerbated by local circumstances that continue to impact the high-tech sector. The crossroads facing Israeli high-tech concerns the direction it will take moving forward: will it resume its growth trajectory, stagnate as it did following the dot-com bubble, or enter a period of retrenchment?

Image: Israeli High-Tech in Numbers – source reference – https://innovationisrael.org.il/en/report/introduction-and-main-points-2/

Despite some positive indicators, such as continued growth in high-tech output and exports in 2023, several key indices have shown worrying signs. High-tech employment growth slowed to just 2.6% in 2023, barely above Israel’s natural population growth rate. This is a critical metric, as high-tech employment significantly impacts state revenues from taxation and overall GDP growth. Other indices related to business activity in high-tech, such as startup fundraising and venture capital investments, have returned to 2018 levels or earlier. Notably, startup fundraising in 2023 declined by 55%, a sharper drop than seen in US and European hubs.

Surveys conducted by the Innovation Authority among high-tech companies and venture capital funds reveal heightened concerns following the October 7 events. Over a third of startups currently seeking funding anticipate raising capital at significantly lower valuations than their current ones (Down Round). This sentiment is reflected in the business activities of these companies, with reports of slowed business operations, delays in product development, and unmet goals since October 7. Additionally, Israeli startups have scaled back their hiring plans for the coming year, with most reductions expected in domestic hiring.

The centrality of high-tech to the Israeli economy is exceptional on a global scale. The sector’s contribution to the Israeli economy is akin to the role of natural resources in countries reliant on commodities like oil or gas. Human capital in high-tech is thus considered “Israel’s natural resource,” and high-tech employment directly influences economic activity and growth across the entire economy. As long as high-tech employment grows faster than the population, the sector will continue to exert a positive influence on the economy.

High-tech’s importance is particularly pronounced during periods of increased state funding needs, both military and civilian. The sector’s tax contributions are vital at this time, making it crucial to maintain its high levels of economic activity. The Innovation Authority and the Ministry of Finance’s Chief Economist are expected to release a report later this year on the high-tech sector’s contribution to state revenues from taxation, detailing the impact of high-tech employees and commercial companies on state revenues.

Despite high-tech’s significance, the sector faces growing challenges. Israeli high-tech is highly dependent on multinational factors, including startup investors, multinational companies, clients of Israeli firms, international research affiliations, and supply chains, including those for defense industries. Damage to Israel’s reputation due to the current situation poses a risk to various activity indices, as seen in the recent lowering of Israel’s credit rating, which reflects foreign investors’ concerns about the future of the Israeli economy.

Given high-tech’s importance and its current challenges, alongside increasing global competition in innovation, there is an urgent need for state policy to prevent the sector from regressing into a negative trend that could harm the entire economy, as happened in the early 2000s. Past success does not guarantee future success, and the sector’s reliance on capital and reputation must be safeguarded.

Despite the sector’s centrality, state investment in Israeli high-tech is lower than in other global hubs like the US, the UK, and South Korea. The high dependence on foreign investments and the lack of a significant local safety net mean the sector may struggle during crisis periods. State policy must manage market expectations and restore Israel’s reputation as an attractive investment destination for high-tech investors. Long-term growth requires investing in quality education for all population groups nationwide and at different stages of the educational and professional timeline.

To address some of these challenges, the Innovation Authority has introduced several programs, including the “Fast Track” program for companies with short runways and the launch of the Startup and “Yozma 2.0” funds. The Innovation Authority continues to develop solutions to meet the needs of Israeli high-tech.

In conclusion, Israel’s high-tech sector has demonstrated remarkable resilience and adaptability amidst the ongoing conflict with Hamas. The proactive measures taken by the government and private sector entities have been instrumental in maintaining stability and growth. The sector’s technological advancements and global collaborations have further cemented Israel’s reputation as a leader in innovation.

Despite the challenges posed by the conflict and political instability, the high-tech sector continues to be a significant driver of economic growth and a critical component of Israel’s economy. The future success of the sector will depend on strategic investments, both from government and private sources, and a continued focus on innovation and adaptability.

The resilience of Israel’s high-tech sector amidst adversity underscores the enduring spirit of Israeli innovation and its vital role in the country’s economy. By leveraging its strengths and addressing the challenges ahead, the sector can continue to thrive and contribute to Israel’s economic prosperity.


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