Vladimir Bikhovskiy/Israeli flag
By Tal Elyashiv
Founder & Managing Partner, SPiCE VC
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According to the Israel Innovation Authority, Israel's 2021 high-tech exports accounted for more than 54% of the country's GDP, with more than 10% of all Israelis working in the high-tech industry. The high-tech industry in Israel has an impressive capital flow of well over $27 billion. And when it comes to my venture capital (VC) wheelhouse, I personally find the 88 mega-funding rounds of more than $100 million USD completed by Israeli startups to be particularly historic.
But that was 2021. So much has changed, and the state of Israel and its "Startup Nation" status is in jeopardy.
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Anti-Democratic Policies Spark Anti-Business And Anti-Investment Response
The new Israeli government, headed by Benjamin Netanyahu and supported by a coalition of what is seemingly the most right-wing government Israel has ever seen, began the execution of a sudden and aggressive plan to legislate a set of new laws that could fundamentally remake Israel's system of government — drastically weakening the powers of the judiciary and the legislative. The Guardian reports that what Knesset's constitution, law and justice committee set in motion "despite overwhelming domestic protest and concerns expressed by economists, business and academic leaders, including U.S. and other Israeli allies, was a vote on multiple bills. One of which will give politicians total control over the appointment of supreme court justices, and another one will allow a simple majority in the Knesset to override almost all supreme court rulings."
The reaction to the new government's move to overhaul Israel's judicial system has been swift and harsh. The chief justice of Israel's Supreme Court has said the proposal would be a "fatal blow to democracy." However, I don't need to hear from senior-level government officials to tell me what's to come for my home — the country that I defended, and my kids are in the process of defending, is on the wrong track and about to fall off a cliff.
This is why, as an Israeli citizen, entrepreneur, investor, and business leader, I cannot in good conscience put investors' money into any Israeli-based company as long as the country is on its current path. To be clear, I am still a strong believer in Israeli innovation and its high-tech ecosystem capabilities. But the risk created by the current judicial changes is much too high for investors to take when combined with the regular risks in the VC industry — and here's why:
There's Too Much Legal Risk
A weakened judiciary can have catastrophic effects on the confidence of investors, entrepreneurs, and consumers, which can undermine growth — especially in tech. A strong and independent judiciary is critical for protecting the rights of businesses and individuals, providing a stable and predictable legal framework, and resolving disputes fairly and efficiently. If the judiciary is weakened or perceived to be politicized, businesses and investors get spooked — taking their money with them on the run.
There's Too Much Political Instability
The hasty and haphazard government and judicial changes, which highlights the lack of consensus and utter disregard for risk, can only lead to additional political and geopolitical instability. As political uncertainty in the country increases, so does Israel's risk profile globally. And if there's one thing that businesses and investors don't like, it's uncertainty on a global stage.
There's Too Much Financial Risk
International rating agencies Fitch, Moodys and the S&P recently warned that the threat to democracy in Israel poses a risk on Israel's credit rating. Israel's credit rating reduction could lead to a significant depreciation of the Israeli Shekel vs. the U.S. Dollar and the Euro — increasing interest rates and inflation. Also, the inability of the country to borrow may lead to additional taxation, especially for successful companies.
This tune has been played before — specifically if you look at Hungary. Similar actions led to concerns about the rule of law and political stability in Hungary, which made businesses and investors less likely to invest in Hungarian companies — slowing economic growth and job creation.
There's Too Little Growth Viability
Venture capital investors need to be comfortable that a company they invest in will be able to raise the capital it needs to fuel its future growth (assuming it does well, of course). When this is put at risk, investors' appetite to invest in a company decreases.
Money may be moved outside of Israel, creating significant foreign exchange pressure on the Israeli currency, which may result in a significant weakening of the NIS. This is already beginning to happen. In fact, Israeli banks already reported in recent weeks a withdrawal and movement of money from Israeli accounts. Additionally, multiple Israeli unicorns like Wiz and Papaya Global announced they are moving company funds out of Israel, along with Nasdaq-listed Arbe Robotics (ARBE) and other Israeli startups.
Eynat Guez, CEO of global payments unicorn Papaya Global, recently expressed similar concerns. Specifically, Guez mentioned that taking funds out of Israel was not a political decision. Rather, it was based on risk assessments of keeping significant funds in a country that is going through major reforms that could have an impact on the country's stability and our ability to perform as a company.
If Israel Doesn't Change Course Immediately, Its Fate Is Clear
It pains me to write these words as an Israeli and an entrepreneur. But remaining silent as I witness the dismantling of one of the most successful democracies in the world, and the only democracy left standing in the Middle East, with a growing and thriving startup ecosystem, is just not an option. I want to see Israel avoid the fate of Hungary and others — and she still can. But until then, I will make my voice heard and keep my investors' money safe from the devastation I fear is upon my country.
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