Israel’s thriving technology sector is facing its biggest crisis as the collapse of Silicon Valley Bank (SVB) has removed a crucial funding source for the country’s startups.
Why is Israel suffering?
The country’s tech sector, known as “Startup Nation”, accounts for around 15% of the country’s economic output and more than half of exports, and is a crucial part of the Israeli economy.
SVB was regarded as the “go-to bank” for the country’s startups, and the news of its collapse has sent shockwaves through the sector.
Proposed judicial reforms, which limit the power of the Supreme Court and increase the government’s control over the appointment of judges, have also created uncertainty, and many current and potential investors are worried about the potential impact on Israel’s high-tech sector.
“The high tech sector needs stability, needs the rules of the game to be clear, needs a certainty that…they will have the court to go to,” said Karnit Flug, a former Bank of Israel Governor. The reforms could result in a brain drain, as an estimated 100,000 Israelis already live and work in California’s Silicon Valley.
SVB’s collapse will affect more than half of the country’s startups, including both unicorns and smaller companies. These startups have raised concerns that the loss of the bank could result in a reduction in foreign direct investment, which totaled $15 billion last year.
The collapse of SVB will also affect the broader technology industry in the country, which employs just 10% of the country’s workforce but accounts for around 15% of economic output, more than half of exports, and a quarter of tax income. The failure of SVB could also result in Israeli tech firms registering as US companies to keep R&D at home.
Tech sector sees decline in Q1 2023 funding
According to the IVC Research Center and LeumiTech, Israeli high-tech firms raised $1.7 billion in the first quarter, down 70% from the $5.8 billion in the first three months of 2022 and its lowest quarterly fundraising level in four years.
A number of high-tech firms such as U.S.-Israeli cyber security startup Wiz have said they would pull money from the country and keep funds from entering the country if the reforms pass.
However, the decline in Q1 2023 funding is not entirely due to SVB’s collapse and the proposed judicial reforms. The decline is also a result of the macro dynamics and private equity markets, which were already affecting the Israeli tech ecosystem.
Israeli startups and investors fear fewer American banks may be willing to lend to companies due to the judicial reforms, which means less competition and more onerous terms.
Local banks may step in to fill the void, but they cannot grow their loan books overnight. The banking industry in the country will not be able to fill the vacuum left by SVB alone, according to a top executive at an Israeli bank.
The collapse of Silicon Valley Bank and the proposed judicial overhaul are undoubtedly major threats to Israel’s booming tech sector. As startups in the country look for alternative funding sources, local banks are stepping up to fill the void, but it remains unclear if they can offer the same level of financing and support as SVB.
