Israeli Tech Sector Resilience despite 9 months of war - and why its enemie's dream to destroy the country will just remain a dream

When Israel and Hamas went to war last October, we looked at the potential consequences for the tech sectors in Israel. Nine months on, discussions with entrepreneurs and investors indicate that Israel’s startup and VC ecosystem, particularly its cyber and AI sectors, has shown resilience in the face of the conflict.

The tech industry is vital to Israel’s economy. As of 2022, it employed over 14% of the workforce, contributed more than 18% to the GDP, and made up half of the country’s exports, according to the Israel Innovation Authority’s 2023 report. In the first half of this year, there were significant acquisitions, especially in cybersecurity and AI, totaling over $2 billion across 11 companies. Key deals included Nvidia’s acquisitions of Run.AI and Desi, and Blackstone’s purchase of Priority. Notably, Wiz, a cloud security unicorn, raised $1 billion—the largest financing round for an Israeli startup—and is reportedly in talks for a $23 billion acquisition by Google.However, the landscape isn’t entirely positive.

Venture capital investments have plummeted by over 70% year-over-year, and many tech firms have seen employees mobilized for military service. “Several companies called many people to army duty in the first months of the war, which included about 10% of employees in the tech sector,” Dror Bin, CEO of the Israel Innovation Authority, explained in an interview. “Additionally, others were occupied during the initial weeks, and the education system was shut down, causing people to stay home with their kids. This situation impacted human capital significantly.

For early-stage startups without revenues, it became tougher to raise funds.

”Furthermore, cyber-attacks have surged since the conflict began, targeting sectors like managed services, communications, finance, and health. These attacks, which have tripled, have cost Israel over $3 billion, according to Gaby Portnoy, director general of the Israel National Cyber Directorate.

Despite these challenges, Israel’s cybersecurity industry, driven by skilled talent from the Israel Defense Forces’ tech units and a strong entrepreneurial culture, has been instrumental in mitigating these threats.

Some argue that the conflict has had minimal impact on Israel’s cybersecurity needs. Jon Medved, CEO of VC firm OurCrowd, remarked, “Clearly, more people are trying to hurt us and attack Israeli organizations, the government, and companies than ever before, but it’s simply that more of the volume of the music has been turned up, rather than we are hearing a whole new kind of composition.”Investment Trends in Cybersecurity and AIMedved, leading Israel’s most active venture capital firm, acknowledged that the war complicated life for Israeli investors. Key personnel being called to reserves and a preference among global investors to wait out the conflict have been significant hurdles.Despite these issues, venture capital saw growth in the first half of 2024.

Private funding reached $5.1 billion, with the cybersecurity sector playing a major role, constituting 52% of this funding. This trend is influenced by global cybersecurity demands, according to Startup Nation Central, an NGO that tracks Israel’s tech ecosystem.Startups in cybersecurity and AI continue to attract funding, with companies like Wiz, Hailo, and AI21 Labs highlighting the sectors’ importance. Conversely, early-stage companies in less popular sectors face greater funding challenges.“Almost another billion dollars of exits were made in the cyber area in the first quarter of 2024 despite the ongoing war,” Medved noted. “Cyber clearly has been the leading sector for Israeli tech and investing, and it’s the gift that keeps giving. One could hope that AI will emerge strongly, with important tech breakthroughs and funding, certainly at OurCrowd, where we are believers in this revolution with over 80 investments in AI so far.”Hailo, an AI processor company and OurCrowd portfolio member, exemplifies successful AI startups in Israel. It raised $120 million at a $1.2 billion valuation, navigating the conflict to secure funds.

CEO Orr Danon mentioned that global investor sentiment hadn’t shifted significantly, possibly due to Hailo’s strong AI positioning, though he acknowledged tougher conditions for other founders.“It’s hard to say how much of this is due to the war and how much is just part of the economic cycle.

Overall, things are recovering, but only in specific areas; for instance, the cybersecurity sector is performing exceptionally well,” Danon added. Support from Local Investors and Stakeholders

Despite the war, it’s crucial for Israeli startups to keep their businesses operational. With many having a global customer base and go-to-market teams in the U.S., immediate sales impacts are minimal. Yet, those outside cybersecurity and AI struggle to secure funds to scale operations.

Organizations like the Israel Innovation Authority and OurCrowd have been vital. The Israel Innovation Authority’s Fast Track program, aimed at early-stage, pre-revenue startups caught in fundraising when the war started, raised over $100 million, with an additional $150 million from the private sector, supporting 250 startups.“We observed that these companies didn’t have enough funds to continue operations, and we didn’t want to see hundreds of great companies go under,” Bin explained. “In total, we injected $250 million into these companies within three months. By the end of January, these startups knew they would receive funding and could continue their operations. The idea was to extend their runway for more than a year, allowing them to survive during the war and return to fundraising without pressure.”

OurCrowd’s Israel Resilience Fund, launched last December, supports startups affected by the war or developing 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 and had secured $17 million by March, investing in 35 startups. Notably, OurCrowd waived all management fees and carried interest.

AI’s Growing Role in Cybersecurity AI’s integration into various industries has accelerated. Roey Eliyahu, co-founder and CEO of cybersecurity unicorn Salt Security, told TechCrunch that most cybersecurity startups are adopting AI to enhance their products, helping customers better defend against cyber threats. Salt Security itself uses generative AI to help customers quickly interpret threat data.“We have been leveraging ML 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 users can interact for a more streamlined experience, similar to using ChatGPT compared to a traditional Google search.”While AI’s applications in cybersecurity are diverse, from aiding cost-effective code development to penetration testing, Medved cautions that both defenders and attackers are leveraging AI. “It’s an incredibly hot area, and one must remember that not only are the good guys using AI to protect us, but the hackers are also busy deploying AI to make us more vulnerable and steal our money and identities,” Eliyahu added.

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