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Tuesday, July 23, 2024

Israeli High Tech is Proving Its Resilience as War Rages On

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By: Sara Miller

Eight months into Israel’s war against the Hamas terrorist organization in Gaza, and the country’s high-tech sector is proving its hallmark resilience and innovation – still drawing in investment and realigning itself to this current reality.

Indeed, a new in-depth report from the Israel Innovation Authority, the branch of government dedicated to promoting the high-tech sector on the global stage, shows that the sector is not in the dire situation feared by industry elders at the start of the war sparked by Hamas’ heinous attack on southern Israel on October 7.

“The picture it paints is quite a good one, taking into account the fact that 2023 was a horrible year, with regard to the political instability [over proposed judicial reforms] and the war in the final quarter that’s ongoing,” IIA Chief Economist Dr. Assaf Kovo says of the report, dubbed the “State of the High-Tech Sector in Israel 2024,” which polled hundreds of members of the industry in Israel.

“We expected results to be much worse, but frankly, in most of the parameters, Israeli high-tech managed to grow,” he tells NoCamels.

Perhaps unsurprisingly, one field in the nation’s high-tech sector that does indeed appear to be thriving in wartime is military technology.

Over the past eight months, Israel has displayed its prowess in fending off wave after wave of aerial attacks from Hamas and its allies in Gaza, Hezbollah in Lebanon, the Houthis in Yemen and even these groups’ main sponsor Iran.

In April, Iran launched an unprecedented 300-missile strike on Israel, almost all of which were felled in midair, an equally unprecedented feat that was perceived as an excellent showcase of the Israeli missile defense system.

“There was very significant proof yesterday of the technological capabilities of the State of Israel, behind which are the defense companies,” Sigma Investment House CEO Yair Shani told the Globes business website the day after the attack by Iran.

“Countries to which we want to supply defense technology will now be eager to buy, after seeing how the country is protected. This is the best sales promotion. Iran has done excellent sales promotion for Israel’s arms companies. This will give a very big boost to the industry, of course focusing mainly on defense.”

In fact, Israeli defense firms have in recent months announced a slew of new foreign collaborations in countries keen to bring their innovative technology to their own shores.

These collaborations include the sale of Sentrycs’ counter-drone technology, which will be used at multiple military bases across Europe, and a $50 million contract with an unnamed international client for Elbit’s new air defense system Red Sky, which protects against low-altitude aerial threats.

Sentrycs technology also found favor in the UK, which has included the Tel Aviv-based startup in its National Protective Security Authority Catalogue of Security Equipment (NPSA CSE), following a rigorous assessment of its Detection, Tracking and Identification (DTI) capabilities.

And in January, Israel Aerospace Industries (IAI), which makes the Arrow missile defense system, announced the launch of an innovation center in Virginia to expand its business activities and presence within the US.


Circling The Wagons

The relative stability of the sector is in no small part due to those industry elders – the IIA among them – who in late 2023 scrambled to shore up a sector whose workforce was decimated by emergency military call ups and the threat of evaporating investments, based on the premise that wartime brings an uncertainty that is abhorred by market forces.

“What we did as the Innovation Authority, as a part of the Israeli government, was trying to make government funds available to startups, but specifically to startups that had short runways of less than six months and that had significant assets, whether they are technological or business assets, in order to help them just get through this period of the war,” Kovo explains.

“Assuming,” he clarifies, “that the war is going to end eventually and that those companies will be able to raise funds from private investors.”

Others who worked to keep the entire enterprise afloat include OurCrowd, the country’s largest online investment platform, which in November launched its Israel Resilience Fund to support Israeli startups. By late March, the fund had received more than $17 million in commitments and planned to invest in around 40 companies by the following month. New York-based VC 97212 Ventures also recently closed a $20 million fund for investment in Israeli startups in the pre-seed or seed stage.

Kovo does acknowledge a downturn in investment since the start of 2023, but points out that the levels of fundraising for the first five months of 2024 are not too dissimilar to the sums raised in 2018 and 2019.

The boom in investment of 2021 and 2022 should actually be viewed as an anomaly, he explains. Because while it seems there has been a massive downturn in investment in the past 18 months, one can draw more or less a straight line from 2017 levels of investment to today – with a very visible spike for the boom years.

Indeed, with $1.46 billion invested in May alone (the second consecutive month to raise over $1 billion collectively), the sector has pulled in a total of $4.1 billion in funding since the start of the year – a little over half of the $8 billion raised in total in 2023, but with seven months of 2024 still to go.


Danger Signs

The IIA report does sound a note of caution, however, in particular with regards to employment within the sector. It found that while the industry employed a further 10,000 people in 2023, bringing the sector’s workforce total to almost 400,000, the 2.6 percent increase from 2022 “barely outpaced” population growth rates and raised a potential red flag about future expansion.

Acknowledging the issue, Kovo says that companies had been more optimistic about growing the workforce in Israel and abroad back in November, just one month into the war. But, he explains, as the conflict lasted into Q2 of 2024, attitudes began to shift.

“In March and April, it sort of turned into pessimism,” he says. “They think that they won’t be going to recruit any employees in Israel in the upcoming year.”

Even so, he clarifies, while there has been a reduction in the rate of Israeli companies’ new hires abroad compared to other years, it is still an upward trend.

“The increase in employees is [slowing], but it’s still positive,” he says.

The high tech industry remains crucial to Israel’s economy, in 2023 comprising a shade under 20 percent of the country’s total GDP – approx. $92.2 billion – and 53 percent of its exports, worth $73.5 billion.

And with the release of the IIA report, both the authority’s chairman Alon Stopel and president Dror Bin stressed the urgency of increased government investment in the sector to ensure its survival should the country again face challenges of the magnitude of the current war.

“Israel’s government budget for R&D is relatively low,” said Stopel, explaining that most of the investments come from non-governmental sources, with a “significant portion” from abroad.

“The resilience of the high-tech sector must be strengthened through diverse budgetary additions, including governmental, to address market failures and reduce dependency on external investments,” he said.

Celebrating that resilience, Bin also warned that “high dependency on foreign investments” demanded a reassessment of how Israel directs resources to the sector.

“Despite numerous challenges in 2023, Israeli high-tech continued to grow,” Bin said.

“However, past success does not guarantee future success.”


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