Israeli High-Tech: Far From Being a 'Start-Up Nation'
Israeli high-tech is undergoing a transformation as entrepreneurs increasingly launch companies in the U.S. and reliance on foreign capital grows. Noam Kanty of EY notes that the industry has become a complex ecosystem facing new challenges.
Israeli high-tech is at a turning point. Giant deals continue to be signed, cyber companies continue to grow at a dizzying pace, and from the outside, it seems that the Israeli machine is still strong and functioning. But beneath the surface, a deeper change is taking place: entrepreneurs are establishing companies directly in the United States, local labor costs are rising relative to foreign currency, and artificial intelligence (AI) is beginning to dismantle the way technology companies have been built over the last few decades.
"Israeli high-tech today is a complex thing; it is far from being a 'Start-Up Nation'," says Noam Kanty, co-CEO of EY Israel, in an episode of the 'Investment Train' (Rakevet HaHashkaot) podcast, in a conversation with Dan Kachanovsky, CEO and owner of Scala. The EY firm currently accompanies about 80% of the high-tech market in Israel, giving Kanty a rare perspective on the entire market.
A Matured Market
According to Kanty, over the last decade, Israeli high-tech has undergone a fundamental change. "If up to 10 years ago, 2 to 3 billion dollars a year entered the Israeli market in private investments, in recent years it has been hovering around 16 to 18 billion dollars," he explains. The market is no longer composed only of young startups, but includes entire layers of companies at different growth stages—from private firms with revenues of over 100 million dollars to public companies.
This growth creates a challenge. Venture capital funds operate with an expiration date and must return money to their institutional investors through a sale or an IPO. The number of companies reaching maturity is growing, but the IPO market is not necessarily keeping up with this pace.
Who is Financing High-Tech?
One of the surprising points Kanty presents concerns the source of the money driving the industry. According to him, over 80 to 90 percent of the money is foreign, not Israeli. Participation by Israeli institutional bodies is relatively limited, while the vast majority of capital comes from abroad, primarily the U.S. "It's 70 to 80 percent American money. The dependence of Israeli tech on the United States is enormous," adds Kanty. The American market is large and open to technological changes, making it a natural destination for both customers and IPOs.
The AI Revolution and Question Marks
Kanty, who worked in Silicon Valley in 1997, sees AI as the next great technological revolution, but one accompanied by real risk. "It could very well be that we are in an AI bubble," he says, mentioning the pattern that repeated itself in every previous revolution, including the 'dot-com' bubble burst in 2000. AI is already changing work processes in tech companies, helping to analyze huge amounts of information and replacing some traditional data analysis roles. At the same time, Kanty emphasizes that technology does not replace business and human understanding.
Beyond AI, Kanty points to the exchange rate as a real threat to competitiveness. The strengthening of the shekel against the dollar makes local labor more expensive, which is already affecting development location decisions for multinational companies. "The damage from the exchange rate is enormous," he says, noting that tech currently accounts for close to 40 percent of taxes paid in Israel.
