How Israel’s High-Tech Sector Went To War Over Court Reforms

By Sara Miller, NoCamels,  July 27, 2023  

Erel Margalit leads a march across Brooklyn Bridge against the Israeli government’s planned court reform (Nir Arieli)

On Tuesday, July 25, 2023, a day after the Knesset (Israel’s parliament) passed legislation reducing the influence of the judiciary over the decisions of the political echelon, the major newspapers in Israel all sported the same cover: a page of solid black broken only by a small slogan in white at the bottom that read “A black day for Israeli democracy.”

The cover was actually an advert paid for by the “High-Tech Protest” – a group of hundreds of people working in Israel’s high-tech sector, from entry-level employees to CEOs and venture capitalists.

The group’s members have taken to the streets on a regular basis to protest the judicial overhaul, out of what they say is a sense of “mission and responsibility for the future of the State of Israel.”

The controversial “reasonableness” legislation limits the ability of the High Court (which in Israel also functions when needed as the Supreme Court) to review government actions, preventing the judiciary from striking down any government decision that it believes is not a reasonable measure.

Supporters of Prime Minister Benjamin Netanyahu and his far-right coalition say the law is needed to curb an activist court trying to govern from the bench; its critics decry it as anti-democratic and a power grab by the government – and one that has only just begun.

The legislation has been met with fierce opposition in Israel for the past six months, with tens of thousands taking to the streets across the country every week in protest.

A survey carried out by state broadcaster Kan earlier this month found that 43 percent of Israelis opposed the new law, while just 31 percent backed it and 25 percent were unsure.

The protests by the high-tech industry have been a prominent factor in the ongoing demonstrations.

“There’s a clear distinction between the current government, which is extreme and right wing, and the warriors of democracy, which include the high-tech sector, the doctors, the soldiers, the pilots, the teachers and many people around the country, who are saying no to the change in the judicial system and yes to democracy,” Erel Margalit, one of Israel’s most prominent high-tech entrepreneurs, tells NoCamels.

There is no central leadership to the high-tech protest, but rather it was an organic emergence of concerned individuals, industry veteran Erez Shachar and one of the first people in the movement tells NoCamels.

“The high-tech sector is very sensitive to political stability, to liberal democratic values,” says Shachar, who is managing partner at Qumra Capital in Tel Aviv.

“We don’t have any physical assets – our assets are intellectual property and the talent of people, and these people are, by definition, extremely mobile.”

The high-tech protests have not remained within Israel’s borders, and Margalit has been at the forefront of demonstrations in the United States. On Monday, he led a march across Brooklyn Bridge against the judicial overhaul.

“We say no to dictatorship, no to anti-pluralism and no to a non-independent judicial system!” he told the protest.

The protesters have been very visible in New York, which is home to many Israeli startups as they move to expand. Among those startups is Israeli Mapped in NY, a platform created to shine a light on Israeli innovation and help entrepreneurs to make their mark in the city.

On Wednesday, Israeli Mapped in NY CEO Guy Franklin joined New York Stock Exchange President Lynn Martin and leading lights in the Israeli high-tech industry, including Wiz CEO Assaf Rappaport and Taboola boss Adam Singolda, to ring the opening bell at the NYSE to honor his company. Many of the Israelis present donned black t-shirts emblazoned with “Save our democracy” in white letters.

Brain Drain

Erez Shachar warns that the economic impact on the Israeli innovation ecosystem is tremendous and potentially long lasting. He explains that while in recent years, 80 percent of Israeli startups have registered in the country and only 20 percent have registered abroad, since the start of 2023 those figures have effectively reversed.

And he says this is due to foreign investors – who account for 90 percent of the funds received by Israeli startups – telling those companies that they must register outside of Israel due to the political instability in the country.

“These institutional investors have very strict ESG [environmental, social and governance] standards, are very concerned about political instability, are definitely very concerned about human rights and all of this is at risk from this current government,” he says.

So while those companies still physically operate to some degree inside Israel, their taxes go to the country – primarily the United States – in which they are registered.

“The high-tech sector is dependent on foreign investors and foreign investments and these are affected by the [legislation],” explains Jonathan Saacks, the managing partner of Tel Aviv-based F2 Venture Capital.

“We believe the high-tech sector is extremely important to Israel’s stability, strength and success as a country and nation,” he tells NoCamels.

And Shachar does not believe that the sector will remain as stable as it has over the past decade or so.

“When [a country] becomes less stable and more at risk of losing some of the liberal democratic values, it’s really, really easy to reallocate funds – even people – to different geographic locations,” Shachar says.

Ultimately, he warns, the people who will suffer due to this relocation are not the ones working in the high-tech sector, but rather weaker members of Israeli society who rely on government stipends to get by and who will likely see those stipends shrink as tax revenues to the state shrink.

“The government will have a diminished tax base in the next few years as a result of what’s currently going on – and this is already happening,” he says.

Saacks is less than sanguine about Israel’s future, in the face of a potentially massive departure of talent in the tech sector.

“The most important factor and key success factor is the human capital and strength of the Israeli entrepreneurs, scientists, engineers and operators,” he says.

“If these professionals decide to relocate out of Israel this will be extremely negative and probably irreversible to the success of the high-tech sector.”

Shachar stresses, however, that while the situation currently looks bleak from an industry perspective, he remains optimistic that the sector will ultimately flourish once again fully within a democratic, thriving Israel, even if an entire generation of startups – from seed to exit – has been lost.

Margalit agrees that the sector’s funding will rebound.

“I think that investors are looking for direction. And once they understand that the Israeli companies are continuing to build great ideas, I think the investments will continue,” he says.

“Thanks to many of the people that are protesting and are raising their voice… I think the world will understand that there’s a big enough group in Israel that will continue to build this country in a way that’s innovative, in a way that’s open, in a way that democracy is an integral part of everything that we’re doing.”

This positive perspective is not shared by Amir Mizroch, communications advisor for several leading Israeli tech companies and the former director of communications for Startup Nation Central.

“I don’t see any real positives for Israeli tech in the current political configuration and especially with the future legislative plans the government has,” he tells NoCamels.

“This government and its growing political base prioritize Torah over technology,” he says.

“My assessment is that it will be much harder for Israeli startups to raise funding if they are based here – there’s too much risk, too much volatility, and Israel‘s external image, which is already complicated, is becoming increasingly murky in the eyes of global institutional investors.”

Despite the scattered hopefulness, the numbers bear out the financial concerns.

Diminishing Returns

The high-tech industry was the largest contributor to the national GDP in 2022, accounting for just over 18 percent or 290 billion shekels ($78B), according to the Israel Innovation Authority, the branch of the government dedicated to promoting the sector on the global stage. It was also responsible for 50 percent of the country’s foreign exports.

And despite predictions that the sector was on track to keep expanding in the coming years, the events of the past six months have shown that is not the case.

With the caveat that the rest of the world has experienced a slowdown in their tech sectors (although the US is beginning to show signs of recovery that are not echoed in Israel), the country has seen a massive downturn in investment in high-tech.

The Israel Innovation Authority reports that Israeli high-tech companies raised $3.7 billion in funding in the first half of 2023, the lowest amount for that period in five years. And, according to the independent Start-Up Nation Policy Institute, this is a 31 percent drop from the second half of 2022 and a 68 percent decrease compared to the same period last year.

This dramatic downturn was even cited by US-based Moody’s Investors Service – one of the “big three” global credit ratings agencies – when it issued a warning after the law passed that there are “signs that Israel is decoupling from global trends.”

The agency also cautioned that the legislation bore “negative consequences for Israel’s economy and security situation.” Spotting the trend back in April, when it expressed concern over a “deterioration of Israel’s governance,” Moody’s lowered Israel’s credit rating from “positive” to “stable.”

And even though Netanyahu this week was quick to dismiss Moody’s warning as a “momentary reaction,” insisting that “Israel’s economy is very strong,” it was not the only global financial institution to sound the alarm over the legislation.

American multinational investment bank and financial services company Morgan Stanley also reacted negatively to the legislation, downgrading Israel’s sovereign credit to a “dislike stance.”

“The recent events point to continued uncertainty and thus the potential for an increased risk premium that would lead to weakening FX [foreign exchange] and higher borrowing costs,” the financial institution said.

“Such economic shocks tend to lead to weaker GDP growth due to lower business investment and private consumption growth.”

Despite the financial fallout and the protests, Netanyahu and his government are determined to stay the course. After the victory in Tuesday’s vote, offers were extended to negotiate with the opposition over the continuation of the overhaul.

But with efforts to find a compromise failing to reach a successful conclusion in the months leading up to the vote, the opposition parties are mistrustful of the government and skeptical that it genuinely intends to search for a middle ground.

The future of the legislation, the protests and even the entire high tech sector hangs in the balance.

As Margalit puts it: “The world is looking to see where Israel’s going from here.”