Israel’s startup scene shows resilience despite nine months of war

When the war between Israel and Hamas broke out last October, we investigated its potential impact on the technology ecosystems in Israel and Palestine. Nine months later, the prevailing opinion in Israel, based on my conversations with founders and investors, is that the conflict has made the startup and VC ecosystem more resilient, especially the cyber and AI sectors.

The technology sector is a key pillar of Israel’s economy: according to the Israel Innovation Authority’s 2023 annual report, the sector employed over 14% of the workforce in 2022, contributed more than 18% to GDP, and accounted for half of the country’s exports.

Since the beginning of the year, 11 companies, primarily in the cybersecurity and AI space, have been acquired for over $2 billion. Notable acquisitions include Nvidia’s acquisitions of Run.AI and Desi, and Blackstone’s acquisition of Priority. In addition, cloud security unicorn Wiz, which recently raised $1 billion – the largest funding round of any Israeli startup – is reportedly in talks to be acquired by Google in a deal valued at $23 billion.

However, the situation is not entirely rosy. Venture capital investment in Israel has fallen by over 70% year-on-year (from 2022 to 2023), and many technology companies have mobilized their employees into the reserve for the war effort.

“During the first months of the war, several companies called up many people for military service, including about 10% of the tech sector workforce,” said Dror Bin, CEO of the Israel Innovation Authority, in an interview with TechCrunch. “In addition, others were employed during the first few weeks and the education system was closed, so people stayed at home with their children. This situation had a significant impact on human capital. It became more difficult for early-stage startups without revenue to raise money.”

In addition, cyberattacks on various sectors, including managed service providers, communications, finance, and health, have tripled since the attacks last October. According to Gaby Portnoy, Director General of the Israel National Cyber ​​Directorate, these attacks have cost Israel over $3 billion since last October. However, the country’s cybersecurity industry, backed by skilled talent, graduates of the Israel Defense Forces’ technical units, and a robust entrepreneurial culture, has played a critical role in fending off these cyberattacks.

Some say the war has had minimal impact on Israel’s ongoing need to protect itself from hackers from around the world. “Obviously there are more people than ever trying to harm us and attack Israeli organizations, the government and companies, but that’s simply because the music has been turned up louder rather than us hearing a whole new kind of composition,” Jon Medved, CEO of VC firm OurCrowd, told TechCrunch.

Cybersecurity and AI startups continue to be popular with investors

Medved, who runs Israel’s most active venture capital firm, said the war has certainly not made life easier for the average Israeli investor. Not only are there cases of key personnel in companies serving in the reserves, as Bin described, but many international investors would rather wait until the war is over before giving large sums of money to Israel.

Despite this, venture capital grew in the first half of 2024, which bodes well for the ecosystem. Private funding in Israel increased 31% to $5.1 billion in the first half of 2024, with the cybersecurity sector playing a crucial role, accounting for 52% of private funding; global trends in cybersecurity are driving this increased activity, according to Startup Nation Central, an NGO that covers the Israeli tech ecosystem.

Startups in popular sectors such as cyber and AI continue to receive funding, with companies such as WIZ, Hailo and AI21 Labs underscoring the importance and attractiveness of both sectors to investors. At the same time, early-stage and growth-stage companies in less trendy areas face greater funding challenges, the report said.

“Despite the ongoing war, nearly another billion dollars were drawn down in cyber in the first quarter of 2024,” Medved noted. “Cyber ​​is clearly the leading sector for Israeli technology and investment, and it is a gift that keeps on giving. One can hope that AI will rise strongly with major technological breakthroughs and funding, especially at OurCrowd, where we believe in this revolution with over 80 investments in AI to date.”

Hailo, one of OurCrowd’s portfolio companies, is the flagship AI company in Israel. The company makes AI processors for edge devices, known for their high performance at low cost and low power consumption. Hailo recently raised $120 million at a $1.2 billion valuation, securing the funds amid an escalating dispute (according to CEO Orr Danon, fundraising for the AI ​​chip processor began and completed between last October and this April).

Speaking to TechCrunch, Danon mentioned that he hasn’t noticed a change in global investor sentiment in recent months, which could be attributed to the ease of fundraising and Hailo’s position as an AI startup. However, he noted that the fundraising environment for other founders, especially those outside the cyber and AI sectors, has become significantly more difficult compared to a year and a half ago.

“It’s hard to say how much of this is due to the war and how much is simply part of the economic cycle. Overall, things are recovering, but only in certain areas; for example, the cybersecurity sector is doing exceptionally well,” Danon added.

How local investors and other stakeholders intervened

Although the war is a major concern, startup founders and their investors know it is crucial to keep their businesses running. Most Israeli startups have a global customer base and many go-to-market teams are based in the US, so the war will not have a direct impact on revenue in the short term. However, startups outside the cybersecurity and AI sectors are having a harder time raising funds to scale their operations.

The efforts of organizations like the Israel Innovation Authority and OurCrowd have proven crucial during these times. For example, the Israel Innovation Authority launched a program called Fast Track to provide grants to young startups that were not yet making a profit and were in the middle of funding rounds with local and global investors before the war began. According to Bin, the program raised over $100 million, with another $150 million coming from the private sector, all of which was disbursed to 250 young startups.

“We realized that these companies did not have enough funds to continue operating, and we did not want to see hundreds of great companies go under,” the agency’s head said. “In total, we provided $250 million to these companies in three months, and by the end of January, these startups knew they could get funding and continue operating. The idea was to extend their runway by more than a year so they could survive during the war and start fundraising again without pressure.”

OurCrowd, for its part, launched the Israel Resilience Fund last December to support startups affected by the war or developing solutions relevant to Israel’s immediate needs, such as reconstruction, emergency medicine, food security, media monitoring and cybersecurity. The fund is expected to raise $50 million, but has secured $17 million in commitments as of March. Notably, OurCrowd, which has invested in 35 startups through this fund, has waived all management fees and profit sharing. The fund will

The use of AI is now more intertwined with various industries than ever before. Roey Eliyahu, co-founder and CEO of cybersecurity unicorn Salt Security, told TechCrunch that most cybersecurity startups are integrating or adopting AI capabilities to enhance their products and thus enable customers to better defend against cyber threats. He added that the API security startup is also incorporating generative AI to help customers quickly gather and understand threat data.

“We have been using ML and big data for years to analyze API behavior and detect threats that traditional rules and signatures cannot prevent,” noted Eliyahu. “Recently, we developed an AI assistant that users can interact with for a more streamlined experience, similar to using ChatGPT versus a traditional Google search.

While AI applications in cybersecurity can range from supporting more cost-effective code development to assisting with penetration testing, Medved believes the global technology industry is still in its early stages of developing AI for cybersecurity and advises caution.

“This is an incredibly sensitive topic and you have to remember that not only are the good guys using AI to protect us, but hackers are also busy using AI to make us more vulnerable and steal our money and our identities,” Eliyahu noted.