A recent report by Calcalist reveals a grim picture, with international investment in Israeli startups plummeting by 23%. This disturbing trend highlights challenges and critical junctures for our nation’s economic and technological future. In times of great external uncertainty, such as the impact of geopolitical tensions and recent conflicts, the need for strong local support for startups is essential.
Our startup is more than just an economic organization. They are the lifeblood of our nation’s innovation and resilience, and are a powerful and key driver of the continued prosperity of Israel’s economy. The success of our technology sector also provides critical funding to support Israel’s security needs in an increasingly turbulent region.
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Avichay Nissenbaum of Lool Ventures
(Photo: Mariana Stebeneva)
As we well know, there are many investors who not only value the innovation, talent and resilience of Israel’s technology sector, but also feel a strong affinity for Israel. But first and foremost, they have great returns, and as we know, returns are what moves and motivates investors.
Nevertheless, many investors who are not very familiar with the Israeli technology landscape, or who have invested only occasionally in Israeli startups, prefer to wait and see how current events unfold. It may be a step back. Political “judicial reforms” throughout 2023, followed by war over the past six months, have created uncertainty and made investors hesitant. This poses a risk to the VC community, especially in the early seed stages, as it threatens to seed the next generation of Israeli startups.
Once international interest is waived, the responsibility to fill this void falls directly on the Israeli government, Israeli institutional investors, venture capitalists, and angel investors. Together, these must form a solid foundation for our nation’s technological capabilities to continue to grow, even in the face of political and security headwinds.
Why should the government intervene?
Given the challenges posed by declining international investment, the Israeli government must play an active role in fostering the country’s high-tech startup ecosystem. Here’s why government intervention is especially essential to preserving and strengthening the high-tech sector’s vital role in Israel’s economy.
1. Sustainable economic growth:
The high-tech sector is the cornerstone of Israel’s economy and is world-renowned as the “Start-up Nation.” The sector not only drives innovation but also contributes significantly to GDP and exports. Following the recent downturn in international investment, government action is essential to maintain this momentum and ensure continued growth and development.
2. Stabilization of the investment environment:
Government policies are needed to reassure international investors and create a more stable and attractive investment environment, and external uncertainties such as geopolitical tensions and economic fluctuations may undermine investor confidence. is essential at certain times. These include tax cuts, regulatory streamlining, and a direct investment fund to encourage domestic and foreign investors to get involved in Israeli high-tech startups.
3. Close the early-stage investment gap:
The decline in early-stage funding has had a particularly negative impact on fostering the innovation that has kept Israel at the forefront of technology. Government-backed venture funds can provide these startups with the capital they need to support their fragile early stages and ensure they have the opportunity to grow into stable, profitable companies.
4. Promoting sectoral strategic interests:
The Israeli government could target aid to areas of strategic importance to its national interests, as has been done in the past for cybersecurity. One obvious area where Israel is lagging behind is AI, which is evolving at the speed of light. AI is driving further changes in many other fields, including robotics, digital health, industrial automation, biotechnology, and space technology. Many of these fields often require intensive research and development and long-term investments, and their risks may make them not immediately attractive to retail investors. profile, but is important to Israel’s strategic economic and innovation leadership goals.
Important role of institutional investors
Although Israeli institutional investors such as large insurance, pension and savings investment funds manage large sums of money, investment in Israeli venture capital remains modest relative to its capabilities, and compared to its U.S. peers in general. This is far less than the typical investment amount. Israeli institutional investors will invest an estimated $143 million directly in Israeli high-tech companies in 2023, a significant 70% decrease from $486 million in 2022, according to a report from the Israel Innovation Authority. did. The number of transactions also decreased by 55%. This reduction is particularly concerning at a time when it is more important than ever to strengthen economic resilience through technology and innovation.
These institutions are uniquely positioned to reverse this downward trend and drive significant growth within the startup ecosystem. By increasing their venture capital investments, institutional investors can be a beacon of confidence and encourage commitment from other investors. Their involvement not only brings much-needed financial stability and increases available capital, but also allows startups to expand their operations, enhance technological advancements, and accelerate market entry. Probably. This type of support is essential to keeping the tech industry vibrant and dynamite, especially during economically challenging times. It is also an opportunity for these institutions to cultivate portfolios that include businesses with high growth potential and foster a healthier and more diverse economic environment. Once again, the role of governments is crucial in encouraging institutional investors to actively participate in the technology sector. This time we need to focus on the early stages and adjust incentives accordingly. The government appears to be working on such a plan, which is in the works but not yet clear.
Venture Capitalists and Angel Investors: Catalysts for Growth
The vibrancy of Israel’s startup scene is maintained not only by institutional support but also by the dynamic contributions of venture capitalists and angel investors. According to data from Startup Nation Central, 220 private investment rounds have been raised since October 7th, totaling a staggering $3.1 billion. This highlights the important role investors play in driving our nation’s entrepreneurial efforts.
Venture capitalists and angel investors are often on the front lines, identifying and nurturing high-potential startups at their most vulnerable stages. Their investment is more than capital. They provide strategic guidance, mentorship, and access to international networks essential to expanding your business globally. In an era of fluctuating external investment, the continued commitment of these local investors stabilizes our startup ecosystem and moves it forward. To that end, the government solicited proposals from Angels clubs and approved the so-called “Angels Act” last year. These are positive actions, but sadly only time will tell if they will have the necessary impact at the required pace.
Although we are concerned about the continued influx of foreign investment due to the geopolitical situation, we at lool Ventures remain confident and bullish on Israeli innovation and are actively investing in Israeli innovation starting with our third fund. We are making investments. We recognize and embrace our role in this ecosystem, which is to continue to foster Israeli innovation while generating the highest returns. During this period of uncertainty, the Company has issued two term sheets since October 7th and completed another investment at the same time. Our actions embody our belief that supporting pioneering technology ventures is more important than ever. We encourage continued engagement from our industry peers, both venture capital and angel investors, to drive growth and innovation, not only improving individual companies, but also strengthening the Israeli economy as a whole. We are aiming for
This is a critical moment for Israel’s economic and technological future. The recent decline in international support should serve as a wake-up call that the time has come for an integrated investment strategy that strengthens our startup ecosystem. The Israeli government has a vital role to play. This intervention will not only fill the immediate gap created by the decline in foreign investment, but also prepare the foundations for sustainable growth and resilience in the high-tech sector. This strategic engagement will ensure that Israel’s technology ecosystem continues to thrive and propel the country’s economy forward in the face of global uncertainty.
Governments, institutional investors, venture capital and angel investors need to work more closely together to create a strong support system that can withstand global investment fluctuations.
Every aspect of our investment community plays a unique and important role. By adjusting your strategy and increasing your efforts, you can ensure that your startup not only survives but thrives. The actions we take today will determine the strength and success of our national economy tomorrow.
Avichai Nissenbaum is a general partner at lool Ventures, an Israeli early-stage fund.
