Why investors are still bullish on Israel even in wartime

Oct 8, 2024 5:35 am | Israel21c, News

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Massachusetts-based Two Lanterns Venture Capital, a seed fund investing in US and Israeli software startups, plans to invest 50 percent of its second fund in Israeli startups.

It’s not that the VC feels sorry for Israel during a difficult year of war. The decision is based on dollars and sense, said Two Lanterns founder and managing director John Harthorne at a recent online Israeli Innovation Webinar.

John Harthorne of Two Lanterns VC. Photo courtesy of Two Lanterns

“Within the Two Lanterns venture portfolio, our 12 Israeli investments are currently outperforming the rest of our startups by nearly 1.7x,” said Harthorne, adding that “the Israeli founders are likely to significantly outperform the average as a group over time.” 

The webinar examined why this is the case, how the current conflict is impacting the startup ecosystem, and what sectors of the ecosystem are most attractive for investors.

Harthorne, who previously founded and led the MassChallenge nonprofit accelerator for high-impact startups, including many in Israel, said the reason “Israel produces such incredible founders” is straightforward.

“I believe Israelis to be the most resilient people on the planet,” he said. “Launching startups is a very difficult uphill battle … so resilience is one of the most critical elements for success.”

Yoni Cheifetz, partner at Lightspeed Venture Partners, which funds disruptive enterprise, consumer, fintech and health innovators in Israel and other countries, said investors look for three things: innovation, capital availability and the ability to invest and take out capital. 

“I believe all those things will grow in Israel. I don’t see any danger in [relation to] that.”

New statistics seem to support these statements. 

Despite an ongoing war that has severely impacted businesses on many levels, the Israel Innovation Authority reports that Israel has maintained its position as the third-largest global tech investment hub, raising nearly $9 billion between October 2023 and August 2024. 

Cyber on top

Cybersecurity companies (startups but mainly established firms) grabbed the biggest slice of that pie. A case in point: Cyber startup Torq of Tel Aviv recently closed a $70 million round, bringing its 2024 investments to $112 million amid triple-digit growth.

“On the cyber front, we have almost a perfected flywheel at this point in terms of evolution of startups,” said panelist Udi Mokady, founder and executive chairman of Petah Tikva-based CyberArk, which has a market cap of over $10 billion and approximately 3,000 employees in 15 countries serving more than 8,000 enterprise customers.

Udi Mokady, the Founder and Executive Chair of Cyberark. Photo courtesy of David Shopper

Many Israeli startups are developing security solutions for new threats arising from technologies such as artificial intelligence, he said. 

“Israel is probably not going to be the one creating the language models and infrastructure around AI, but rather the trust and security and governance around AI,” said Mokady, who was one of the angel investors earlier this year in Israeli startup Clarity, which protects against deepfakes. 

He agreed with Harthorne that resilience is the primary ingredient in Israel’s success.

“Like during covid, we’ve seen amazing resilience and even an increase in productivity. Everybody stepped forward and leaned in. The mantra of ‘Israel delivers no matter what’ was just that, across the board in the industry.”

Mokady said he’s seeing some US funds recognizing that “this is a great time to invest in Israel because we will come out this and will come out of it strong.”

AI and defense

Cheifetz, of Lightspeed Ventures, agreed that cyber will continue to be “really big” and that startups using AI in innovative ways should also pique investor interest. 

“AI moves fast, as opposed to quantum computing where the pace is slow,” he said. 

Serial entrepreneur Micha Kaufman, founder of Tel Aviv-based Fiverr, the world’s top freelance platform, listed “everything that has to do with digital transformation” as attractive for investors in Israeli tech. 

He singled out cyber, consumer Internet, SaaS (software as a service) and even defense as sectors of particular interest.

Yoni Cheifetz, partner in Lightspeed Venture Partners. Photo courtesy of Lightspeed

Cheifetz observed that “VCs have largely kept away from the defense industry but there’s a lot of knowledge in Israel in that space.” (Mokady wryly explained that this is because “with defense technologies you want to test them in real time, and unfortunately in Israel you can do that.”)

Cheifetz said one major reason that “Israel is an attractive place, almost as competitive as the Valley, from an investment perspective” is that the military cherry-picks outstanding STEM students at the high school level.

The IDF “puts them in units that fast-forward them in their careers by 10 years. Our two main deal sources in Israel are people coming out of these units and repeat entrepreneurs coming out of successful companies,” he said. 

“We’re investing as intensively as before and will continue to do so.”

High-tech will prevail

The panelists agreed that the situation right now is not ideal, citing decreased early-stage fundraising, fewer new startups, and severe talent and staffing shortages due to military reserve duty since October 7.

Fiverr CEO Micha Kaufman. Photo by Omer Hacohen

“The current conflict occurred in a tough macroeconomic environment and geopolitical landscape around the world. On top of that, we have our own conflict. From an investor’s standpoint, having less exposure to Israel is an easier choice,” said Kaufman.

“On the other hand, startups that had all the reasons in the world not to survive are still thriving and finding ways to deal with the situation. In the long run, I believe Israel in general, and high-tech in particular, will prevail. We have a society of absolute heroes and patriots who want to build an incredible future here.”

Despite widespread anti-government protests and military threats on multiple fronts, Kaufman added, “Israeli society and its high-tech environment are much larger and stronger than any government or crisis. It’s crucial to continue supporting high-tech through this crisis as we see the next waves of innovation coming from Israel.”

To view the entire webinar, click here

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