After navigating a recession and military conflicts, advanced Israeli technology companies may be facing their biggest test yet as the collapse of Silicon Valley Bank wipes out a major source of funding, while proposed judicial reforms threaten the foundations of corporate law. The Israeli economy has benefited from a wave of success in the technology sector, which employs only ten percent of the workforce but accounts for about 15 percent of its economic output, over half of its exports, and a quarter of its tax revenues.
However, the proposals from the far-right coalition led by Prime Minister Benjamin Netanyahu, which grant the government greater authority in appointing judges and limit the Supreme Court's power to overturn laws, have raised concerns among current and potential investors. Karnit Flug, former governor of the Bank of Israel and currently vice president at the Israel Democracy Institute, stated, “The advanced technology sector needs stability, it needs clear rules of the game, it needs certainty… with courts it can turn to,” adding that without this, investors will refrain from injecting funds.
A potential risk also includes accelerating brain drain. Approximately 100,000 Israelis already live and work in California's Silicon Valley, with many others having moved to Europe. Government data indicates there are around six thousand current job vacancies in the technology sector, which comprises about 400,000 positions in total. Flug told the Israel Council on Foreign Relations, “This sector… will take their minds… and their ideas and entrepreneurship, and some countries will roll out the red carpet for them.”
The parliament has approved the proposed legislation, which its supporters claim is necessary to limit what they see as judicial interference in political affairs, while opponents argue it poses a threat to democracy. However, the final approval has been postponed for a month following widespread protests. Several advanced technology companies, such as the Israeli-American cybersecurity firm Wiz, have stated they will withdraw their funds from Israel and prevent financing from entering if the proposed reforms are passed, while the CEO of Nice, a cloud software company, reported that major investors are closely monitoring the situation.
In the meantime, the Israeli shekel has dropped to its lowest level in three years against the dollar amid expectations of a decline in foreign direct investment, which hit $15 billion last year and peaked at $27 billion in 2021. According to both IVC Research Center and Lume Tech, Israeli advanced technology companies raised $1.7 billion in the first quarter of the year, down 70 percent from $5.8 billion in the first three months of 2022, marking the lowest quarterly fundraising level in four years.
### The Impact of the Silicon Valley Bank Collapse
Concerns in the technology sector are also growing due to the collapse of Silicon Valley Bank, which John Medved, CEO of OurCrowd, referred to as the “bank of refuge” for Israeli startups—a group that consists of seven thousand companies, some valued at over a billion dollars, while others are small businesses employing no more than 50 people.
Venture capital firms and startups have indicated that more than half of startups in Israel hold accounts at Silicon Valley Bank, and for some, those accounts were their only banking tool in the United States, though the exact transactional volume is unspecified. Mickey Balter, CEO of Orient Systems, shared that Silicon Valley Bank was the only American bank for his company, noting that they fortunately managed to transfer 70 percent of millions of dollars from their account there to Israel, leaving the rest with the American bank.
At first, Balter thought his company had lost the remaining thirty percent, but he regained access to it once regulators took over the bank. He said, “Had that happened, it would have been very painful… before (the regulators took over), I expected to lose most of our operational liquidity.” BankLumi stated it managed to transfer a billion dollars to local accounts before U.S. regulators took control of the bank, which investors say is approximately half of the expected returning amount.
Technology companies and investors noted that Silicon Valley Bank was unique, as it understood the climate of the Israeli technology sector and offered loans under terms that no other bank provided. Medved said, “These guys were very professional and working with them was great… banks can be annoying these days... but these guys were not.”
Adam Fisher, a partner at Bessemer Venture Partners, indicated that due to the judicial reforms, the number of U.S. banks willing to lend to Israeli companies might decrease, meaning less competition and stricter terms. He noted, “Local banks will step in to some extent, but they can’t increase their loan portfolios significantly overnight.”
A senior executive from one of the Israeli banks expressed optimism about enhancing lending to startups, but noted that local banks alone will not be able to fill the gap left by Silicon Valley Bank. He added, “We don’t aspire to provide billions of dollars, but we certainly aim to double or triple our portfolio.”
As a result, it is likely that Israeli technology companies will seek to register as American companies while retaining their research and development activities in Israel, according to Yaron Samid, managing partner at Tech Aviv Founder Partners. Samid mentioned that some large U.S. banks offered to open deposit accounts for those affected by the collapse of Silicon Valley Bank, and that fintech company Brex had done the same. Other financial institutions offered to provide emergency liquidity but at higher interest rates.
Samid said, “There’s no doubt that some companies could not continue without the credit facilities provided by Silicon Valley Bank… there will be some contraction. That was already a reality due to macroeconomic factors and direct investment market dynamics, but this will accelerate it.” He continued that the proposed judicial reforms have prompted some potential investors to withdraw or request more time to consider after entering “advanced stages” of investment negotiations with some founders of Israeli startups. Samid declined to name specific companies at their request. He added, “Companies with a strong position will continue, while those without the same strong position will not.”
