When the war between Israel and Hamas broke out last October, we examined its potential impact on the Israeli and Palestinian tech ecosystems. Nine months later, the prevailing sentiment in Israel, based on my conversations with founders and investors, is that the conflict has made the startup and venture capital ecosystem more resilient, especially its cyber and AI sectors.
The technology sector is an important pillar of Israel’s economy: in 2022, the sector employed more than 14% of the workforce, contributed more than 18% of GDP and accounted for half of the country’s exports, according to the 2023 annual report of the Israel Innovation Authority.
Since the beginning of the year, 11 companies, mostly in the cybersecurity and artificial intelligence space, have been acquired for more than $2 billion. Notable acquisitions include Nvidia’s purchases of Run.AI and Desi, as well as Blackstone’s acquisition of Priority. In addition, cloud security unicorn Wiz, which recently raised $1 billion, the largest round of funding for any Israeli startup, is reportedly in talks for a $23 billion acquisition by Google.
However, the situation is not entirely optimistic. Venture capital investments in Israel have decreased by more than 70% year-on-year (from 2022 to 2023) and many technology companies have mobilized their employees to participate in the reserves in the war effort.
“Several companies called up a lot of people for military service in the first months of the war, which included around 10% of employees in the tech sector,” Dror Bin, CEO of the Israel Innovation Authority, told TechCrunch in an interview. “In addition, others were busy during the first few weeks and the education system was shut down, forcing people to stay home with their children. This situation significantly affected human capital. For early-stage startups without revenue, it became more difficult to raise funds.”
In addition, cyberattacks against various sectors, including managed service providers, communications, finance, and healthcare, have tripled since the attacks last October. According to Gaby Portnoy, director general of Israel’s National Cybersecurity Directorate, these attacks have cost Israel more than $3 billion since last October. However, the country’s cybersecurity industry, driven by skilled talent, graduates of the Israel Defense Forces’ technology units, and a strong entrepreneurial culture, has played a crucial role in defending against these cyberattacks.
For some, the war has had little impact on Israel’s ongoing need to protect itself from hackers around the world. “It’s clear that more people than ever are trying to harm us and attack Israeli organizations, the government and businesses, but it’s just that the music has become louder, rather than us hearing a completely new kind of composition.” Jon Medvedthe chief executive of venture capital firm OurCrowd told TechCrunch.
Cybersecurity and artificial intelligence startups remain popular among investors
Medved, who runs Israel’s most active venture capital firm, said the war certainly did not simplify life for the average Israeli investor. Not only were there cases of companies with key personnel serving in the reserves, as Bin described, but many global investors would rather wait for the war to end before committing large sums of money to Israel.
Despite this, venture capital grew in the first half of 2024, which bodes well for the future of the ecosystem. Private funding in Israel in the first half of 2024 saw a 31% increase to $5.1 billion, with the cybersecurity sector playing a crucial role, accounting for 52% of private funding; global cybersecurity trends are driving this surge in activity, according to Startup Nation Central, an NGO that reports on the Israeli tech ecosystem.
Startups in popular sectors such as cyberspace and artificial intelligence continue to secure funding, with companies such as WIZ, Hailo and AI21 Labs underscoring the importance and attractiveness of both sectors for investors. At the same time, early-stage and early-growth companies in less popular areas face more significant funding challenges, the report notes.
“In the first quarter of 2024, almost $1 billion more was invested in the cyber sector despite the ongoing war,” Medved commented. “The cyber sector has clearly been the leading sector for Israeli technology and investment, and it is a gift that continues to bear fruit. One could expect AI to emerge strongly, with significant technological advancements and funding, most notably at OurCrowd, where we believe in this revolution with over 80 AI investments so far.”
Hailo, one of OurCrowd’s portfolio companies, is the poster child for AI companies in Israel. The company produces 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 funding amid escalating conflict (the AI chipmaker began and concluded fundraising between last October and April of this year, according to CEO Orr Danon).
In a conversation with TechCrunch, Danon mentioned that he had not witnessed a change in global investor sentiment in recent months, which could be attributed to the ease of fundraising for Hailo’s position as an AI startup. However, he noted that the fundraising environment has become significantly more challenging for other founders, particularly those outside of the cyber and AI sectors, compared to a year and a half ago.
“It is difficult 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 specific areas – for example, the cybersecurity sector is performing exceptionally well,” Danon added.
How local investors and other stakeholders stepped in
While the war is a major concern, startup founders and their investors know that keeping their businesses running is crucial. Most Israeli startups have a global customer base, with many go-to-market teams based in the US, meaning the war won’t directly impact sales in the short term. However, startups outside of the cybersecurity and AI sectors have had a harder time raising funds to scale up their operations.
The efforts of organizations like the Israel Innovation Authority and OurCrowd have proven crucial in these times. For example, the Israel Innovation Authority launched a program called Fast Track to provide grant money to early-stage startups that were not generating revenue and were stuck in the middle of fundraising rounds with local and international investors before the war began. According to Bin, the program raised more than $100 million, with an additional $150 million contributed by the private sector, all of which went to 250 early-stage startups.
“We saw that these companies did not have enough funds to continue operating and we did not want to see hundreds of large companies go under,” said the director of the agency. “In total, we injected 250 million dollars into these companies in three months and, by the end of January, these startups knew that they would receive funding and could continue operating. The idea was to extend their room for manoeuvre for more than a year, which would allow them to survive during the war and raise funds again without pressure.”
For its part, OurCrowd launched the Israel Resilience Fund A fund was created last December to support startups affected by the war or to develop solutions relevant to Israel’s immediate needs, such as reconstruction, emergency medicines, food security, media monitoring and cybersecurity. The fund aims to raise $50 million, but has failed to do so. secured $17 million in commitments from March. It is worth noting that OurCrowd, which has invested in 35 startups through this fund, waived all management fees and accrued interest. The fund
The use of AI has become more interconnected than ever with various industries. 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, allowing customers to better defend against cyber threats. He added that the API security startup also incorporates generative AI to help customers quickly consume and understand threat data.
“We have been leveraging machine learning and big data for years to analyze API behavior and detect threats that traditional rules and signatures cannot prevent,” Eliyahu noted. “Recently, we developed an AI assistant so that users can interact and enjoy a more streamlined experience, similar to using ChatGPT compared to a traditional Google search.
While AI applications in cybersecurity can range from helping in the development of more cost-effective code to assisting in penetration testing, Medved believes the global tech industry is still in the early stages of AI for cybersecurity and advises caution.
“It’s an incredibly hot topic, and we have to remember that it’s not just the good guys who are using AI to protect us, but hackers are also busy deploying AI to make us more vulnerable and steal our money and identities,” Eliyahu said.
