Tech leaders in Israel wonder if it’s time to leave

For years, budding Israeli tech executives have asked seasoned entrepreneur Yanki Margalit where they should start their fledgling businesses. For years, he’s offered the same advice: here in Israel, where software engineers are plentiful, international investors are eager, and friends and family live.

But as Mr. Margalit plots his own new venture, focused on tackling climate change, he reluctantly concluded that Israel was not the right place to start.

“Given the current atmosphere, it’s almost irresponsible to start a business here,” the 60-year-old said, “and it’s heartbreaking.”

The luminaries of Start-Up Nation, as Israel has been known for decades, are eyeing the releases. Several have already announced they are relocating or transferring money out of the country, including the chief executive of Papaya Group, a payroll company valued at over $1 billion.

The reason is that a right-wing government, led by Prime Minister Benjamin Netanyahu, recently announced plans for a radical overhaul of the country’s justice system that many believe will end its 75-year existence as a independent institution.

The proposed changes would drastically reduce the court’s ability to strike down laws passed by the Knesset, the country’s parliament, and give the ruling coalition much greater control over who sits on the bench.

It has caused so much civil unrest and mass protests that Israeli President Isaac Herzog said in a televised speech last week that the country was “on the brink of constitutional and social collapse”.

More quietly, people like Mr. Margalit are reassessing what it means to operate here and deciding that if the government revamps the justice system, it’s time to move on.

“It’s all about risk management and the risk is for the brand that is Israel,” said Assaf Rappaport, chief executive and co-founder of Wiz, a $6 billion cloud security company. “It took a long time to build this brand, and today every company in the world can trust Israel as a partner in its cyber defense. These reforms will challenge all that.

While the judicial changes will affect all Israeli businesses, the reaction from the tech sector is of most concern as it provides much of the power to the economy.

Some 54% of Israel’s exports are high-tech products and services, according to the Israel Innovation Authority, a supporting arm of the government. The Israelis have created more than 90 so-called unicorns – private companies valued at over $1 billion – including Wix.com, which offers cloud-based web services; game company Moon Active; and financial services company eToro.

The loss of top earners and the companies they run would be devastating in a country where 81% of tax revenue comes from just 20% of the population.

The new government, formed in late December, includes members of ultra-Orthodox and ultra-nationalist political parties. Both rely heavily on government subsidies: the former because few of its members participate in the labor market, and the latter because it wants funds to support settlements in the West Bank.

This is why Eran Yashiv, professor of economics at Tel Aviv University, sees judicial reform as a kind of drain on resources.

“It’s a redistribution from the high-tech sector to religious and nationalist minorities,” he said. “And that would turn Israel into an illiberal country.”

In Israel’s parliamentary system, the administration generally controls the legislature, so gaining more sway over the courts would give Mr. Netanyahu and his ministers influence over all three branches of government and far less checks on its powers.

Earlier this month, a group of 56 American economists sent a letter to Mr Netanyahu claiming that his government’s judicial proposals would “harm the Israeli economy by weakening the rule of law and thereby displacing Israel to Hungary.” and Poland”.

“There is a tremendous amount of research over the past 25 years that shows stability and the rule of law support better economic growth,” Zvi Eckstein, former deputy governor of the Bank of Israel, said in an interview. . “As economists, we fear that reduced property rights for individuals and businesses will introduce uncertainty and that a weaker judicial system will increase the likelihood of government corruption. Both of these things will cause the economy to slow down considerably.

If Israel’s democratic institutions are undermined, investors and leaders argued, it will keep blue-chip customers and investors at bay. And if a company is struggling to attract customers, it will have the same problem with talent.

Many Israeli-run companies, including Wiz, are already based in the United States and maintain a subsidiary in Israel, as it makes it easier to appeal to investors and employees. Israeli tech executives who live in the United States often return when their children reach school age so they can acclimate to Israeli culture and serve in the military.

“We used to talk about coming back to 2024, and now it’s like we’re not talking about it, which is very important to us,” said Nadav Weizmann, an entrepreneur who is launching his third venture, Cardinal. , a tool for product managers. , in Austin, TX. “For a start-up founder, it’s now much harder to imagine going back to Israel, because you don’t know what it will be like.”

If the government goes ahead with its legal plans, the exodus of Israeli tech leaders will increase and the influx will decrease, said Adam Fisher, co-founder of Bessemer Venture Partners, which has backed more than 30 start-ups in the country. The money from Bessemer and other venture capitalists – 90% of all investment in Israeli technology comes from foreign sources – will simply follow the entrepreneurs.

“When I invest in Israel, I’m not really investing in the Israeli economy; I don’t look at the shekel or rail infrastructure or GDP growth,” Fisher said. “I invest in entrepreneurs, and if those entrepreneurs want to move elsewhere, that’s fine.”

The office of Israeli Finance Minister Bezalel Smotrich declined to comment. In a statement in mid-February, he said claims that the reforms were undermining democracy were part of a “scaremonger campaign”. He and other coalition members said they were simply correcting an imbalance that gives too much power to the Supreme Court.

In a Fox News interview this month, Netanyahu said: “We have probably the most militant courthouse on the planet.

Since 2020, Mr Netanyahu has been on trial for bribery, fraud and breach of trust, which he has denied. His interest in revamping the court was deemed conflicting enough that this month the country’s attorney general ordered him not to get involved in the effort. Netanyahu’s office called the request “unacceptable”.

That a government led by Mr Netanyahu is jeopardizing Israel’s technological miracle baffles many, as he has long been one of the sector’s most vocal champions. But a flight of capital has already begun.

“I hear concrete instructions from my clients on how to mobilize money out of Israel, to Switzerland or London,” said Eran Goren, co-founder of Fidelis Family Office, which handles money for wealthy Israelis. “We work very closely with the private banking departments of the big banks and they say it’s coming from all directions – people are just withdrawing money.”

A declining tech industry would make Israel poorer, weaker and more religious, Yashiv said. This should worry anyone concerned about stability in the Middle East, he added.

“Weaker states tend to be more aggressive, and a weaker Israel will be a more aggressive Israel,” he said.

Few of Israel’s tech leaders said they would leave with joy. Although it pained him, Mr Margalit weighs the pros and cons of cities like London, Paris and New York.

“If they pass this legislation,” he said, “what are my options?”