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

For years, budding Israeli tech executives have asked Yanki Margalit, a veteran entrepreneur, where they should start their fledgling company. For years he has been giving the same advice: here, in Israel, where software engineers abound, international investors are eager, and friends and family live.

But as Mr. Margalit himself prepares a new venture, one aimed at combating climate change, he has come to the grudging conclusion that Israel is the wrong place to launch.

“Given the atmosphere now, it is almost irresponsible to start a business here,” says the 60-year-old, “and that is heartbreaking.”

The stars of Start-Up Nation, as Israel has been known for decades, are watching the exits. Several have already announced they are moving money or moving out of the country, including the CEO of Papaya Group, a payroll company valued at more than $1 billion.

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

The proposed changes would severely curtail the court’s ability to strike down laws passed by the Knesset, the country’s parliament, and give the ruling coalition much more say over who sits on the bench.

That has sparked so much civil unrest and mass protests that Israel’s President, Isaac Herzog, declared in a televised address last week that the country was “on the brink of constitutional and social collapse.”

Calmerly, people like Mr. Margalit are rethinking what it means to work here and decide that if the government reforms the judiciary, it’s time to leave.

“It’s all about risk management and risk is to the brand that is Israel,” said Assaf Rappaport, the CEO 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 their cyber defense. These reforms will put all that into question.”

The office of Israeli Finance Minister Bezalel Smotrich declined to comment. In a mid-February statement, he said the reforms that harmed democracy were part of a “scare campaign”.

While the legal changes will affect all Israeli companies, the technology sector’s response is of greatest concern, as it provides so much of the economy’s horsepower.

About 54 percent of Israel’s exports are high-tech products and services, according to the Israel Innovation Authority, a support arm of the government. Israelis have created more than 90 so-called unicorns – private companies worth more than $1 billion – including the gaming company Moon Active and the financial services company eToro.

Losing top earners and the businesses they run would have a devastating impact in a country where 81 percent of tax revenue comes from just 20 percent of the population.

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

That’s why Eran Yashiv, an economics professor at Tel Aviv University, sees the reform of the justice system as a kind of money grab.

“It’s a redistribution of the high-tech sector to religious and nationalist minorities,” he said. “And it would make Israel an illiberal country.”

In the Israeli parliamentary system, the government mostly controls the legislature, so gaining more influence over the courts would give Mr Netanyahu and his ministers influence over all three branches of the government and much less control over his powers.

Early this month, a group of 56 US economists sent a letter to Mr Netanyahu arguing that his administration’s judicial proposals would “adversely affect the Israeli economy by weakening the rule of law and thereby pushing Israel toward Hungary and to move Poland”.

“There has been a tremendous amount of research over the last 25 years showing that stability and the rule of law support better economic growth,” said Zvi Eckstein, a former deputy governor of the Bank of Israel, in an interview. “As economists, we worry that reducing individuals’ and companies’ property rights will create uncertainty, and that a weaker judiciary will increase the likelihood of government corruption. Both of these things will cause the economy to slow significantly.”

Undermining Israel’s democratic institutions, investors and executives argued, will keep blue-chip clients and investors at bay. And if a company is struggling to attract customers, it has the same problem with talent.

Many Israeli-led companies, including Wiz, are already based in the United States and have a subsidiary in Israel because that makes it easier to attract investors and employees. Israeli tech executives living in the United States often return when their children reach school age so they can get used to Israeli culture and serve in the military.

“We used to talk about going back in 2024, and now it’s like we’re not talking about it, which is a big deal for us,” said Nadav Weizmann, an entrepreneur who launched his third company, Cardinal, a tool for product managers. launches. , in Austin, Texas. “It’s a lot harder now for a startup founder to envision going back to Israel because you don’t know what it’s going to look like.”

If the government goes ahead with its judicial plans, the outflow of Israeli tech leaders will increase and the inflow will decrease, said Adam Fisher, a partner in Bessemer Venture Partners, which has backed more than 30 start-ups in the country. Money from Bessemer and other venture capital firms — 90 percent 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’m not looking at the shekel or rail infrastructure or GDP growth,” said Mr. Fisher. “I invest in entrepreneurs, and if those entrepreneurs want to settle elsewhere, that’s fine.”

Mr Smotrich and other members of the coalition have said they are merely redressing an imbalance that gives the Supreme Court too much power.

In an interview with Fox News this month, Mr. Netanyahu: “We probably have the most activist court in the world.”

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

That a government led by Mr. Netanyahu would jeopardize Israel’s engineering marvel baffles many, as he has long been one of the industry’s most outspoken champions. But a capital flight has already begun.

“I hear concrete instructions from my clients to mobilize money from Israel, to Switzerland or London,” says Eran Goren, co-founder of Fidelis Family Office, which manages the money of wealthy Israelis. “We work closely with private banking departments of major banks, and they say it’s coming from all sides – people are just pulling money out.”

A languishing technology industry would make Israel poorer, weaker and more religious, Mr Yashiv said. That should worry anyone concerned about the stability of 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 technology leaders said they would leave happy. Even though it hurt him, Mr. Margalit weighs the pluses and minuses of cities like London, Paris and New York.

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