Israeli High-Tech: Economic growth in times of crisis

In a context of extreme adversity, Israel's high-tech sector has demonstrated a remarkable capacity for resilience and growth, according to a report on the industry by https://finder.startupnationcentral.org/ and posted on editorial address by Yariv Lotan, vice president of digital products, development, data and insights of that company.

According to the cited source, one year after the tragic events of October 7, 2023, this sector has stood out for its ability to navigate through economic obstacles and geopolitical tensions, becoming a pillar of stability and innovation on the global stage. The first nine months of 2024 saw a sustained increase in international investment, a clear sign of the strength and strategic importance of the Israeli tech ecosystem, even in times of crisis.

According to data from the report, the first three quarters of 2024 saw a 30% increase in private financing compared to 2023, with financing estimated at $10.2 billion, despite market turbulence and regional conflict. This demonstrates investor confidence in the high-tech sector's ability to withstand and adapt, reflecting Israel's attractiveness to global capital. Of this amount, $7.7 billion came from reported transactions, and another $2.5 billion was estimated. This growth underscores the continued confidence of investors in Israel's high-tech sector, even amid market instability and regional conflict. Compared to $7.8 billion in the first nine months of 2023, this impressive growth highlights Israel's robust appeal for global investment.

Yariv Lotan, Vice President of Digital Products, Development, Data and Insights states: "Israel's technology sector remains strong and stable, although challenges lie ahead. Private equity trends and M&A activity reflect cautious but sustained investor interest with robust performance in business software and health technology. However, the decline in seed and second-round funding, together with the decline in public funding, will be key areas to monitor for future growth and long-term sustainability of the sector."

According to the quoted source, 7,018 companies are active in the tech industry in Israel, and in the third quarter of the current year, the reported private financing of Israel decreased by 27%, up to 2.5 billion dollars. However, compared to the third quarter of 2023, this represents an increase of 13%. When accounting for unreported rounds and rounds with undisclosed amounts, the total estimated funding is $3.1 billion. The number of financing rounds in the third quarter of 2024 was 162, down from 206 recorded in the second quarter of the current year. This represents a continued slowdown in the trend of recent quarters.

The cited report states: "However, in the first nine months of 2024, the Israeli tech ecosystem saw 16 mega funding rounds (over $100 million per round). These mega rounds brought about $1.1 billion to the Israeli tech industry in Q3 alone, or 45% of private funding, which accounts for 62% of all deals in Q2 and 38% in Q1. The largest deal in the third quarter was Safe Superintelligence, which was worth a billion dollars, which is 41% of the total funding in this quarter".

Mergers and acquisitions (M&A) activity reached $12 billion in the first nine months of 2024, marking a 40% increase over the same period in 2023, when it stood at $8.9 billion in the same period. This significant growth, driven largely by exits from the business software and health technology sectors, indicates sustained global confidence in Israel's ability to innovate and deliver high-value solutions despite broader economic uncertainties . M&A transactions remain a strategic growth vehicle, underscoring international appetite for Israeli technology assets.

Regarding the origin of investors in the Israeli tech industry, the cited document shows that in the third quarter of 2024, 38% of investors are global and the rest are local.

The share of rounds with exclusively global investors continued to decline and reached 30% in Q3, following the decline that started in Q1. However, the share of rounds with at least one global investor (alone or with an Israeli investor) continues an upward trajectory from 49% in Q1 to 54% in Q3.

Mirroring trends in the US, Israel's tech sector grew in private funding annually, although it experienced a quarterly decline. However, compared to Europe, Israel stood out for its relative financial stability, strengthening its competitive position on the global stage. The end of the third quarter of 2024 came in a context marked by the profound impact of the tragic events of October 2023. Both personally and professionally, the devastating massacre had serious consequences for the tech community. In times of crisis, Israel's tech community has mobilized to help from managing war and operational centers, to supporting affected families and evacuees in the south and north of the country. About 30% of the employees at some startups have been called up for military service, affecting the work of many companies, especially in northern Israel, where the daily threat of bombings has shut down their businesses.

However, Israel remained the third global hub in attracting capital, after Silicon Valley and New York, a sign of market maturity and international confidence in its ecosystem. Although the number of IPOs decreased, the M&A market continued to thrive, while US multinationals showed a steady interest in Israeli innovation.

The level of early-stage funding has returned to healthy numbers, similar to 2018-2019, reinvigorating the Israeli startup ecosystem. Investments in mature companies have increased, contributing to the expansion of the Israeli tech sector. At the same time, the inflation of 2020-2022 ratings has been replaced by more realistic ratings, including "flat" or step-down rounds. This suggests a recalibration beneficial to long-term market sustainability.

Israel needs to further expand its technological capabilities in key areas such as defense and AI, from infrastructure to AI-based applications. In parallel, support for marginalized communities, including the recruitment of talent from the peripheries and diverse communities, is essential for the sustainable development of the Negev and Galilee regions.

Despite the decline in global investment and the number of new startups, Israel continues to drive innovation through breakthrough entrepreneurship and dynamic teams. Over the past year, there has been a trend of investing in large rounds aimed at mature companies, indicating an increase in the number of consolidated companies, but also a caution of global investors in supporting early stage companies.

Today, more than ever, it is clear that Israeli high-tech plays a crucial role in supporting the economy and social and national security efforts. Its continued commitment to community and diversity will ensure a positive impact, preparing the sector for sustainable development and contributing to Israel's economic recovery and growth in 2025 and beyond.