A Year On, War Has Not Undone Israeli VC—But Leaves Indelible Mark
Source: PitchBook, Leah Hodgson
Photo: Taylor Brandon on Unsplash
After more than a year of war, Israel’s venture capital ecosystem has proved resilient, but the conflict with Hamas is set to have a lasting impact on its future.
Since the Oct. 7 attacks of last year, Israel’s broader economy has been strained, with the International Monetary Fund cutting expected GDP growth in 2025 by half and with its budget deficit climbing to 8.3% of GDP for the 12 months ending in August, compared to a target of 6.6% for 2024 as a whole. Yet the high-tech sector, which accounts for 20% of the country’s economic output, is still growing and continues to attract VC investment.
So far this year, some $3.2 billion has been invested across 355 deals in Israel, according to PitchBook data. While this is below last year’s annual deal value total of $4.2 billion, with current estimates putting the decrease at 7.4%, the number should be contextualized within the global VC downturn.
Furthermore, the country is doing better than other ecosystems of a similar size. Total deal value in Singapore, for example, is projected to fall by 13.9% this year, while Sweden is set for a 41.1% drop. Even larger ecosystems such as France are pacing to fall further than Israel.
“People were expecting [Israel’s tech ecosystem] to fall apart, but it never happened,” said Jon Medved, CEO of Israeli VC firm OurCrowd. “Of course, it’s been hard, but venture capital, by nature, is a high-risk asset class.”
One explanation is the strength of certain sectors within Israel’s tech industry, namely cybersecurity and AI, which have continued to attract investor appetite and produce several VC mega-rounds—defined as those worth over $100 million.
In January, cloud-native security specialist Aqua Security extended its Series E with $195 million led by Evolution Equity Partners to reach a valuation above $1 billion. AI chipmaker Hailo raised a $120 million Series C extension in April led by backers including Poalim Equity and OurCrowd.
Shmuel Chafets, founder and partner of London-based VC Target Global, noted that there has been a flight to quality as a result of the conflict, adding that high-quality teams aren’t having a particularly difficult time raising funding. That is not to say some startups are not struggling to get investments over the line.
A survey from the Israel Innovation Authority found that investment agreements have increasingly been delayed, with many unable to meet investors due to the war.
“Israel is a tale of two cities: Those that are doing well are raising and those that don’t have product market fit aren’t,” said Medved. “[Startups in the early stages] are the ones that are struggling more.”
Pre-seed and seed-stage startups have seen the sharpest contraction in deal value, PitchBook data shows, with this year’s total projected to be 43.6% lower than 2023’s figures. On the opposite side of the scale, venture growth is expected to grow its annual deal value by 59.2%.
Over the past year, Israel’s government has taken measures to stimulate investments in early-stage startups. One such initiative is the Yozma Fund 2.0—a $160 million vehicle for incentivizing institutional investors to back Israeli tech companies through domestic VC funds.
But mounting costs from the war have prevented the government from extensive intervention, much to the chagrin of some in the ecosystem.
“There are certain people who think the government should do more to get money flowing into the ecosystem,” said Chafets. “I think the main thing the government could do is to make sure that they have the right infrastructure and the education is there.”
Fight for talent
Access to talent has become a significant challenge for Israeli startups, according to Medved, putting pressure on growth plans.
A Ministry of Finance research paper from February found that 20% of reservists for the Israeli army are employed in the high-tech sector. Medved noted that around 10% of OurCrowd’s employees are serving in the reserves at any given time.
The Israel Innovation Authority’s survey found that 70% of the 507 high-tech companies that responded reported disruptions to their operational continuity.
Chafets believes that while the talent shortage is a very real challenge at the moment, it may have benefits in the future.
“I think a lot of entrepreneurship is going to come from this war,” he said. “A lot of people are going to come back with new ideas and skills that they can use to fix real-world problems. After living in sustained conflict, people will want to change their lives.”
Chafets said there could be a “new wave” of founders with skills developed from being in the reserves.
What’s next?
Since Oct. 7, Israel’s startup ecosystem has maintained its position as a global hub. As tensions in the Middle East intensify, sustained conflict could challenge the sector’s growth and stability in the years to come.
“I don’t think any of us expected that over a year into this, we would still be at war,” Medved said. “The big question is where do we go from here and unfortunately none of us has a crystal ball. Israeli startups have shown extraordinary resilience, but let’s hope [the war] ends sooner rather than later.”
About Leah Hodgson
Leah Hodgson is a London-based senior reporter for PitchBook, covering the venture capital ecosystem across Europe and the Middle East. Leah, who joined PitchBook in 2018, graduated from the University of Surrey with a BA in international politics with French. She has previously been a radio reporter in France. She later turned to financial journalism, covering the wealth management industry.