With Israel now simultaneously fighting Hamas in Gaza, Hezbollah in Lebanon, Houthi rebels in Yemen, Iran-backed terrorists in Syria and Jordan and getting prepared to engage militarily with Iran, questions are being raised about the capacity of its mighty tech-industry to withstand a wider war.
Many leading international publications and think tanks are wondering how Israel’s tech –sector, which accounts for over half of the country’s exports, a fifth of GDP—and a fifth of the reservists in the Israel Defence Forces (IDF), is managing to save the war-hit economy.
The point that emerges from their analyses is that the present situation may not last long but at the moment technologies related to defence and security are showing remarkable growth and greater signs of resilience than expected, thereby not only sustaining the country’s highly valued tech-base but also adding an edge to it.
It may be noted that Israel’s tech industry represents 18% of GDP, compared to 10% of GDP in the U.S. and 6% of GDP in the European Union. The sector makes up 50% of all exports and contributes 30% of all tax revenues domestically.
Israel is said to be an entrepreneurial powerhouse and a hotbed for pioneering technologies, profitable business opportunities, and high investment returns. It is renowned as being the “start-up nation”, given the fact that it is the world leader for number of start-ups per capita—“with 2,000 start-ups founded in the past decade, another 3,000 small and medium-sized start up and high-tech companies, 30 growth companies, 50 large technology companies, and 300 multinational corporations R&D centres".
Another distinct feature of the Israeli technological ecosystem is that Israel is ranked first in the world in R&D expenditure per capita. Israel invests about 6 (six) of its GDP in R&D, highest in the world.
Israel also has the highest percentage of engineers and scientists per capita in the world, and has one of the highest ratios of university degrees and academic publications per capita.
Add to this the fact that due to the mandatory military service, the educated youth also receive advanced technical training during their conscription – years. It is therefore not surprising to come across the stories of the likes of Ophir Dror , one of the founders of a newly formed Israeli cyber start- up, who was drafted to the Israeli army on his birthday last year — October 7.
“For four or five months, I was not available. I was in Gaza, I couldn’t even jump on Zoom calls, so it was just super hard not to be there and be part of a company I just founded and that came out of stealth while I wasn’t there,” Dror told The Times of Israel. “We were four founders and four employees at the outbreak of the war. As my army unit had a lot of missing equipment, one of the founders started fundraising. And for around a month and a half, the office was not really doing cyber security but buying various supplies, packing and sending us boxes.”
Despite all this, Lasso Security won the confidence of investors, raising the funds it needed to develop its product, and almost tripled its workforce during the war period.
Lasso is just one example of Israel’s economic and national resilience. There are many reports that for the past year, start-up founders, investors, and employees have transformed, and adapted. They all attempted to keep fuelling Israel’s tech powerhouse, a major driving force for the growth of the country’s economy.
It is no wonder therefore why despite its involvement in multiple wars, Israel’s tech sector, which depends considerably on foreign investment, still ranks third as a global hub for investments, attesting to its resiliency. Recent data for 2024 shows that there is already more than $4.5 billion invested in the first six months, and the country seems to be on track for a $10 billion year which represents almost a 50% increase. Such a trend is rare in the world.
Reports suggest that despite the perception that global sentiment is turning against Israel, foreign investors continue to back the country. Foreign investors still represent 46% of the 217 active venture funds in Israel, according to the Start-up Nation Central report. They participated in 93 per cent of all funding rounds in the first half of 2024, marking a seven-year high.
It is important to note here that the most prominent among the sectors where the investments are coming to happens to be cyber security that attracted 52 per cent of private funding in the first half of 2024. Cyber-security mergers and acquisitions totalled $1.5 billion across nine deals. Israeli companies were reportedly involved in 13 of 14 global cyber security acquisitions during the same period.
According to Jon Medved, CEO of OurCrowd, Israel's high-tech industry, “Cyber is hotter than ever”. Apparently, Google had expressed interest in buying Wiz for $23 billion, but the company declined the offer after its $12 billion valuation just before. Had the deal gone through, it would have been Google's largest acquisition ever and the biggest in the cyber security sector, Medved has pointed out, adding, "Cyber-security is important; people like Google say so. And Israel dominates here. We are clearly number one".
The other key area is defence, where investors are said to be eager to get involved. As Medved says, Israel is one of the top five defence technology exporters in the world, and “many of the country's entrepreneurs come from the defence sector, ensuring the technology remains highly relevant”.
According to him, although the recent surge in interest in defence tech is likely driven by the war between Russia and Ukraine and instability in Europe, Israel's on-going battle against Hamas and other terrorist organisations over the past year has also played a role. When Israeli reservists return to their high-tech jobs, they bring valuable insights that help them improve technologies based on what was helpful in combat.
The linkage between the Israeli tech and the country’s military, has always been very strong. The military has not only been a buyer of high-tech products but also a supplier of entrepreneurs. Such ties between the two, as the Economist magazine notes, help explain why Israeli tech centres rely less on things like mobile apps and more on cutting-edge innovations that may come out of, or be useful for, the military”.
Increased defence spending over the past year in the country has contributed towards the resilience of many Israeli tech firms. In fact, there are examples of firms like Elsight , which was specializing in software to inspect buildings and other infrastructure using drones and robots, now is focusing only on defence and earning over half of their revenue from military contracts, up from less than 5% before October 7 last year.
For Medved, Israel is also growing in the artificial intelligence sector, which "reflects a widespread belief that AI is the future of everything." There have been large investments in 94 different AI companies.
There is, of course, another side of the story. There are many analysts who argue that that the prolonged wars that Israel is engaged with have started affecting , and that is not insignificant. A survey published in June by the Israel Advanced Technology Industries “showed 65% of venture capital funds reported challenges due to identifying as Israeli and more than 30% of Israeli companies and start-ups have moved activity abroad”.
There are also reports of some tech firms showing signs of strain and going for retrenchment of the workers. Israeli government bonds have been downgraded two notches by Moody’s, a rating agency.
Even Medved, who says that he is an innate optimist (“if you are not optimistic, you should not be a venture capitalist"), admits that "if we don't put this war to bed sooner than later," things could change.
But, for now, "I am proud of the way Israel's tech ecosystem leadership has handled itself and been incredibly resilient ", he says. It seems obvious that the defence and security related tech firms are the most important sources of optimism for Israel’s wider economy at present. It remains to be seen how long it will last.
By Prakash Nanda
(prakash.nanda@hotmail.com)
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