When war broke out between Israel and Hamas last October, we explored its potential impact on the Israeli-Palestinian tech ecosystem. Now, nine months later, in Israel, conversations with founders and investors alike suggest the conflict has made the startup and VC ecosystem more resilient, particularly in the cyber and AI sectors.
The technology sector is a key pillar of the Israeli economy: as of 2022, the sector employs more than 14% of the workforce, accounts for more than 18% of GDP, and accounts for half of the country's exports, according to the Israel Innovation Authority's 2023 annual report.
So far this year, 11 cybersecurity and AI-focused companies have been acquired for over $2 billion. Notable acquisitions include Nvidia's purchases of Run.AI and Desi, and Blackstone's acquisition of Priority. Additionally, cloud security unicorn Wiz, which recently raised $1 billion in the largest funding round ever for an Israeli startup, is reportedly in talks to be acquired by Google for $23 billion.
But the situation is not entirely rosy: venture capital investment in Israel is down more than 70% year-on-year (2022-2023), and many tech companies are mobilizing employees into the reserves in preparation for war.
“In the first months of the war, several companies called up many people, including about 10% of their tech employees,” Dror Bin, CEO of the Israel Innovation Authority, told TechCrunch in an interview. “In addition, other companies were busy during the first weeks, and the education system was closed, so people had to stay home with their children. This situation had a huge impact on human capital. Funding became more difficult for early-stage startups without revenue.”
Additionally, cyberattacks targeting a variety of sectors, including managed service providers, telecommunications, finance, and healthcare, have tripled since last October's attacks. According to Gaby Portnoy, head of Israel's National Cyber Agency, these attacks have cost Israel more than $3 billion since last October. But the country's cybersecurity industry, fueled by a skilled workforce, graduates of the IDF's engineering corps, and a robust entrepreneurial culture, has played a key role in defending against these cyberattacks.
For some, the war has had only a minimal impact on Israel's ongoing need to defend itself from hackers around the world. “Obviously, there are more people than ever trying to hurt us and attack Israeli organizations, government and companies, but it's just that the music has been turned up, it's not like we're hearing a whole new kind of music,” John Medved, CEO of venture capital firm OurCrowd, told TechCrunch.
Cybersecurity and AI startups remain popular with investors
Medved, who runs Israel's most active venture capital firm, said the war hasn't made life easier for the average Israeli investor. Not only are there examples of key corporate figures on the reserves, as Bin noted, but many global investors will likely prefer to wait for the war to end before putting significant money into Israel.
Nevertheless, venture capital is growing in the first half of 2024, which bodes well for the ecosystem. Israel's private fundraising in the first half of 2024 grew 31% to $5.1 billion, with the cybersecurity sector playing a key role, accounting for 52% of private fundraising. Global trends in cybersecurity are driving this increase in activity, according to Startup Nation Central, an NGO that reports on the Israeli tech ecosystem.
Startups in popular sectors such as cyber and AI continue to secure funding, with firms such as WIZ, Hailo and AI21 Labs highlighting the importance and attractiveness of both sectors to investors. At the same time, early-stage and early-growth companies in less trending sectors face more significant fundraising challenges, the report noted.
“Despite the ongoing war, there has been nearly $1 billion more investment in the cyber sector in the first quarter of 2024,” Medved said. “Cyber is clearly a leading sector for Israeli technology and investment, and it continues to be a gift. With significant innovation and funding, we can expect to see AI emerge strong. At OurCrowd, that is certainly the case. We believe in this revolution, and have made over 80 AI investments to date.”
Hailo, an OurCrowd portfolio company, is a leading Israeli AI company. The company makes AI processors for edge devices, known for their low cost, low power consumption, and high performance. Hailo recently raised $120 million at a $1.2 billion valuation, securing funding amid escalating conflict. (CEO Orr Danon said the AI chip processor opened and closed fundraising between October last year and April this year.)
Speaking to TechCrunch, Danone said he hadn't seen a change in global investor sentiment over the past few months, which he attributed to the ease of fundraising due to Hailo's status as an AI startup. However, he noted that compared to a year and a half ago, the fundraising environment has become significantly tougher for other founders, especially those outside the cyber and AI sectors.
“We don't know how much of this is due to the war and how much is simply part of the economic cycle. Overall there is a recovery, but only in certain areas. The cybersecurity sector, for example, is doing exceptionally well,” Danon added.
How local investors and other stakeholders have stepped in
Although the war is a major concern, startup founders and investors know that keeping their businesses open is crucial. Most Israeli startups have a global customer base and many of their go-to-market teams are based in the U.S., so the war will not have a direct impact on their sales in the short term. However, startups outside of the cybersecurity and AI sectors are struggling to raise capital to expand.
The efforts of organizations like the Israel Innovation Authority and OurCrowd have proven invaluable during this time. The Israel Innovation Authority, for example, launched a program called Fast Track to provide grants to early-stage startups that had no revenue before the war began and were in the midst of fundraising rounds with local and international investors. Bin says the program has raised more than $100 million, with an additional $150 million from the private sector, all distributed to 250 early-stage startups.
“We realized that these companies did not have enough capital to continue operating, and we did not want to see hundreds of great companies go bankrupt,” the agency's head said. “In total, we injected $250 million into these companies within three months, and by the end of January, these startups knew they had received the capital and could continue operating. The aim was to extend their funding by more than a year, to allow them to survive the war and return to fundraising without pressure.”
Meanwhile, OurCloud launched the Israel Resilience Fund in December last year to support startups affected by the war or developing solutions related to Israel's immediate needs, such as reconstruction, emergency medical care, food security, media monitoring, and cybersecurity. The fund aims to raise $50 million, but as of March had secured commitments of $17 million. Notably, OurCloud, which has invested in 35 startups through the fund, has waived all management fees and carried interest. The fund is
The use of AI is becoming more intertwined with different industries than ever before. Roey Eliyahu, co-founder and CEO of cybersecurity unicorn Salt Security, told TechCrunch that most cybersecurity startups are integrating or adopting AI capabilities to enhance their products and help customers defend against cyber threats more effectively. He added that API security startups are also embracing generative AI to help customers quickly consume and understand threat data.
“For years, we have been leveraging ML and big data to analyze API behavior and detect threats that traditional rules and signatures cannot prevent,” Eliyahu said. “Recently, we have developed an AI assistant that users can interact with to create a more streamlined experience, similar to using ChatGPT compared to a traditional Google search.”
The applications of AI in cybersecurity range from helping develop more cost-effective code to aiding penetration testing, but Medved believes the global tech industry is still in the early stages of using AI in cybersecurity, and he urges caution.
“This is a very dangerous field, and we must not forget that not only are good people using AI to protect us, but hackers are also busy deploying AI to make us more vulnerable and steal our money and personal information,” Eliyahu said.