The war between Israel and Hamas in October had a significant impact on the tech ecosystems in Israel and Palestine. However, nine months later, it is clear that the conflict has made the startup and VC ecosystem in Israel more resilient, particularly in the cyber and AI sectors.
The technology sector is a crucial part of Israel’s economy, employing over 14% of the workforce, contributing more than 18% of the GDP, and accounting for half of the country’s exports. In 2022, 11 companies, primarily in cybersecurity and AI, were acquired for over $2 billion. Notable acquisitions include Nvidia’s purchases of Run.AI and Desi, as well as Blackstone’s acquisition of Priority. Additionally, cloud security unicorn Wiz, which recently raised $1 billion, is reportedly in talks for a $23 billion acquisition by Google.
However, venture capital investments in Israel have seen a decline of over 70% year-over-year. Many tech companies mobilized their employees into the reserves for the war effort, impacting human capital significantly. The education system was also shut down, causing people to stay home with their kids. These factors have made it tougher for early-stage startups without revenues to raise funds.
Furthermore, cyber-attacks targeting various sectors have tripled since last October’s attacks, costing Israel over $3 billion. However, Israel’s cybersecurity industry has played a crucial role in defending against these attacks, driven by skilled talent and a robust entrepreneurial culture.
Despite the challenges, venture capital grew in the first half of 2024, with private funding increasing by 31% to $5.1 billion. The cybersecurity sector played a crucial role in this growth, representing 52% of the private funding. Startups in popular sectors like cyber and AI continue to secure funding, while early-stage companies in less-trending areas face more significant challenges.
The war did not simplify the life of the average Israeli investor, with instances of companies having key personnel serving in the reserves. Many global investors also preferred to wait for the war to end before committing large sums of money to Israel. However, the fundraising environment has become significantly more challenging for founders outside the cyber and AI sectors.
Efforts from organizations like the Israel Innovation Authority and OurCrowd have been crucial during these times. The Israel Innovation Authority launched a program called Fast Track to provide grant money to early-stage startups caught in the middle of fundraising rounds. The program raised over $100 million, with an additional $150 million provided by the private sector. OurCrowd launched the Israel Resilience Fund to support startups affected by the war or develop solutions relevant to Israel’s immediate needs.
AI has become more intertwined with various industries, including cybersecurity. Most cybersecurity startups are integrating or adopting AI capabilities to enhance their products and better defend against cyber threats. However, caution is advised, as hackers are also busy deploying AI to make us more vulnerable.
Overall, while the war had its challenges, the tech ecosystem in Israel, particularly in the cyber and AI sectors, has shown resilience and continues to attract investments. Efforts from organizations and the integration of AI in various industries contribute to this growth.
