Israel is indeed the startup nation with the largest number of startups per capita. Despite economic uncertainties, private funding in the Israeli tech ecosystem for 2023 neared $10b, with disclosed funding at $7.9b, showing stability at 2019 levels but with fewer rounds. Since the outbreak of the war, the Israeli high-tech sector has navigated significant challenges but showed remarkable resilience. 

With political domestic tension and the ensuing war against Hamas and now Hezbollah –all against a background of global macroeconomic contraction, Israel’s startup ecosystem has its challenges. However, Israeli tech companies have shown characteristic agility and creativity in overcoming setbacks, allowing some even to thrive.

In historical periods of crisis, the private Venture Capital market has been known to seize the opportunity for lucrative investment, and the startup arena in Israel is indeed seeing various sectors bloom. Joining us today to help us understand where the savvy investor should be focusing is Mor Assia, founding partner of iAngels, an expert and leader in the private startup investment sector. 

How has the post-October 7th war affected the startup ecosystem in Israel, and what are some of the challenges that it faces today?

First, we need to remember that significant and interesting deals have been happening since October. For instance, Wiz raised $1b at a $12b valuation before declining a $23b acquisition offer. Similarly, Nvidia acquired two companies for ~$1b, and Palo Alto Networks did the same. In fact, iAngels’ portfolio companies alone have collectively raised over $120m since October. This indicates that despite the circumstances, there is still a lot of activity, and all these deals were negotiated and executed after the onset of the war, which is a positive sign.

With that said, I see many opportunities for local investors. A lot of international VCs and global CVCs have pulled their teams out of Israel for security reasons. This creates a unique environment for VCs like iAngels, which have available capital, actively seek investment opportunities, and have proprietary access to deal flow at attractive terms. In times of crisis, savvy investors often find the best prospects.

Often, a crisis is a time of opportunity for the savvy investor. Are impact investment opportunities attractive in the current climate?

Absolutely. What we are experiencing now in Israel is a continuation of a downward economic cycle that began prior to the war. We are witnessing a return to valuations we haven’t seen in about a decade—what we might consider more normal valuations. Companies with strong traction and potential for product-market fit and revenues are now raising at seed valuations. Conversely, some companies are facing challenges in raising funds due to the reduced number of investors and available capital, leading to down rounds or recapitalization efforts. Interestingly, these down rounds can present attractive value propositions. Often, the best opportunities and highest returns come from investing in these situations.

iAngels has over 26 exits under its belt and has onboarded over 100 portfolio companies.  You partner with some of the highest caliber entrepreneurs in the nation. What are you seeing today as the most exciting sectors for investment?

Today, we must acknowledge that Israeli entrepreneurs tend to innovate for global markets, not just for Israel. This means we are less reliant on the local economy when building startups. We focus on solving big world problems and looking outward for new customers. We are keen to invest more than ever in companies that can scale quickly and rely heavily on software solutions. Areas where Israelis succeed most such as software, cybersecurity, enterprise software, and digital health.

Moreover, we are beginning to see innovation cycles emerge in sectors related to defense and cybersecurity, especially in the context of the current situation. This creates an opportunity for Israeli entrepreneurs to lead globally and be at the forefront of these developments.

AI is definitely the buzzword that is making headlines across the globe, from cybersecurity companies to biotech. Is this an arena that investors should be wary of or embrace?

The short answer is absolutely to embrace it! If we look back two to three years, AI was often a buzzword that might have raised eyebrows among investors. Today, AI is a fundamental layer in nearly everything—from code development and design to customer success processes and data structuring. It enhances organizational efficiency and enables rapid scaling.

Today, I expect that startups will increasingly harness AI solutions to build products faster and grow at an accelerated pace. That said, we must approach AI responsibly and transparently, ensuring that it supports fair and scalable practices. At iAngels, we’re focused on backing entrepreneurs who push the boundaries of what’s possible, addressing significant global challenges with scalable and efficient solutions.

Has the war harmed Israel’s ability to penetrate world markets from a technology perspective? 

Among all our portfolio companies, we have not seen any loss of business due to being Israeli or because of the war. On the contrary, we’ve experienced immense support from our partners who have conveyed messages of support or asked how they can help. Overall, I think we’re seeing a bit of an awakening – those who are identifying themselves as “October 8th Jews,” indicating a shift in their engagement with Israel post-war. They want to help, learn more, and get involved in meaningful ways.

For us, one way we can capture that awakening is through a call for people to invest in Israeli startups. Investing in Israeli tech isn’t just altruistic; it supports the broader economy, as Israeli tech generates over 30% of the country’s tax revenue. Those taxes fund essential sectors like health, infrastructure, education, and defense. So, not only does this present an opportunity for financial returns, but it also contributes to building a strong future for Israel – a strong “day after.”

We’ve heard since the beginning of the war that Israeli high-tech always delivers. We’re meeting KPIs, even with many companies having up to 30% of their workforce called to reserve duty or deal with various stressors. This resilience is a promising sign of hope for the future of the high-tech ecosystem, ensuring that Israel’s economy remains strong and robust.