VC investment in Israeli startups has fallen off a cliff as proposed changes to its judicial system rocks business confidence and spurs Israeli entrepreneurs to leave for Europe and the US.
Total funding for Israel-based startups fell 74% year-over-year in H1 2023, according to PitchBook data. By comparison, global VC funding is down 49% this year. Deal count also fell, though less dramatically: The number of deals closed by startups in Israel slowed 45%, compared to a global decline of 34%.
An open letter signed by over 200 Israeli founders, investors and tech workers criticized the proposed reforms, which would, among other things, let the government override high-court decisions. It said the changes would deter foreign firms from investing in Israel’s tech ecosystem by destabilizing the judicial system and undermining minority rights.
As many companies rethink their status in the country, even Israeli VC firms are worried they may have to relocate.
“I really hope it will never happen, and we are fighting furiously,” said Rona Segev, managing partner at TLV Partners, a Tel Aviv-based VC firm that closed a $250 million fund Monday for early-stage startups.
But Segev acknowledged that if the government pushes through its sweeping overhaul to the judicial system, effectively curbing many of the country’s democratic guardrails, “we may be forced to emigrate with the ecosystem.”
Some smaller VC firms, such as AI-focused firm Disruptive AI, have already moved funds overseas to US bank accounts, Reuters reported.
On July 10, Israel’s parliament passed the first of three votes on the judicial reform bill as thousands of protestors rallied across the country, including at its main airport and outside the US mission in Tel Aviv.
So far in 2023, all of the companies in which TLV has invested have been incorporated in Delaware. That includes Oligo Security, a cybersecurity startup that closed a $28 million Series A in February, and HD data mapping software Ariga, which raised an $18 million Series A in June. TLV’s new fund is geared to invest in Israeli entrepreneurs, but Segev estimated that about 90% of its portfolio companies will be based outside of the country.
It’s become increasingly common for Israeli companies to open US bank accounts and move capital to US banks since the reforms were first introduced by Prime Minister Benjamin Netanyahu in January. But just in the last three months, Segev says that a new phenomenon is taking place: Tech entrepreneurs are not only relocating their business domiciles overseas, but also permanently emigrating with their families.
“We are seeing it accelerating, especially in the last few weeks,” Segev said. “It’s starting big time.”
Related read: Is Israel’s tech hub status under threat?
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