Another reason for foreign investors’ confidence in Israeli hi-tech is its limited dependence on the local market. Most Israeli start-ups operate in international markets, with a very high percentage of their revenues coming from outside Israel.
In addition, a significant proportion of Israeli start-ups’ employees are based in other countries, which reduces their exposure to the direct effects of local crises. Although military reserve duty has led to some slowdown in the research and development of Israeli start-ups, it has not materially impacted their revenues.
For example, our 2019 and 2022 vintage funds have invested in quite a few Israeli companies over the past years, and in most cases, the war had only a minimal effect on these companies’ business results. There were delays in product development and challenges in raising new funding rounds, but it has been clear that the strong companies were still able to raise capital or exit even during wartime.
A survey by the Israel Innovation Authority confirmed that the war’s impact on company revenues was relatively minor, mainly because most of the revenue comes from markets outside of Israel. Moreover, companies in the defense and cyber sectors even experienced increased demand due to the growing need for advanced protection solutions.
BUT THE MAIN reason foreign investors continue to invest in Israeli companies is the currently attractive valuations of Israeli start-ups. The war has created a kind of “discount” for start-ups since it’s a matter of supply and demand. It has become harder for Israeli start-ups to raise money during this period, so they can’t be as demanding, and their valuations have become much more reasonable.
In comparison with US start-ups
Compared to US start-ups, Israeli start-up valuations are often significantly lower. For example, over the past two years, we invested in several Israeli companies at the same valuation they had in their previous round, even though their revenues had since doubled or even tripled. If you’re an investor who believes the war will end and Israel will emerge stronger, then today’s valuations present a real opportunity.
A significant asset of Israeli hi-tech is its human capital. According to data from the Israel Innovation Authority, there are currently about 9,000 hi-tech companies in Israel, including more than 500 R&D centers of multinational corporations. This sector employs approximately 396,000 workers, making up around 12% of the total workforce in the country – a figure that is significantly higher than in other countries.
The quality of Israeli tech talent remains very high, and competition for senior tech professionals continues. Beyond technological capabilities, we believe that Israel’s complex reality cultivates people with initiative, determination, creativity, and adaptability – traits that are crucial in start-ups and that make Israeli hi-tech stand out internationally.
Indeed, the quality of human capital is one of the main reasons we want to invest in the tech sector. Another factor is the scientific advancement being achieved; those moments of significant scientific leap that there’s nothing more thrilling than being there to witness them. A third reason to invest in technology is the belief that innovation can make humanity better and generate important social impact.
In recent months, Israeli hi-tech has been showing signs of recovery, and there are indications that the downward trend has halted. Data suggests the sector has reached a point of stability, with capital raising declines stopping and investments gradually returning.
It appears that Israeli hi-tech is at a kind of “local minimum” – a mathematical term describing the lowest point in a function, suggesting that from here on, growth is expected.
Signs of recovery are already visible, and the forecast is that in five years, Israel’s hi-tech business environment will be significantly stronger, which will positively impact start-up valuations. Therefore, this is a prime moment to invest in Israeli hi-tech.
Success stories of Israeli tech companies like Wiz are widely covered in the Latin American press, and local investors are looking for ways to invest in and do business with Israeli companies. We play an important role in building that bridge, believing that it will only grow and expand.
Israeli hi-tech has proven in 2024 that it can handle crises and adapt quickly to new realities. History also shows that Israeli hi-tech knows how to adjust and bounce back. With high-quality human capital, relentless entrepreneurship, and continued support from international investors, Israeli hi-tech will not only survive the challenges ahead – it will grow stronger.
That’s exactly why we are bullish about it.
The writer is managing partner at LIP Ventures, a Latin American venture capital firm.
