Outlook for startups and MNCs: Resilience and Optimism
Israel is home to the operations of 430 multinational corporations (MNCs), which are the employers of 86,000 workers, and make up about 18% of the country’s high-tech force, according to a new report by Israel Advanced Technology Industries, which was presented at the recent annual IATI forum.
While the absence of key personnel in the tech sector damaged startups’ day-to-day operations, only 10% of managers of multinationals surveyed said that the impact was severe. Sharon Shulman, CEO of EY Israel, called on the government to recognize MNCs as a strategic asset for Israel and help them continue to grow and develop in the country.
We caught up with some of the most prominent leaders at Erdinast, Ben Nathan, Toledano & Co. With Hamburger Evron, Herzog and Greenberg Traurig to find out how they assess the impact of the war on both start-ups and MNCs in Israel.
Roy Caner, head of the Hi-Tech department and co-head of Corporate department, at Erdinast, Ben Nathan, Toledano & Co. With Hamburger Evron (“EBN”): “We did not see a highly notable war-related impact on MNCs and start-ups in Israel. As we all know, there was a significant decline in both investment and technology-related acquisitions due to the situation of the global economy and an overall global slowdown, where in Israel there was an added element to the deterioration of the investment activity as a result of the proposed contentious judicial overhaul advanced by the Israeli government earlier in 2023.”
“This decline also affected (downward) valuations of both investment and M&A targets, creating misalignments between the targets and the investors/acquirers. This misalignment, that was also partly strengthened by existing investors not wanting down rounds reducing their overall IRR reports to their investors, led to a heightened use of funding mechanisms that do not trigger down rounds, such as the usage of SAFEs, extension rounds, more than 1X liquidation preferences, and the like. Right before the war began, things were starting to settle, and the M&A and investment activity increased.”
Joey Shabot, Managing Shareholder of the Tel Aviv office of Greenberg Traurig, points out: “In our experience, very few MNC’s are vulnerable to anti-Israel propaganda that tries to paint Israel in a negative light. On the contrary, the vast majority of our clients have said privately and publicly that they stand with Israel. On the other hand, large corporate clients in Israel are highly sensitive to any hint of economic and political instability that might devalue their investments in Israel or reduce the quality or speed our Israel’s innovation output.”
What steps do the Government need to take now, tomorrow, and the day after the war ends?
“Open for Business – No Matter What”
Joey Shabot continues: “My advice to the government would be to lighten up on the Hasbara that is focused on justifying the country’s military activities and highlighting the depravity of our adversaries. Instead, increase focus on the message of “Open for Business – No Matter What”. The Government should transition the messaging to emphasize: the resilience of Israel’s economy and its workforce, the stability of the currency, the democratic process used to make policy decisions, respect for the rule of law by all branches of government. This is the message that MNC’s need to hear in order to feel reassurance regarding their investments in Israel.”
Roy Caner at EBN adds: “The Government needs to make it less burdensome for tech companies to get reimbursement on damages or losses that they incurred due to the war (for example in connection with wages, tax reductions, lease grace periods, etc.), and to provide incentives to institutional investors to encourage investments in certain tech industries which may have been more heavily affected (cyber and AI will always have enough investor traffic).”
Hi-Tech partner at Herzog, Yoni Frider noted: “I would not invest high hopes in the government as, historically, most of the development of the hi-tech sector in Israel was not based on government involvement. Nevertheless, I would expect the government to fulfil its basic duties so that people can occupy themselves with business rather than raising donations. In addition, there is a lot of capital sitting with institutional investors, so it would be beneficial to develop programs that will encourage institutional investors to invest more in early-stage startups, most likely through dedicated funds. The government can also encourage financial institutions to provide debt financing to startups while underwriting some of the risk.”
Funding shortfall and workforce shortages
Hanan O. Haviv, Co-Head of the Herzog Hi-Tech Practice Area adds: “For the first four months of the war, when there was massive enlisting of reserve forces, companies needed to deal with workforce shortages as employees were enlisted. This was mostly evident in young startups and small teams in larger companies that had a large percentage of their employees called up. The war also made the funding environment more challenging,” he adds. “Following a slowdown in startup financing, especially at the growth stage, which started globally in Q2 2023 and continued in Israel due to the judicial reform [that the government tried to initiate in the first three quarters of the year], the war made investment in Israel seem less appealing. The images and news of the war could raise concerns about investing in a “war zone,” with all the uncertainty associated with that.”
Fellow Hi-Tech partner at Herzog, Yuval Meidar adds: “The first few weeks of the war put the whole country in a state of shock, as investors and companies retreated to “survival mode” with no appetite for new investments. This caused investment processes to halt and investors to become reluctant to start new processes.”
However, there is a prevailing sense of optimism over the longer term. Roy Caner adds: “From what we are seeing, there is now a significant amount of money that is available to be invested in attractive companies, both for investments (mainly seed stage) and acquisitions. We have even seen a revival of growth investment transactions. The most significant adverse impact of the war is the decline in cross-border M&A due to MNCs and other acquirers’ desire to wait for more clarity on the economic landscape before committing to acquire a significant Israeli company.”
Continued opportunity and growth
“My tech acquirer clients these days are maybe more attuned to understand the ability of the target companies to deliver their products and services and the effect of employees that are in reserve duty in achieving this. Investors who are familiar with the Israeli eco system and the country’s history, know that there is continued opportunity and growth in Israel, even despite serious challenges. All of the above being said, this is unfortunately not Israel’s first war, and as it has demonstrated in the past, it will prevail from this crisis, and it generally tends to come out stronger than prior. Investors who are familiar with the Israeli eco system and the country’s history, know that there is continued opportunity and growth in Israel, even despite serious challenges.”
