Israel risks turning into a shut-down nation

The writer is founder of Sifted, an FT-backed media company covering European start-ups

In the justifiable, if spicy, words of one veteran tech investor in Israel: “It’s a fricking miracle what we’ve built here.” Over the past three decades, the tiny country of 9mn people, located in a hostile neighbourhood, has shrugged off wars, uprisings and financial crises to create one of the world’s most extraordinary technology hotspots. But the recent lurch away from democracy by Israel’s rightwing coalition government is alarming the country’s celebrated tech entrepreneurs with some now threatening to leave. Is the world’s original start-up nation in danger of turning into a shut-down nation?

To listen to the highly charged rhetoric of many liberal Israeli intellectuals, entrepreneurs and investors, you might think so. The rockstar Israeli historian Yuval Noah Harari has likened the government’s move to restrict the powers of the Supreme Court to an “anti-democratic coup”. The political confrontation, which has triggered mass protests on the streets, has shaken local entrepreneurs and international investors alike and led to a plunge in the value of the shekel. “The tech moguls know that without an independent judiciary and a democratic society, their entire industry is in danger,” Harari wrote in the Washington Post.

On Monday, the three-year-old cloud security start-up Wiz, which has just raised $300mn at an eye-popping valuation of $10bn, became the latest of a string of Israeli-founded tech companies to trumpet the alarm. Wiz said it would not transfer any of the money it had raised to Israel while the political uncertainty continued. The government’s judicial moves endangered the core values of respect for the law and tolerance that underpin Israel’s democracy, Assaf Rappaport, Wiz’s chief executive, told me. “This is more of an existential threat than any missiles.” 

Over many years, Israel’s tech sector has shown astonishing resilience in the face of repeated security threats and has been little distracted by the performative psychodrama of national politics. Its singular focus on building vibrant start-ups, particularly in the fields of enterprise software, security and fintech, has made it the engine of the Israeli economy. Last year, the tech sector accounted for 54 per cent of the country’s exports and employed about one-tenth of the workforce.

Like most other countries, Israel has been hit by the latest tech market downturn, with start-up funding falling by almost half to $15.5bn last year. But that annual total remained the second highest on record and early-stage investment continued to grow in 2022, according to the Start-up Nation Policy Institute. Israel also spends more on research and development as a proportion of GDP — 5.4 per cent — than any other OECD country.

But the government’s judicial power grab has mobilised the tech sector like nothing before. “Restraint has been thrown out the window. Tech people are the muscle behind the protest movement,” another entrepreneur told me. “It’s great that we live in a real democracy as we are seeing today. But the situation is scary as shit.” Some entrepreneurs, such as Rappaport, remain optimistic that a compromise can be reached, clinging to the fact that prime minister Benjamin Netanyahu has been an active champion of Israel’s start-up nation. But others are already hedging their bets, chatting away on messaging groups about the relative merits of relocating to Cyprus, Spain or the US. 

One theory as to why the Israeli tech industry has boomed is because it has perversely benefited from what the historian Mark Zachary Taylor has called “creative insecurity.” Like other small countries facing big security threats, such as South Korea and Taiwan, Israel has made it a strategic imperative to prioritise external security over domestic fights, and technological innovation over wealth redistribution. In his book The Politics of Innovation, Taylor explains how technologically dynamic countries, such as Israel, also rely far more on informal social networks of entrepreneurs and investors than any governmental institutions.

The danger for Israel’s tech sector is that domestic infighting will degrade that creative insecurity and erode the country’s delicate social networks. The veteran investor says it has taken 30 years to build the Start-up Nation but it can be easily damaged. “It has not been built in the ground but in our minds and hearts,” he says. There may be bigger forces at play in Israel than the future of its tech sector. But it would do untold damage to the dynamism of Israel’s economy and its geopolitical security, if the government were to lose those hearts and minds.