4 reasons why Israel is leading a global VC rebound despite the war

The resilience of Israeli tech, and the growing investment in it from abroad, have significant implications for Israel’s fundamental economic stability

WHAT WAS THE fastest-growing venture economy in the world in the first half of this year?

Let me surprise you. It was Israel.

Venture funding in Israeli startups grew by 31% in the first half of 2024 compared to the last half of 2023 – almost double the global rate of 16%. This surge occurred even as war raged with Hamas and Hezbollah, and Israel came under direct attack from Iran for the first time in history. Israel outstripped the US, the next-fastest growing region with 28%, while venture investment in Europe and Asia actually declined, by 6% and 18% respectively.

“Israel’s tech ecosystem demonstrated remarkable resilience in the first half of 2024, with significant growth in funding and M&A activity,” says Eze Vidra, Co-Founder and Managing Partner?at?Remagine Ventures and a veteran observer of Israel’s tech sector.

No, this was not a case of Israeli institutions propping up the local economy. Foreign investors account for 46% of the 217 active venture funders in Israel. They participated in 93% of all funding, a seven-year high and a resounding vote of confidence by the global financial community in Israel’s innovation ecosystem even as the rockets were flying.

The big names voted with their checkbooks. Index Ventures has invested $60 million in five Israeli startups since the start of the war, while Sequoia and Greylock reopened their Israeli offices and Accel raised a $650 million fund in May to invest in Israeli and European startups. “Raising an eighth fund to invest in Israel is no longer a brave decision; it doesn’t matter what the situation is here,” Accel Partner Harry Nelis told Calcalist. “Israel has always been one of our key markets, and we hope it will continue that way.”

Reserve duty

Don’t get me wrong. The months since the barbaric Hamas attack on southern Israel last October have been painful and hard. Just within OurCrowd, two of our colleagues have lost family members, another was kidnapped and is still missing in Gaza, and two other family members were critically wounded and face months of rehabilitation. At any time, up to about 10% of our employees are serving in the reserves. This month we suffered the body blow of hearing that Hersh Golberg-Polin, son of Jon Polin, a founder of our early portfolio company Abe’s Market, was brutally murdered by Hamas after being held captive for more than 300 days since he was abducted on October 7.

Startups across the country have to contend with employees being called up for military reserve duty and their children terrified by Hamas and Hezbollah rocket attacks, while companies located near Gaza or near Lebanon have been displaced.

Still, Israeli startups have remained largely resilient, and the country’s world-beating rise in venture funding despite the ongoing security challenges indicate that their resilience is gaining admiration and support around the globe.

Israel’s economy is certainly under pressure. Uncertainty over security and flight schedules has played havoc with the tourism industry and with the import and export of goods carried by plane. Agriculture and construction have been hit by a ban on most Palestinian workers entering the country, and an understandable unwillingness of other foreign laborers to come.

But, as the Israel Innovation Authority points out, Israel’s foreign earnings no longer depend on Jaffa oranges or tourism. Israel is not just a modern economy, it is one of the most high-tech economies in the world, with an outsized concentration on its innovation ecosystem. In 2023, high tech contributed 53% of Israel’s exports and 20% of its GDP – similar to the position of oil and gas in countries with an abundance of those natural resources. In 2021, the latest year for which figures are available, corporate and individual income tax revenue from the high-tech sector contributed about 24% of Israel’s total tax collection for the year.

“High tech’s centrality in the Israeli economy is a unique phenomenon,” the IIA reports.?“In South Korea, for example, a country in which, like Israel, the investment in R&D as a ratio of GDP is extremely high, the high-tech sector accounts for 13% of GDP and a third of total exports. In the US, the home of the world’s leading technology hubs, the high-tech sector contributed less than 9% of GDP in 2022 and less than a quarter of total exports in 2021.”

So the resilience of Israeli tech, and the growing investment in it from abroad, have significant implications for Israel’s fundamental economic stability far beyond the 15% of the nation’s workforce it directly employs.

I believe the increase in Israeli venture funding will continue, because the country’s tech ecosystem is uniquely positioned to benefit from four current growth trends in the global venture economy.

1. Mega Rounds

Reports from KPMG and other analysts show that the recent upswing in venture funding is due in large part to the increasing number of mega rounds of $100 million or more raised by startups. In the first six months of 2024, there were 14 mega rounds in Israel, representing 56% of total funding, compared to 47% in the US. The standout example was Wiz, which raised $965 million in May. Israel’s ability to nurture more than a dozen startups capable of raising such serious sums places it at the epicenter of global venture interest.

2. Cybersecurity

As the use of AI accelerates, the cybersecurity challenges are set to increase. “With AI at their fingertips, threat actors will be better positioned than ever to drive cyber attacks,” KPMG reports. “As companies look to protect their organizations, customers, and data, there will likely be an increase in investment in cybersecurity startups able to help companies combat and manage their AI cyber risks more effectively.” In recent years, Israel has emerged as the global leader in cybersecurity startups, with about 50% of all venture funding in the sector invested in Israeli companies. Cybersecurity accounted for 52% of private Israeli startup funding in H1 2024.?In addition, cybersecurity?companies accounted for 35% of the value of Israel’s H1 2024 exits. Israeli companies comprised 13 of the 14 global cybersecurity acquisitions reported during the same period. Israel is located at the nexus of a major growth sector in the world venture industry.

3. Artificial Intelligence

More than 35% of global venture funding in H1 2024 was invested in AI startups – up from only 14 % in 2022. OurCrowd has investments in 94 different AI companies, and is among the top 15 most active AI investors in the world, according to PitchBook data. Our activity in this sector reflects a widespread belief that AI is the future of everything. Meta, Google, Microsoft and other major corporations have already sunk tens of billions into AI and the trend shows no signs of slowing down. Israel, with its deep-tech expertise, has already produced several AI unicorns including Wiz, BioCatch and Hailo, and is well-positioned to attract much more AI investment in the future.

4. Defense

Following Russia’s invasion of Ukraine, and increasing tensions in other parts of the world, defense technology is once again the focus of intense interest. This is a sector where Israel excels. “While this space has yet to see major consolidation, the next year or two could see a small number of large defensetechs moving to become public while their smaller counterparts become targets for acquisition by the large defense companies of the world,” says KPMG.

Outperforming

So the venture data is in and, to everyone’s surprise, Israel is outperforming the entire world, despite what is happening here. It is true that there are serious issues in some sectors of Israel’s economy, and in some sectors of Israel’s startup ecosystem. At OurCrowd, we are doing our best to support the most vulnerable startups. I do not belittle the war and its impact – especially for those personally injured, affected and bereaved.

But the data clearly shows, astonishingly, that in the midst of this war, Israel’s venture numbers are rebounding significantly at twice the global rate. And underpinning this rebound are the sectors where Israeli technology excels: cybersecurity, AI, defense and deep tech. If this happening now, just imagine the boost to Israel’s tech sector and to its broader economy as soon as this war ends with Israel’s security and deterrence restored.

We must all hope and work to make sure that this happens as soon as possible.

About ‘Investors on the Frontlines’

I’m the CEO and Founder of OurCrowd, the global equity investment platform that gives individual accredited investors access to private market startup deals alongside top-tier VCs. If you are an investor, private family office or financial advisor, subscribe here for my biweekly commentary or follow me on Twitter. I welcome your comments in the response section below.