The start-ups are leaving the Start-Up Nation: New survey reveals growing concerns

Across the board, large portions of Israel’s start-up ecosystem are moving funds, headquarters and investments away from the Start-Up Nation.

Israel Start up (photo credit: INGIMAGE)
Israel Start up
(photo credit: INGIMAGE)

Together with the ongoing debate regarding judicial reform legislation and its ensuing civil unrest, Israel’s tech ecosystem has been grappling with significant challenges.

A recent survey conducted by Start-Up Nation Central, an organization focused on supporting Israel’s technology industry, sheds light on the implications faced by the tech sector this year and its expectations for the future. The survey, carried out on July 18-19, included leaders from start-up companies, venture-capital funds, and tech investors.

The survey respondents provided valuable insights into the current state of affairs and how they perceive the impact of the domestic situation on their businesses. A total of 734 professionals participated in the survey, representing 521 companies. The breakdown of respondents included 615 from start-up and tech companies, and 119 from the investor community.

Start-ups are moving their money

One of the key highlights from the survey was the significant number of Israeli start-up companies taking active legal and financial measures to mitigate risks. About 68% of the start-ups surveyed said they had already taken action, including withdrawing cash reserves, relocating their headquarters outside of Israel, moving employees abroad, and conducting layoffs.

Thousands wave the Israeli flag as they protest against the judicial overhaul at the Knesset in Jerusalem. February 20, 2023. (credit: YONATAN SINDEL/FLASH90)
Thousands wave the Israeli flag as they protest against the judicial overhaul at the Knesset in Jerusalem. February 20, 2023. (credit: YONATAN SINDEL/FLASH90)

Moreover, 22% of companies reported diversifying their cash reserves outside of Israel, while 37% of investors said companies in their portfolios had withdrawn some of their cash reserves and moved them abroad.

This shift indicated a growing concern among businesses and investors about the potential consequences of the ongoing unrest.

Start-ups are moving their home bases

Another notable finding was the trend of changing headquarters locations. Around 8% of companies said they had already begun the process of relocating their headquarters outside of Israel, and an additional 29% said they intended to do so in the near future. Among the investors, 20% said companies in their portfolios had already started this process, and 69% said companies in their portfolios were considering relocating their headquarters outside of Israel.

“The situation is becoming increasingly worrisome as we observe companies and investors taking active steps to move their activities away from Israel,” Start-Up Nation Central CEO Avi Hasson said. “This trend has intensified notably over the past three months. Steps such as registering a company abroad or launching new start-ups outside Israel may have long-term implications that could be difficult to reverse.”

Even Israeli investors are hesitant about investing in Israel

Furthermore, the survey revealed that a growing number of Israeli investors are considering or have already started investing in foreign companies. Approximately 67% of the investors surveyed said they were exploring opportunities beyond Israel, indicating a shift in Israeli venture-capital investment strategies.

Comparing the Israeli tech sector’s expectations for recovery with the US technology and VC market, the survey found a stark contrast. Only 12% of Israeli investors believed they would witness signs of recovery in the Israeli venture-capital market in the coming six months. In contrast, 65% of investors expressed optimism about the VC market in the US, with many expecting a more rapid and significant rebound.

Hi-tech is against a lot of the debated legislation

The survey highlighted a glut of negative sentiment regarding the judicial reform and its effect on the Israeli economy. Among company executives, 78% said the judicial reform was having a negative impact on the activity of their companies.

This finding underscored the challenges and disruptions that businesses in the Israeli tech sector are facing due to the ongoing legislative changes and civil unrest.

Investors also expressed significant concerns regarding the judicial reform’s effects on their portfolio companies. Eighty-four percent of investors said the judicial reform had negatively influenced the performance and prospects of the companies they have invested in.

This sentiment reflected the broader uncertainties that investors are grappling with as they navigate the evolving landscape.

Beyond the direct effects of the judicial reform, the survey also indicated investors’ apprehensions about the potential consequences of any deterioration in relations between Israel and the US. Eighty percent of investors said a deterioration in diplomatic ties would have a negative influence on the tech industry in Israel.

This finding highlighted the interconnectedness of the Israeli tech ecosystem with the global economy, particularly its strong ties with the US as a key market for tech innovation and investment.

“As an organization with a mission to strengthen the technology industry in Israel, it is our duty to share this data with decision-makers in Israel and provide an up-to-date picture of the situation as it unfolds,” Hasson said.