Whither Israel? Israeli tech players comment on the impact of the country’s convulsions

As we covered in April, Israel has become convulsed by “reforms” to the judiciary, proposed by the Benjamin Netanyahu-led government, which passed yesterday. There is now deep concern that the judiciary’s 75-year history as an institution independent and separate from the government could be limited by the ruling political party of the day. Critics of Netanyahu say the changes remove important checks on the executive’s authority and could be open to abuse. Proponents say the reforms will cool the judiciary’s alleged “overreach.”

Yesterday, Israel’s parliament ratified the first bill, after compromise efforts collapsed and opposition parties walked out in protest.

Public demonstrations against the amendment have been going on for weeks, and reached a crescendo yesterday, with protesters being dragged away from the parliament by police. Thousands took to the streets across the country, blocking highways. The opposition and other groups now plan to appeal against the law at the Supreme Court.

What will be the effect on Israel’s “Startup Nation” reputation? Is one of the world’s most innovative tech ecosystems now under threat from political strife?

It’s almost certainly too early to tell what the long-term effects will be, but there are signs that hi-tech players are moving fast to reduce the impact on their businesses.

Just ahead of this week’s parliamentary vote, tech industry nonprofit Start-Up Nation Central conducted a survey of participants in the Israeli venture and hi-tech market.

It found that 22% of companies were already diversifying their cash reserves outside of Israel, and 37% of investors said their portfolio companies have withdrawn some of their reserves and moved them overseas. Some 8% of companies reported that they had already begun the process of relocating their headquarters, and 29% indicated their intention to do so in the near future.

Even more startling, almost 70% of Israeli investors said their portfolio companies intended to relocate their headquarters in the future and register in another country.

The uncertainty caused by the judicial “reforms” are also leading to staff layoffs, with almost half saying they have already laid off between 10% and 30% of their employees, and just over 20% of companies are planning to relocate their employees away from Israel.

We asked entrepreneurs, investors and ecosystem players in Israel to comment on the situation. Here are their thoughts:

The tech industry is coming back to the days of the early 2000’s where Israeli tech founders needed to relocate to the US in order to raise funds, needed to incorporate in the US and eventually building companies outside of Israel with some R&D resources in Israel.

This is already happening. Tech engineers are leaving — some to “temporary” places like Greece and Cyprus. Some for good, to Europe, to the UK, Portugal, Spain, and US. The recent events are the too much for them to carry — the cost of living, heavy taxation and a government that invests a minimum amount in basic infrastructure, such as transportation and education.

The other issue is that we will see more mature companies shutting down, if they are not performing extremely well and they are incorporated in Israel. The risk factor for investors is just too high, they’ll miss the opportunity to raise additional funds.

The so called “reforms” are already having a devastating impact on the Israeli startup industry. Most new startups are registering as American companies along with the IP. Investments have slowed as well. Most importantly though, the local talent — the most important ingredient of “Startup Nation” — is seeing increasing numbers looking to move elsewhere in the short, medium and long term. Many of us can’t see ourselves raising our children here under a non-democratic regime, and messianic economic policies.

You need to differentiate between short term and long term effects. Short term it will most definitely affect Israeli tech. It already has. The Shekel is down, Israeli investors are tightening their operations, and global investors are more reluctant to deploy capital in Israel.

The thing is, in my opinion, as someone who is NOT pro the reform in its current format, this is the definition of a self-fulfilling prophecy. The protestors are yelling day and night that this reform will transform Israel into a dictatorship, which is ridiculous and baseless. They are yelling all day long how this is the end of Israel, which it is not.

So it’s no surprise that investors are being cautious with Israel. These protesters are claiming the economy will crash, so they are crashing the economy.

Long term, on the other hand, this will not impact Israeli tech. In one year from now, Israel will be stronger than ever. More investments, more unicorns, and more IPOs.

A VC from a prominent fund in Israel who asked not to be named

First I think (and hope) that current modifications to the Israeli law – are temporary and will be restored once a new parliament is re-elected, in 3.5 yrs time. In the meantime, we have an uncomfortable situation. I do believe that entrepreneurs will now relocate to the US with greater ease. But the main activity of R&D will still remain in Israel. This can be good news for the scalability of Israeli startups. One of the issues I’ve experienced in recent years is a lack of willingness of founders to relocate to the US – which many times held back their growth.

There are obviously more doomsday scenarios. But these were promoted in order to put pressure on the current government and coalition. I believe it actually helped in stopping most of the modifications, but not all – as we saw yesterday. I believe that the Nasdaq index has a much bigger impact on Israeli hitech than any thing else.

While the ongoing reform of the legal system is imperative to establish a robust and independent court that upholds the laws passed by the Knesset, it is equally essential to strike a balance that respects the diverse perspectives and values within our society. We must ensure that this reform process takes into account the concerns and interests of all stakeholders, including the tech industry, which holds immense significance in Israel’s economy and innovation landscape.

As the government forges ahead with its reforms, it is natural for some apprehensions to arise about their potential impact on the tech sector. It is incumbent upon us to carefully evaluate these changes and consider their implications for the tech companies operating in Israel… I also want to acknowledge that Benjamin Netanyahu, commonly referred to as Bibi, has demonstrated mastery in handling the economy during his time as Prime Minister. His policies and leadership have been instrumental in driving Israel’s economic growth and stability. Therefore, I have confidence that under his guidance, the necessary measures will be taken to support the tech industry and foster an environment that encourages companies to remain in Israel.

Though I refrain from speculating on whether tech companies will leave or stay, my belief in the strength of Israel’s economy and the tech sector leads me to be optimistic about their continued presence and success within our nation. I am not worried about companies leaving; rather, I believe the opposite is true — that the tech industry will remain robust and continue to thrive.