When the conflict between Israel and Hamas erupted last October, we explored its implications for the tech ecosystems in both Israel and Palestine. Now, nine months later, conversations with founders and investors reveal a prevailing sentiment in Israel: the war has fortified the resilience of its startup and venture capital (VC) landscape, particularly within the cybersecurity and AI sectors.
The technology sector is a crucial pillar of Israel’s economy. As detailed in the 2023 annual report from the Israel Innovation Authority, the tech industry employed over 14% of the workforce, contributed more than 18% of the GDP, and accounted for half of the nation’s exports in 2022.
Since the beginning of this year, 11 companies—mainly in cybersecurity and AI—have been acquired for over $2 billion. Significant acquisitions include Nvidia's purchases of Run.AI and Desi, along with Blackstone's acquisition of Priority. Additionally, Wiz, a unicorn in cloud security that recently raised $1 billion—the largest funding round for any Israeli startup— is reportedly in discussions with Google for a $23 billion acquisition.
However, the landscape isn’t entirely positive. Venture capital investment in Israel has dropped over 70% year-over-year from 2022 to 2023, with many tech firms activating their employees into military reserves for the war effort. “Several companies summoned employees for military duty in the early months of the war, affecting about 10% of the tech workforce,” Dror Bin, CEO of the Israel Innovation Authority, noted in an interview. “Furthermore, the education system's shutdown meant that many were at home with children, significantly affecting human capital. For early-stage startups without revenue, fundraising has become increasingly challenging.”
Cyberattacks have surged across various sectors, including managed service providers, communications, finance, and health, increasing threefold since last October’s attacks. According to Gaby Portnoy, director general of the Israel National Cyber Directorate, these cyber threats have cost Israel over $3 billion since the onset of conflict. Nevertheless, Israel's cybersecurity industry—bolstered by talented graduates from the IDF's tech units and a strong entrepreneurial culture—has been pivotal in countering these attacks.
For some, the war has minimally affected Israel’s imperative to defend against global hacking attempts. “Clearly, there are more hostile actors targeting Israeli organizations, government, and companies than ever, but it’s more of an amplification of existing threats rather than a new dynamic,” explained Jon Medved, CEO of VC firm OurCrowd.
Despite these challenges, cybersecurity and AI startups remain attractively positioned for investors. Medved, leading Israel’s most active venture capital firm, stated that the war has complicated the average investor’s landscape. Not only have key personnel been summoned to serve, but many global investors are hesitant to commit large sums until the conflict subsides.
Despite these hurdles, venture capital shows signs of growth, particularly in early 2024. Private funding in Israel surged by 31%, reaching $5.1 billion in the first half of 2024, with the cybersecurity sector accounting for 52% of that funding, reflecting global trends accelerating this sector's momentum, as reported by Startup Nation Central.
Startups in sought-after areas like cybersecurity and AI continue attracting investors. Companies like Wiz, Hailo, and AI21 Labs highlight the robust demand for innovative solutions in these fields. Conversely, financial challenges remain for early-stage startups in less popular sectors, as noted in the report.
“Notably, nearly a billion dollars in exits occurred within the first quarter of 2024, predominantly in cybersecurity, even amid ongoing conflict,” stated Medved. “Cybersecurity is undeniably the frontrunner in Israeli tech, and we anticipate that AI will also thrive, generating significant advancements and funding opportunities—we at OurCrowd have made over 80 investments in AI so far.”
Hailo, an emblematic AI company in Israel, exemplifies this growth. Known for its high-performance, low-cost AI processors for edge devices, Hailo successfully secured $120 million at a $1.2 billion valuation amidst escalating conflict. CEO Orr Danon remarked that his company wrapped up fundraising in April, maintaining interest from global investors.
In a conversation, Danon reflected on the fundraising landscape, noting that while global investor sentiment hasn’t significantly shifted for Hailo, it has become notably tougher for many founders outside the cybersecurity and AI niches compared to a year and a half ago.
“It’s challenging to pinpoint the effects of the war versus general economic cycles. Overall, we’re seeing recovery, but it’s predominantly in specific sectors; for instance, cybersecurity is thriving,” Danon added.
Local investors and stakeholders have stepped up in these trying times. While the conflict is a pressing concern, startup founders and their investors recognize the importance of maintaining operational continuity. Many Israeli startups have a global customer base, often with go-to-market teams located in the U.S., implying that the war has minimal immediate impact on sales.
Organizations like the Israel Innovation Authority and OurCrowd have taken pivotal roles during this crisis. For instance, the Israel Innovation Authority implemented a program called Fast Track to provide grant funding to early-stage startups caught in the fundraising limbo due to the war. According to Bin, this initiative raised over $100 million, complemented by an additional $150 million from the private sector, helping 250 startups sustain their operations.
“We found that many startups lacked sufficient funds to continue, and we wanted to prevent promising companies from collapsing,” Bin explained. “Over about three months, we allocated $250 million, allowing these startups to extend their operational runway for over a year and return to fundraising without the added pressure.”
OurCrowd also introduced the Israel Resilience Fund to support startups affected by the war or those working on solutions for Israel’s immediate needs, including reconstruction, emergency medical services, food security, media monitoring, and enhanced cybersecurity. The fund, aiming to raise $50 million, had secured $17 million in commitments as of March, and OurCrowd waived all management fees and carried interest for the startups involved.
The integration of AI across various industries has reached new heights amid the conflict. Roey Eliyahu, co-founder and CEO of cybersecurity unicorn Salt Security, shared that AI capabilities are increasingly being adopted by cybersecurity startups to fortify defenses against cyber threats. His startup, specializing in API security, has also harnessed generative AI to streamline threat data management for users.
“We have utilized machine learning and big data for years to analyze API behaviors and identify threats that standard methodologies cannot detect,” Eliyahu elaborated. “Recently, we developed an AI assistant to enhance user experience, making it reminiscent of ChatGPT compared to traditional search engines.”
While the applications of AI in cybersecurity vary, Medved believes the tech industry is still in the nascent stages of AI utilization for security purposes and counsels vigilance.
“It’s an exceptionally dynamic field, and it’s crucial to keep in mind that while defenders are deploying AI technologies to safeguard systems, adversaries are also leveraging AI to exploit vulnerabilities,” Eliyahu warned.
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