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SturtupBlink Report: Startups are fleeing Israel

Amidst reports that start-ups are beginning to flee the country in response to the government’s controversial judicial overhaul, a new report shows Tel Aviv dropping to tenth place on an annual list of the world’s top start-up ecosystems.

According to the latest Startup Ecosystem Report by Startup Blink, an industry analysis organization, Israel’s startup capital of Tel Aviv continued a year-over-year decline which started in 2019, even as Jerusalem rose by seven spots on the list and Israel, as a country, remained stable at third place globally.

Tel Aviv’s decline is “a worrying trend that, if continued, will mean the ‘Start-up Nation’ has no ecosystems in the top 10,” the report stated, noting that the Netanyahu government’s efforts to limit the power of the courts “threatens to impact investment in the country's startup ecosystem and break the trust between the country and its entrepreneurs.”

“It is extremely rare to see a country that blatantly engages in policies which alienate the majority of its most successful entrepreneurs,” the report stated. “Israel is not only a startup nation, but also a brain drain nation. Over 80 Israeli unicorns are now operating in the US. Part of this exodus can be explained by the need to be close to clients and major markets. However, a substantial part is also related to Israel's relatively low friendliness toward start-ups.”

Members of Israel’s hi-tech sector have been prominent in the leadership of the protests against the judicial overhaul, with many participating in a national strike this March which forced Prime Minister Benjamin Netanyahu to temporarily suspend his efforts.

Industry leaders have warned that “harming the court’s status” would “constitute a real existential threat to the glorious high-tech industry that has been built in Israel with great effort over the past three decades.”

A poll released in April by Tel Aviv-based start-up Nation Central found that 46 percent of companies were ”planning to extract cash reserves from Israel,” with more than half of these intending to transfer over half of their reserves abroad, a whopping 42 percent considering moving their registration to another country and 27 percent actively considering relocating employees abroad.

A survey by the Israel Innovation Authority released the following month found 80 percent of start-ups established so far this year were opened outside Israel and that companies also intend to register their future intellectual property overseas – which would result in a severe blow to Israel’s tax coffers.

Major start-ups started withdrawing from Israel as early as January, with one CEO explaining that “in the emerging reform, there is no certainty that we can conduct international economic activity from Israel.”

The Start-Up Nation Central poll also found that an overwhelming majority of domestic firms and investors believe the government’s controversial judicial overhaul plan will make it substantially more difficult for them to raise funds and do business in Israel.

According to poll results, over 80 percent of investors and start-ups “believe the judicial changes will have a negative impact on them and their portfolio companies” while 65 percent of multinational corporations polled indicated that they expect the overhaul to negatively impact “interest in piloting, buying, or commercializing Israeli innovation.”

Seed funding for new start-ups in Israel has already fallen significantly since the government took power.

According to IVC and Lumitec data, in the fourth quarter of 2022, Israeli start-ups raised $284 million in seed rounds; In the first quarter of 2023, a decrease of about 40 percent was recorded, to $173 million; And in the second quarter of 2023, another sharp drop of about 43 percent was recorded, to only $99 million.

On Tuesday, a day after Knesset lawmakers passed a key judicial overhaul law revoking the Supreme Court’s authority to overturn government decisions it deems unreasonable, Morgan Stanley cut Israel sovereign credit to a “dislike stance,” while Moody’s credit rating agency warned that “there is significant risk that political and social tensions over the issue will continue, with negative consequences for Israel’s economy and security situation.”

Citibank also issued a warning against investment in Israel on Tuesday, stating that recent legislative developments “challenge Israel’s economic situation” which is now much more “dangerous and complicated.” The bank advised that its clients hold back from investing in the country.

Earlier this month, Haaretz calculated that the Israeli economy has suffered a loss of approaching 150 billion shekels—an average loss of over 50,000 shekels, or $13,500, per household— due to the overhaul.

Reuters contributed to this report.