CEOs, venture capitalists and other interested parties within the Israeli start-up industry want to know whether the government’s planned legal reform, which would undermine the High Court of Justice’s authority, will hurt foreign investment in local hi-tech.
“It’s an easy answer: Definitely,” said Ben Rabinowitz, managing partner and founder of Amiti Ventures, a leading early-stage, venture-capital firm in Israel. “It’s a disaster in many ways.”
“It's a disaster in many ways.”Ben Rabinowitz
Tanking Israel’s reputation among foreign investors
“Businesses need checks and balances, and they need consistent rule of law,” he said. “When a government has all the power, as an independent business, you’re no longer protected or have that predictability you need.”
According to Prof. Moshe Zviran, Tel Aviv University’s chief entrepreneurship and innovation officer, “With the changes [to the legal system] that are being suggested, the government is trying to aim high at the High Court. But undoubtedly, it will affect lower courts as well, and that could have a devastating effect on the willingness of VCs to invest.”
“As well, the VCs’ investors, who put the money in their hands with hopes that they will make more money out of it, may become reluctant to invest in VCs that invest in Israeli companies or in Israel in general,” he said.
Rabinowitz said: “The other problem is that we’re already seeing from the S&P [500 stock-market index] and other rating agencies that this will affect the credit rating of the country, because if you’re not a liberal democracy with checks and balances, you can’t expect to have the same type of credit ratings.”
Bigotry is bad for business
“Those things are very important from an economic basis,” Rabinowitz said. “We have a huge shortage of engineers in Israel today, and the more that we can attract women to take leadership roles, the more we can bring Arab-Israelis into the hi-tech workforce, the more we can bring haredi [ultra-Orthodox] Jews into the workforce, it will only make Israeli tech much, much stronger. It doesn’t matter what your values are, we need more talent, and we need a more welcoming place that will draw more talent.”
“We also need to be consistent with what’s happening in the world on the ESG [environment, social and governance] front,” he said. “Companies and investors really do care about whether a country supports diversity and inclusion. There are some major investors around the world that have made it very clear that this is part of their evaluation for investing, and so if we go against that trend, it will hurt us.”
Rabinowitz said this emphasizes the importance of the High Court’s authority within the legal system.
“Even if you have a government with views that are racist, and anti-gay and against the Arab-Israeli community, etc., if you have an independent High Court, it’s shown again and again that it can protect minorities and protect against a government that tries to overreach,” he said.
Prof. Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research and an economist at Tel Aviv University, said the government’s hawkish approach to the West Bank and Gaza Strip would likely harm Israel’s economy from a foreign perspective.
“Adoption of the one-state solution without any indication of providing equal rights to all inhabitants of the West Bank would act as a turbocharger to BDS activity and attendant embargoes against Israel, with legal implications and consequences for Israeli companies searching for foreign investments in their activities and for export opportunities abroad,” he said.
“Adoption of the one-state solution without any indication of providing equal rights to all inhabitants of the West Bank would act as a turbo-charger to BDS activity and attendant embargoes against Israel, with legal implications and consequences for Israeli companies searching for foreign investments in their activities and for export opportunities abroad.”Dan Ben-David
Stop it before it happens, and get the US involved
According to Zviran, the damage done by legal reform would be extremely difficult to reverse.
“I don’t see a way to recuperate from it if it happens,” he said. “I think the government is convinced that it is going the right way, without considering the consequences in depth.”
Since the legal reform is one of the primary tenets of the new government’s platform, “They likely won’t be in a position to backtrack,” he added.
Many Israelis who have similar concerns think preventative action is the best course of action and are holding frequent public protests and sending letters highlighting entrepreneurs’ concerns to the prime minister.
Ben-David offered a glimmer of optimism amid what he said was a dire situation.
“The good news is that a very large and growing cross-section of Israelis – Left, Center and Right, religious and secular – have begun to push back,” he said. “This is a country that has a history of getting its act together when its back is to the wall. We are at just such a point today.”
One glaring issue is that there seems to be little outcry from interested parties outside the country, Rabinowitz said.
“A lot of people are asleep outside of Israel. The US Jewish community, US political leaders and investors that invest a lot and put a lot of energy in Israel are all silent right now. They're all going to complain after this is done, so it's really important that they raise their voice now, not later.”Ben Rabinowitz
“A lot of people are asleep outside of Israel,” he said. “The US Jewish community, US political leaders and investors that invest a lot and put a lot of energy in Israel are all silent right now. They’re all going to complain after this is done, so it’s really important that they raise their voice now, not later. They need to share their perspective and say they want an Israel that is a democracy, which includes protecting the rights of minorities and includes having a rule of law, and it includes having an independent judiciary.”
“Tech is a super exciting place to be, and as well as being a leader in the world, we’re all moving forward,” Rabinowitz said. “But it’s important for everyone who is going to be influenced, not just in Israel but also those on the outside, to speak now – not to wait for the change and only then get involved.”