Israel’s hi-tech sector sees 55% investment drop in 2023, slowed employment growth

Investments in Israeli start-ups dropped in 2023, declining 55% when compared to 2022, according to a report by the Israel Innovation Authority.

The report – The State of the High-Tech Sector in Israel 2024, is an annual overview of the sector, put out by the authority, which is the government body charged with fostering the development of industrial research and other innovation in Israel.

The sharp drop in investments in the sector, mostly impacted later funding rounds of Israeli companies and raised concern about the future of Israeli hi-tech, said the authority.

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

Hi-tech’s massive proportion of exports has been consistent in recent years with the sector’s exports making up more than 50% of Israel’s total exports in three of the last four years.

The report also found that employment growth in the sector slowed to 2.6% in 2023, which barely outpaces population growth. Continued employment growth that is faster than the population’s growth is crucial for the sector to continue to have a positive influence on Israel’s GDP, said the report.

Israeli start-ups' global shift

Local instability is also impacting decision-making by Israeli start-ups. Almost 40% of the venture capital funds polled by the authority reported that at least one company in their portfolio relocated intellectual property abroad due to this instability.

Almost 25% of these VCs estimated that over 30% of the companies in their portfolio “shifted significant operations abroad in the past year or plan to do so in the coming year, not solely due to organic growth,” the report found.Failure to meet goals, product development delays, and slowed business activity were the main impacts of the events of October 7 on companies, who reported scaling back hiring plans for the coming year during the war, said the report.

There was also a decrease in the number of job vacancies after October 7, mainly in central Israel, it found. The first quarter of 2024 saw a recovery in the number of vacancies to prewar levels, but these levels were still the lowest seen since early 2019.

The sector is “very sensitive to Israel’s international relations,” said the authority, and damage caused to Israel’s reputation could put the future of the sector at risk.

“The downgrade of Israel’s credit rating already reflects foreign investors’ concerns about the future of the Israeli economy,” it said.

The report also noted that there has not been a significant change in diversity in the sector where 65% of employees are Jewish, non-haredi men.

The authority called for the allocation of additional government funds to hi-tech.

“Despite the centrality of hi-tech in Israel’s economy, government investment in hi-tech in Israel is lower than that of countries ranked above Israel in innovation indices like the US, UK, and Korea,” said the report.

 “The sector may struggle to weather crises as it relies heavily on foreign investments and lacks a significant local safety net,” it added.

“Most hi-tech investments come from nongovernmental sources, with a significant portion from foreign investors. Therefore, the resilience of the hi-tech sector must be strengthened through diverse budgetary additions, including governmental, to address market failures and reduce dependency on external investments,” said IIA chairman Alon Stopel.

“Significant additional government investment in the ecosystem is needed in the coming years to ensure the continued growth of Israel’s economic engine,” said IIA Director General Dror Bin.

When asked about what this government funding should look like, Bin told The Jerusalem Post that government investment could reduce Israel’s dependence on foreign capital.

“Government money has two objectives. First, it is indeed a tool to get over the current slump when injecting money into companies in need of funding to continue their growth trajectory,” he said.

“Furthermore, when considering strategic growth, government investment is focused in segments with higher risk (under-financed by the private sector) as well as in incentivizing local institutional investors to invest in Israeli tech VCs and companies, which in turn will provide better market stability for the long-term,” he explained.The authority proposed several investment plans to increase funding in the sector, in the past year, including launching a start-up fund and an incubator program, he said.

The authority also recommended creating more certainty for the sector with multi-year governmental investment programs that show support over time. It also recommended investing in “quality education” for all of Israel’s populations in order to strengthen the sector.

Overall the report shows a sector at a crossroads. After rapid growth since 2018, “the question is whether, looking forward, hi-tech will return to a growth trajectory, enter a stagnation phase similar to the post-dot-com bubble burst in 2001, or, worse, shift towards contraction,” read the report.