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Knesset Talk Pivots: The Role of Financial Institutions in Reshaping Israel's High-Tech Landscape

July 20, 2023 - Israel's high-tech industry, once a flourishing garden of startup companies, is facing a significant crisis. The foreign investment, which has traditionally watered this garden, is evaporating alarmingly. Alarm bells are ringing as investment volume has shrunk from NIS 42 billion to just NIS 7 billion, sparking urgent discussion by the Knesset Economic Affairs Committee, where the mission was not just to address challenges but to tap into domestic potential and bolster local financial institutions to support Israeli hi-tech startups.

In the Subcommittee for Advancing Israeli High-Tech at the Knesset's Economic Affairs Committee, the state of the high-tech sector was the day's main topic. Representatives from Knesset members, financial institutions, the Ministry of Innovation, Science & Technology, the National Economic Council, startup incubators, representatives of startup companies, and other stakeholders convened to address this crisis. Their task was to explore how to incentivize local financial institutions to invest in Israeli hi-tech startups.

"The most acute problem plaguing our high-tech industry is the lack of foreign investment, especially in startups," said Subcommittee Chair MK Avigdor Lieberman. He stressed the need for a new and appealing mechanism to attract these "cash-rich" financial institutions to invest in Israeli startups.

MK Liberman presented a stark contrast in investment data, revealing that foreign investments in Israeli startups totaled NIS 42 billion across 2021 and 2022. However, Ministry of Finance projections suggest a bleak outlook for 2023-2024, predicting a fall to just NIS 7 billion.

He stated, "We are currently in a crisis. The current budget approved by the Knesset for the upcoming two years falls short of what is needed to salvage the industry. An additional NIS 2 billion injection could be a potential solution, but unfortunately, I don't foresee this happening."

Tomer Gal, a well-renowned AI (Artificial Intelligence) expert, Chairman of the AI Forum at the Israeli High-Tech Association, and Israel Innovation Authority Evaluator proposed the establishment of a foundation designed to catalyze the investment process. This foundation would serve as a conduit for larger companies to pump funds into the industry. He highlighted the vital role of startup incubators in this innovative approach, emphasizing their importance for stimulating the investment environment and promoting sustainable economic growth.

The decline in foreign investment has also reignited discussions around the 'Angels Law.' Once a catalyst for private investors, the law underwent amendments when the investment landscape shifted. "With the current downturn, it might be time to revisit this law," - suggested Tomer.

He also raised the discussion about tax incentives. Tomer expressed the need for tax benefits for investments in Israeli companies, reasoning that such incentives could stabilize the high-tech industry and reduce dependency on foreign capital.

Marian Cohen, Chair of the Israeli High-Tech Association, candidly shared her concerns: "The steep fall in investments within Israeli startups is alarming. Our actions, or lack thereof, are impacting our startup industry. If we fail to stimulate and promote investment today, we face a challenging road ahead."

It is evident that Marian Cohen's comments, while highlighting pressing challenges, underscore the urgency and potential for the nation to rally and rejuvenate the industry. Her emphasis is a call to action, signaling hope if the proper steps are taken.

MK Oded Forer (Yisrael Beitenu) provided insight, stating: "If the government fails to recognize this as a state of emergency, the entire sector is at risk. Even if we were to reverse the entire regulatory upheaval tomorrow, it's unrealistic to expect investors to return overnight."

While pointing out the immediate challenges, MK Forer's statement also suggests that the tides can turn with timely interventions. His emphasis on regulatory changes indicates that there are actionable solutions within reach.

Yaron Breski, a visionary managing partner of a venture capital fund focusing on Israeli startups, highlighted accomplishments and current challenges: "To date, we have successfully established 28 companies. Yet not a single dollar has been raised from an institutional body, and only a minor portion came from Israeli investors. Raising funds, given the present scenario, appears challenging. But Israeli financial institutions possess untapped potential to play a transformative role."

Breski's testament stands as a beacon of Israel's inherent entrepreneurial spirit. His words emphasize the vast reservoir of local potential waiting to be harnessed.

High-tech entrepreneur Moran Leshem Bar shed light on the current landscape, saying: "In the high-tech industry, we sense the ticking clock. Our servers and models need refining, and our products' value is in flux. Recently, interactions with local investors and funds showed hesitancy and international funds are treading cautiously. However, the pivot towards local financial institutions might be our beacon of hope for rejuvenation."

Moran Leshem Bar's reflections underscore the importance of adaptability. Her emphasis on local financial institutions signifies hope, hinting at the prospect of a more self-reliant and resilient startup ecosystem in Israel.

Irit Touitou, a high-tech executive, drew a powerful parallel to emphasize the importance of unity and collaboration: "While there have been setbacks this year, Israel has always shown its mettle in crises, much like our immediate response to help Greece. Similarly, we can mitigate this crisis by rallying together – the government, the financial institutions, and the tech sector. Our economy thrives on the high-tech sector, and with the right partnerships, we'll ensure it continues to do so."

Touitou emphasizes the need for state intervention, highlighting the profound interconnectedness of the high-tech sector with the broader Israeli economy. Her remarks, though rooted in immediate concerns, also echo a more general sentiment: just as Israel has risen to aid others in times of need, there is every reason to believe that, with collaboration and determination, the nation will rally around its high-tech industry, steering it towards brighter horizons.

Recognizing the feedback and aspirations shared by entrepreneurs and high-tech professionals, Subcommittee Chair MK Liberman proposed an innovative solution. He suggested establishing a fund comprised of investments from the Israel Innovation Authority, the Ministry of Finance Budgets Department, and the Israel Tax Authority. This fund would be allocated to companies demonstrating potential with minimal risk.

"This fund will ensure readily available capital for our entrepreneurs," stated MK Liberman.

In conclusion, while Israel's high-tech industry—once lauded as the 'start-up nation'—faces new challenges, it also stands on the brink of a promising evolution. This moment offers Israel an excellent opportunity to harness its local potential and achieve greater economic independence. With the commitment and drive of its institutional bodies, Israel has the chance to sustain, reinvent, and strengthen its position in the global tech arena.

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