Israel's High-Tech Sector Is Braving the Storm

"We are experiencing a 'perfect storm,' but Israeli high-tech is resilient and is continuing to grow," Dror Bin, CEO of the Israel Innovation Authority, asserts optimistically. The problems began with the global financial crisis in the second half of 2022. Israel's flourishing high-tech industry was immediately affected and confronted difficulties raising capital for the first time. The situation was aggravated by the political turmoil in Israel from the beginning of 2023, and, of course, by the events of October 7th and its aftermath.

Indeed, since October 7th Israel's entire economy has been suffering, and companies have struggled to continue operating despite the challenging circumstances – including the fact that so many workers were called to reserve duty for extended periods. "Everyone was busy trying to deliver. Entrepreneurs and CEOs were determined to keep their commitments on R&D and product delivery no matter what," says Bin. However, many start-up companies quickly saw their investments running dry and only had enough funding left to stay in business a few more months.

First aid
"The Israel Innovation Authority realized that many early-stage start-ups were stuck with their funding rounds and only had 3-6 months left before they would have to shut down," recalls Bin. The Authority immediately decided to use its resources and experience to help high-potential start-ups survive. Already on November 1st, the Israel Innovation Authority announced the creation of the Fast-Track Bridging Fund – a unique initiative which, during a three-month period, would distribute over $100 million to start-ups with runways of under six months. The idea was to inject emergency money into young companies and enable them to continue developing their products for at least a full year.

Following an accelerated yet thorough due diligence process, 247 start-ups were approved out of the 655 companies that applied for support from the Fast-Track Bridging Fund. The Israel Innovation Authority's Investment Committee prioritized companies that already had technological and business assets but did not yet have revenues. They chose the best start-ups: those that were developing innovative products with disruptive market potential, as well as excellent management teams.

Each start-up company accepted by the Investment Committee was required to obtain matching funds from private investors. On average, the Israel Innovation Authority allocated NIS 1,650,000 to each company and they then had to provide matching funds within three months. Needless to say, this is an excellent opportunity for investors, since all the companies selected for the Fast-Track Bridging Fund were carefully vetted by experts who have extensive experience assessing young start-ups. "These companies are indeed the cream of the crop, and we highly recommend taking advantage of the opportunity to provide matching funds," Bin points out.

Supporting venture funds
Several months into the current war, the Israel Innovation Authority became increasingly concerned that there is a scenario in which Israeli venture capital funds will start to dry up and, as a result, will reduce their investments in local companies, especially early-stage start-ups. In order to avoid this negative scenario, the Israel Innovation Authority will shortly launch another special emergency fund, called Yozma.

The Yozma Fund will be active for two years, through 2025, and is expected to inject a total of approximately $1 billion to Israeli VC funds, of which around one-quarter comes from the government. The idea is to strengthen Israeli institutional investors' confidence in VC funds, which in turn will fortify the local tech ecosystem.

"We want to see more money going into Israeli venture capital funds and we want to provide an incentive," Dror Bin explains. "The way it works is that for every dollar that an Israeli institutional investor puts into a venture fund, we will add 30 cents if the fund is successful. The institutional investor can pay us back and reap all the benefits, so it's like an 'upside booster.'" If, however, the VC fund doesn't yield returns, the Israel Innovation Authority will share the loss with the institutional investor.

New main funding vehicle
Unlike the Fast-Track Bridging Fund and the Yozma Fund, the third major initiative that the Israel Innovation Authority introduced since October 7th has a long-term horizon. In fact, it is a strategic project that was already in the works before the current war and is now being launched. Known as the Deep-Tech Start-Up Fund, it is based on the idea that Israel's high-tech sector must broaden its fields of specialty.

"We believe that in order for Israeli high-tech to be stronger than it is today, it must continue to diversify. Israel's high-tech sector excels in enterprise software, cyber and FinTech – which is great – but we also want to see more groundbreaking, disruptive initiatives in 'deep tech' fields, such as energy, food, agriculture, smart transportation, medical devices, Climate-Tech, construction, materials, and semiconductors," Bin elaborates.

Deep-tech companies focus on solutions for major global challenges, such as global warming, food security or human health. Usually, they are multidisciplinary, involving, for example, both biology and artificial intelligence, or materials science and agriculture; and the product being developed is physical, such as a chip, a drug molecule, or cultured meat. In general, these are products with a longer time-to-market and stricter regulations, which renders them less attractive to potential investors.

There are already hundreds of amazing deep-tech start-ups in Israel, but until now they didn't enjoy satisfactory financing options to allow them fast growth and the Israel Innovation Authority seeks to change this reality through the new fund. "We want to make sure that an entrepreneur interested in starting a deep-tech company or an investor who wants to invest in such a start-up will receive ample support so that they can succeed," says Bin.

The new Deep-Tech Start-Ups Fund, which was launched in March, will be the Authority's main funding vehicle from now on. It will invest in different funding rounds, from Pre-Seed and Seed to Round A series, in order to ensure that deep-tech ventures will have access to optimal investment sources. In its first year of operation, the new fund will allocate approximately NIS 500 million to hundreds of companies. The amount will increase in the future. For pre-seed funding rounds, which usually total less than $1 million, the Israel Innovation Authority will provide grants of 60% through the Fund; for seed rounds totaling $3-4 million, the Fund will give 50%; and for Series A rounds, which usually reach $15-20 million, the Fund will contribute 30%. As always, all requests for funding will undergo scrupulous due diligence.

"I believe that we will see many Israeli deep-tech initiatives that will flourish and change the world for the better. These fields are important for Israel's economy and will serve as economic growth engines," asserts Bin.

Continuing to flourish
Founded in 2016 as an updated incarnation of the Office of the Chief Scientist in the Ministry of Economy and Industry, the Israel Innovation Authority is an independent, statutory public agency whose mission is based on over 50 years of experience. Funded from Israel's national budget, it is managed by a Board of Directors that consists of representatives from both the government and the high-tech sector.

From his vantage point as CEO, Dror Bin is passionate about the unique potential of Israel's ecosystem. "We have first-rate entrepreneurs that love difficult challenges, sophisticated investors, world-class academic research, and grants that we provide, which lower the risks," he points out enthusiastically.

Bin has no doubt that Israel's tech ecosystem will successfully ride out the current storm. "In all the past crises, Israeli high-tech always came out stronger, and in the current difficult crisis, we are determined to ensure that also this time we will emerge stronger and will continue to flourish and develop Israel's economy," Bin concludes optimistically.

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