Uncertainty Over Judicial Overhaul Triggers Exodus of Israeli Startups

The Israeli startup landscape, renowned globally for its innovation and entrepreneurial spirit, is experiencing major changes in the wake of uncertainty around a proposed judicial overhaul. Nearly 70% of Israeli startups are taking proactive measures to relocate parts of their operations and finances abroad, according to a survey by Start-Up Nation Central, a non-profit tracking the local tech ecosystem.

Survey Findings: The Tech Exodus

The comprehensive survey, which included 734 startup founders, CEOs, and venture capital managing directors representing 521 firms in the Israeli tech ecosystem, found that 68% of the surveyed companies are implementing “legal and financial steps”. These steps include:

  • Withdrawing cash reserves
  • Moving their headquarters outside of Israel
  • Relocating employees
  • Conducting layoffs

Start-Up Nation Central CEO Avi Hasson noted the serious implications of this shift: “Companies and investors are taking active steps to move activity away from Israel and this behavior has increased significantly over the past three months. Concerning trends like registering a company abroad or launching new startups outside Israel will be hard to reverse.”

The Trigger for the Exodus: The Controversial Plan

The government’s plan to weaken the country’s judicial system has sparked controversy, with 78% of surveyed startup executives stating that it negatively impacts their operations. Among the venture capital investors surveyed, 84% said the plan has a negative influence on their portfolio companies. The judicial overhaul proposition has sparked widespread protests and strikes involving tech companies, leading to concerns that it undermines the system of checks and balances, threatens the democratic character of the country, and could potentially drive away foreign investment.

Effects on the Israeli Economy

The Israeli tech ecosystem is crucial to the nation’s economy, generating about 16% of GDP, more than 50% of exports, and contributing over 25% of the total income tax. Yet, this sector is under threat from these proposed changes. Statistics from the survey underscore the magnitude of the situation:

  • About 22% of the companies have moved cash reserves outside of Israel to diversify risk.
  • Around 31% intend to withdraw funds in the future.
  • 19% of the surveyed startups laid off employees.
  • 8% of startups have started the process of moving their headquarters outside of Israel.
  • 29% intend to do so in the future.
  • About 67% of investors are investing or considering investing in foreign companies.

The Impact on Investments

The political uncertainty surrounding the proposed changes to the judicial system is also influencing investment decisions, driving investors to increasingly back foreign companies. Data from venture capital firm Viola shows that fundraising by Israeli tech firms in the first half of the year plunged 73% to $3.2 billion versus $12 billion during the same period in 2022. This trend contrasts with initial signs of recovery in the US technology sector. With the ongoing political and social instability in Israel, there is concern that a recovery in the global tech industry may bypass the Israeli economy.

Looking to the Future

The survey predicts that recovery in the US will occur more substantially and at a faster pace than in Israel, with 65% of investors believing the US is already seeing signs of recovery or will within six months, compared to only 12% in Israel. “There is a significant lack of clarity regarding the expected horizon of recovery in Israel,” according to the survey. It highlights the precarious situation of the tech industry in Israel, a nation once hailed as the “Start-Up Nation”.