For the pastseven months, Israel has been locked in a political crisis, creating uncertainty that is doing little to inspire confidence in the future among hi-tech executives.
London
Just a few streets away from Tel Aviv’s magnificent Great Synagogue lies a high-rise building where I learned about unicorns. Not the mythical sort, you understand, but companies that are valued at over $1 billion. There I met Jeremy Kletzkine, vice president of a company called Start-Up Nation Central, who told me about the Israeli Innovation eco-system. Believe me, it is astonishing. It Is also in danger because of the current machinations[1] of Israel’s coalition government.
Israel is not called the “Startup Nation” for nothing. The term originates from a book published in 2009— “Start-Up Nation: The Story of Israel’s Economic Miracle”. This examined and explained how Israel, then a 60-year-old nation with a population of 7.1 million, was able to reach such economic growth that at the time of publication, some 63 Israeli companies were listed on America’s NASDAQ, more than any other foreign country. Israel, a country surrounded by enemies, in a constant state of war since its founding and with no natural resources, produces more startup companies on a per capita basis than large, peaceful and stable nations and regions like Japan, China, India, Korea, Canada, and all of Europe. At the time, the Economist noted that Israel had more hi-tech start-ups and a larger venture capital industry per capita than any other country in the world.
Consider a few facts. Over 11 percent of salaried employees in Israel work in the hi-tech industry. Hi-tech makes up 18 percent of Israel’s GDP, over 50 percent of total exports and about 30 percent of income tax revenues. One out of three cybersecurity unicorns in the world is an Israeli company. All of which explains why hi-tech is dubbed “the growth engine” of Israel’s economy.
So why are many of Israel’s entrepreneurs so worried?
For the pastseven months, Israel has been locked in a political crisis, creating uncertainty that is doing little to inspire confidence in the future. In January, Benjamin Netanyahu, in his sixth term as Prime Minister, and backed by a coalition that includes extremist far-right parties, introduced a bill designed to weaken the powers of the country’s Supreme Court. Supporters of the plan say it is needed to prevent the court from intervening in politics. Critics say the reform will erode democracy and hand unchecked power to the government. Two weeks ago, despite huge protests that filled the streets of Jerusalem and many cities in Israel, lawmakers backed the first part of the judicial overhaul.
Many hi-tech workers and executives were involved in the protests against the judicial reform bill, openly expressing fears about the effect it could have on economic and social stability. Before the vote, some 200 companies pledged to join the protests and the day after the vote, a group calling themselves the Hi-Tech Protest Movement paid for advertisements to black out the front pages of at least four different newspapers, declaring a “black day for democracy”.
One outspoken critic of the bill is EynatGuez, an Israeli hi-tech entrepreneur and CEO and co-founder of Papaya Global, a hugely successful payroll and payments provider. Founded in 2016, the company is valued at $3.7 billion and is the first unicorn to be led by a woman. In a powerful open letter to investors in Israeli hi-tech, Guez lays out the dilemma facing hi-tech businesses if the hard-liners get their way, vowing that Israeli entrepreneurs will continue to fight for Israeli democracy. Here’s what she wrote:
“We fought hard. We won’t stop. As Israeli entrepreneurs we never perceived democracy to be a risk factor within our industry. When we did SWAT analysis, none of us thought that operating from the Startup Nation would be detrimental to our ability to succeed.
We focused on developing the most innovative technologies, hiring the best talent, and identifying our product market fit and go-to-market strategy. Now we realise that we must find our nation’s market fit.
Investing in Israeli tech was never something that was taken for granted. There aren’t many countries in the world where team members serve 10-60 days per year in army reserve training, prioritising the country’s security needs over business. There aren’t too many places in the world in which you are rudely awakened by alarms and reports of military operations just a 30-minute drive from your home. There aren’t too many countries whose routine requires taking Zoom calls in bomb shelters.
Naively, we thought of Israel as an amazing playground for tech—with amazing talents, highly driven people, and a lot of creativity.
We never imagined investing time, effort, and energy fighting for democracy in 2003. But that’s our reality. We tried to make rational claims. We tried explaining—to our own government—how crucial it is to maintain confidence in the Israeli tech ecosystem. We tried to argue the importance of nurturing investors’ trust in the growth potential of Israeli companies.
We fought hard. We lost. We levelled up. We keep on fighting.
We took to the streets. We marched, we chanted, we cried.”
Guez then goes on to name and shame a number of ministers, calling them a group of fanatics whom she claims have hijacked Israel—a gang surrounding the Prime Minister.
“Once known as a keen economist,” she continues,“Netanyahu is no longer the Prime Minister who cares about the Israeli economy or about its defence and deterrence abilities. He cares about his own survival and is willing to sacrifice Israeli democracy to secure it. All tech investments carry risk, it’s part of doing business. For us, operating in a democratic society with a distinguished high court was never part of the risk assessment. It was a given.
Following this political overhaul, Israeli entrepreneurs will set up entities abroad. It’s simply too risky to expose investors to a shady judicial system, with no real oversight, in which they have no protection and no legal remedy. This is a clear and present danger and the consequences will be harsh.
But we will continue to champion democracy. We are tenacious. We are vigilant. We are fighters.”
EynatGuez is not the only business leader sounding the alarm. “There is going to be an economic tsunami alongside the social tsunami,” claims ErelMargalit, founder of the Jerusalem Venture Partners capital fund, which has raised $1.4 billion invested in more than 140 companies. “I’ve just returned from Europe after a round of business meetings with the world’s largest insurance companies and I’m hearing great concern from them,” he told Calcalist, Israel’s leading financial daily. “There will be no investments here because the government is turning Israel from a democracy into a dictatorship,” he added.
Data published recently by Start-Up Nation Central shows that almost 70 percent of Israeli start-ups are taking measures to distance themselves from their home country, withdrawing cash or moving their legal headquarters abroad. Guez told The Times of Israel that Papaya Global would withdraw all its funds from Israel and move them abroad, in protest of the emerging judicial overhaul. Her fears were confirmed the day after the vote in the Knesset when Israel’s credit rating was lowered by Morgan Stanley and risk assessment firm Moody’s warning of a “significant” risk linked to political tensions. Moody’s added that the situation is particularly concerning because hi-tech firms are a key engine of economic growth in Israel.
Dismissing Moody’s report, Israeli Prime Minister Benjamin Netanyahu and ultra-orthodox Finance Minister BezaleiSmotrich, key members of the coalition government forcing the legal changes which are upsetting businesses, insisted “Israel’s economy is based on solid foundations and will continue to grow under experienced leadership that leads a responsible economic policy”. They added that “this is a momentary reaction and when the dust settles it will become clear that Israel’s economy is very strong”.
The danger for both Netanyahu and Smotrich is that the “dust” might be obscuring their vision of the impending economic tsunami approaching Israel—a calamity the unicorns are trying to prevent by fighting for their country’s democracy.
John Dobson is a former British diplomat, who also worked in UK Prime Minister John Major’s office between 1995 and 1998. He is currently Visiting Fellow at the University of Plymouth.