Israel's tech sector defies the odds: a year of war and record investments

According to Startup Nation Central's mid-2024 report released over the summer, the first half of 2024 saw a 31 per cent increase in private funding for VC-backed companies compared to the second half of 2023. A total of $5.1 billion was raised in 322 rounds over six months, with estimates suggesting the final figure could reach $6.7 billion when accounting for unreported and undisclosed rounds – which would make the increase closer to 50 per cent.

The United States saw a 28 per cent increase during the same period, while Europe and Asia experienced declines. Medved emphasised that global, particularly US-driven, trends are far more critical to Israel's high-tech sector than local politics, security, or the economy.

"We are tied to America with an umbilical cord," Medved said, suggesting that investors should look to Wall Street to gauge Israel's economy rather than focusing on Tel Aviv.

Some analysts have pointed to the fact that much of the investment is in big companies, and this is true: fourteen mega-rounds (above $100 million) contributed $2.8 billion, representing 56% of total private funding. However, Medved said, this trend can also be seen in America, where over half of the money deployed comes from mega deals.

"Having these mega deals is not bad. It's good”, Medved stressed. We have good, strong companies, and they are driving American and Israeli numbers up. "However, overall, some companies are still too young, not critical, and struggling. Many of them, said Medved, will probably die.

Specifically, in the first six months of 2024, there were 14 mega-rounds in Israel, representing 56 per cent of total funding, compared to 47 per cent in the US. Among those companies was the cloud security software company Wiz, which hit a record $1 billion round.

"Israel's ability to nurture more than a dozen startups capable of raising such serious sums places it at the epicenter of global venture interest," Medved said.

In general, when looking at mergers and acquisitions (M&A), the first half of 2024 saw a 70 per cent increase over the second half of 2023, surging to $4.1 billion.

Despite the perception that global sentiment is turning against Israel, foreign investors continue to back the country, Medved noted. While Standard & Poor's downgraded Israel's long-term credit rating from AA- to A+ and Moody's lowered its rating to A2 with a negative outlook, foreign investors still represent 46% of the 217 active venture funds in Israel, according to the Startup Nation Central report. They participated in 93 per cent of all funding rounds in the first half of 2024, marking a seven-year high. This includes major players like Index Ventures and Accel.

Israel has long been recognised as a leader in fields such as cybersecurity, fintech, business software, health tech, and climate tech. According to Medved, Israel made the right choice by focusing on cybersecurity.

He highlighted from the report that the cybersecurity sector attracted 52 per cent of private funding in the first half of 2024. Cybersecurity mergers and acquisitions totalled $1.5 billion across nine deals, accounting for 35% of all exits in that period. Furthermore, Israeli companies were involved in 13 of 14 global cybersecurity acquisitions reported during the same period.

"Cyber is hotter than ever," Medved said, noting that Google had expressed interest in buying Wiz for $23 billion, but the company declined the offer after its $12 billion valuation just before. Had the deal gone through, it would have been Google's largest acquisition ever and the biggest in the cybersecurity sector, according to Medved.

"Cybersecurity is important; people like Google say so. And Israel dominates here. We are clearly number one," he added.

Startup Nation Central CEO Avi Hasson echoed this sentiment in a statement: "The recent risks, coupled with the local environment in Israel, were overshadowed by growth in mega-rounds and cybersecurity. One might expect the 'Israeli factor' to have a stronger impact on Israeli tech activity, but the data suggests otherwise."

Another key industry is defense. While investors may have shown little interest in defense technology five years ago, they are now eager to get involved, Medved said. Israel is one of the top five defense technology exporters in the world, according to Medved. Many of the country's entrepreneurs come from the defense sector, ensuring the technology remains highly relevant.

Although the recent surge in interest in defense tech is likely driven by the war between Russia and Ukraine and instability in Europe, Israel's ongoing battle against Hamas and other terrorist organisations over the past year has also played a role. When Israeli reservists return to their high-tech jobs, they bring valuable insights that help them improve technologies based on what was helpful in combat.

Israel, he added, is also growing in the artificial intelligence sector, which he said "reflects a widespread belief that AI is the future of everything." The VC fund has investments in 94 different AI companies. According to PitchBook data, OurCrowd is among the world's top 15 most active AI investors.

Medved admitted that surveys of Israeli funders and CEOs often reveal negative sentiments. He said this is partly because "we live here and go through this all the time. But it is not a black-and-white situation."

He said that "if we don't put this war to bed sooner than later," things could change. But, for now, "I am proud of the way Israel's tech ecosystem leadership has handled itself and been incredibly resilient."