2024 has been a whirlwind for Israel, marked by unprecedented challenges yet underscored by an astonishing resilience within its high-tech industry. Yonatan Sela, a partner at Square Peg, paints a vivid picture of this resilience, noting that despite the tumultuous backdrop of war and conflict, the startup funding landscape has actually grown compared to 2023. Mergers and acquisitions (M&A) have surged, nearly doubling and outpacing global trends. This isn’t just a stroke of luck; it’s a testament to the unwavering commitment and focus of Israeli founders, who have navigated these stormy seas with remarkable tenacity.
Looking to 2025, Sela acknowledges the harsh realities the tech sector faces, primarily the ongoing war, which has far-reaching implications. The human toll is staggering, with casualties and displacement affecting the very fabric of society. The tech workforce, comprising a significant portion of reservists, faces unique challenges as they balance military obligations with their professional lives. The fiscal budget is strained, and the global perception of Israel’s stability is in flux. Yet, amid these trials, Sela remains optimistic. He believes that while domestic-facing sectors may feel the pinch of a potential economic downturn, the export-focused tech sector will continue to thrive.
Square Peg’s investment strategy remains steadfast, targeting early-stage founders who exhibit the potential to build generational businesses. The firm is particularly excited about the burgeoning fields of AI, SaaS, and Fintech. Recent investments have heavily leaned into AI, reflecting a broader trend where Israeli entrepreneurs leverage cutting-edge technology to create solutions that address real-world problems. This focus on innovation is crucial, especially as the landscape shifts towards Cyber and Defense technology, areas where Israel already holds a competitive edge.
With the political winds shifting in the U.S., the potential impact on Israel’s high-tech industry is palpable. Sela suggests that a new American leadership could usher in a wave of deregulation, which may foster growth across various sectors. This could be a boon for Israeli startups, particularly those eyeing the U.S. market as their primary target. Moreover, a reduction in perceived threats, such as the Iranian situation, could bolster investor confidence in Israel, further enhancing its appeal as a tech hub.
However, for Israel to maintain its momentum, the government must take decisive action. Ending the ongoing conflict would not only alleviate human suffering but also restore investor confidence and stabilize the economy. Growing the talent pool is equally critical; the tech industry thrives on skilled labor, and initiatives to enhance education and attract diaspora talent could significantly bolster the sector. Lastly, fostering a stable and predictable business environment is essential. The recent trend of startups incorporating in the U.S. rather than Israel needs to be reversed, and this requires robust policies that encourage local investment and growth.
As the tech landscape evolves, new sectors are emerging. Defensetech is on the rise, driven by current geopolitical realities, while AI and data infrastructure are set to accelerate further. Israel may not have yet produced a foundational AI model company akin to global giants like OpenAI, but there’s a wealth of opportunity in vertical applications. Companies like Aidoc and Exodigo exemplify how Israeli innovation can tackle significant challenges using AI, paving the way for the next wave of transformative tech.
In this ever-changing landscape, the resilience of the Israeli high-tech sector is not just a story of survival; it’s a narrative of opportunity, innovation, and an unyielding spirit. The year ahead holds both challenges and immense potential, and if the right steps are taken, Israel’s tech industry could emerge stronger than ever.
