Resilience in the Face of Conflict: The Israeli Startup Scene
4 min read
Over the past nine months, Israel’s startup ecosystem has faced immense challenges due to ongoing conflict with Hamas. Despite the tumultuous environment, conversations with founders and investors reveal a surprising trend. The tech sector is emerging stronger, with significant growth in cybersecurity and AI.
While the war has undoubtedly impacted daily operations and venture capital inflows, the Israeli tech industry is showing unprecedented resilience. This introduction speaks to the strength and adaptability of a sector that is essential to the country’s economy. It’s a testament to the dedication and innovative spirit of Israeli entrepreneurs.
Impact on Israel’s Tech Sector
When the war between Israel and Hamas started nine months ago, there were concerns about its effects on the tech ecosystem in both countries. Talking to founders and investors, a general sentiment emerged that the conflict has made the Israeli startup and VC landscape more resilient. Especially notable are the cyber and AI sectors.
The tech sector is a crucial part of Israel’s economy. As of 2022, it employed over 14% of the workforce and contributed more than 18% to the GDP, according to the Israel Innovation Authority’s 2023 annual report. It also made up half of the country’s exports. Since the beginning of 2024, 11 companies, mostly in cybersecurity and AI, have been acquired for over $2 billion with significant deals such as Nvidia’s purchases of Run.AI and Desi, and Blackstone acquiring Priority.
Challenges in Venture Capital
However, it hasn’t been all good news. Venture capital investments have declined by more than 70% year-over-year. Many employees in the tech sector were mobilized for the war effort, impacting company operations. “Several companies called many people to army duty in the first months of the war,” noted Dror Bin, CEO of the Israel Innovation Authority.
Cyber-attacks have tripled since last October, causing over $3 billion in damages. According to the Israel National Cyber Directorate, the country’s cybersecurity industry has been critical in defending against these attacks. Despite more attempts to harm Israeli entities, as Jon Medved, CEO of VC firm OurCrowd, said: “It’s simply that more of the volume of the music has been turned up, rather than we are hearing a whole new kind of composition.”
Cybersecurity and AI Investments
Cybersecurity and AI startups remain attractive to investors. Jon Medved, who runs Israel’s most active VC firm, mentioned that although the war hasn’t made things easier, private funding saw a 31% increase in the first half of 2024. Cybersecurity was a major driver, representing 52% of the private funding.
Startups like WIZ, Hailo, and AI21 Labs continue to raise funds, showcasing the importance of these sectors. However, early-stage companies in less popular areas face more significant challenges in securing investments.
Medved highlighted that despite the war, almost another billion dollars of exits were made in the cyber sector in the first quarter of 2024. Hailo raised $120 million at a $1.2 billion valuation, thanks to its AI processors for edge devices. CEO Orr Danon pointed out that raising funds has become more challenging for non-cyber and non-AI sectors.
Local Investors and Stakeholder Efforts
While the war has been challenging, startup founders and investors recognize the need to keep their operations running. Israeli startups often have a global customer base, ensuring the war doesn’t directly impact short-term sales. However, companies outside cybersecurity and AI sectors still struggle to scale.
Organizations like the Israel Innovation Authority and OurCrowd have been pivotal. The Israel Innovation Authority’s Fast Track program provided grants to early-stage startups caught in the middle of fundraising rounds. This program raised over $100 million, with an additional $150 million from the private sector. They deployed this money to 250 startups to extend their runway and help them survive during the conflict.
OurCrowd’s Resilience Fund
OurCrowd launched the Israel Resilience Fund to support startups affected by the war. Focused on essential needs like reconstruction, emergency medicines, food security, media monitoring, and cybersecurity, the fund aims to raise $50 million but has secured $17 million so far.
The fund has invested in 35 startups and waived all management fees and carried interest. This effort underscores the resilience and adaptability of the Israeli tech ecosystem during these turbulent times.
The Growing Role of AI
AI is becoming more integrated into various industries. Roey Eliyahu, CEO of cybersecurity company Salt Security, stated that most cybersecurity startups are incorporating AI to boost their products. This is helping customers defend better against threats.
Eliyahu explained that AI applications in cybersecurity could range from more cost-effective code development to better penetration testing. However, he cautioned that hackers are also using AI, making it a double-edged sword.
Jon Medved believes the global tech industry is still in the early stages of AI for cybersecurity. While AI technologies are advancing, both defenders and hackers will continue to leverage these tools.
Resilience Amid Conflict
Despite the ongoing conflict, Israel’s startup ecosystem has shown incredible resilience. Founders, investors, and stakeholders are navigating challenges while remaining committed to innovation and growth.
The adaptability demonstrated by entities like the Israel Innovation Authority and OurCrowd reveals a robust support system. This ensures continued support for promising startups, even during war.
Moving forward, the Israeli tech ecosystem is likely to build on its strengths in cybersecurity and AI, setting a benchmark for resilience in times of crisis.
In conclusion, despite the numerous challenges posed by the conflict, Israel’s startup ecosystem has displayed remarkable tenacity. From significant strides in cybersecurity and AI to targeted support from local investors and accelerators, resilience is a clear hallmark of this tech community.
Moving forward, these sectors are likely to continue leading innovation, demonstrating that even in difficult times, determination and ingenuity can pave the way for success. Israel’s startup scene stands as a testament to the power of resilience and innovation in the face of adversity.
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