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Judicial Reforms Destroying Israel Startup Nation – Report

The controversial judicial reforms being pushed through the Knesset by the government of Prime Minister Benjamin Netanyahu could be causing irreparable damage to Israel’s high-tech sector – its startups in particular. If a new study from the organization Start-Up Nation Central is accurate, then Israel may soon cease to be known as Startup Nation.

It has been widely reported how many Israeli firms already took funding out of the country, transferring assets to foreign banks. And ratings agencies like Moody’s and Standard and Poor’s have been warning for months that passage of the judicial reforms would harm Israel’s economy. But now we have more hard evidence of what could actually happen.

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According to this new survey, 68% of Israeli startup companies have begun taking active legal and financial steps, like withdrawing cash reserves, changing HQ location outside Israel, relocation of employees and conducting layoffs. In addition, 22% of companies reported that they have diversified cash reserves outside Israel and 37% of investors say companies in their portfolios have withdrawn some of their cash reserves and moved them abroad.

The report also stated that another 8% of companies reported they have already begun the process of changing HQ locations, and 29% reported their intention to do so in the near future. 20% of investors noted that companies in their portfolios have begun changing the location of their headquarters and 69% of investors noted that companies in their portfolios intend to do this in the future.

Such moves would mean massive losses in jobs for Israel.

The report also found that 65% of investors think the US is already seeing signs of recovery or will see them within six months compared to only 12% in Israel and 72% of investors say there will be a negative influence on investment in new companies, compared to 68% who said so in the previous survey. In the recent survey, 28% said the influence will be very negative, compared to 18% who said the same in the previous survey.

The report also found that 67% of investors are investing or are considering to invest in foreign companies – investments outside Israel are growing as a component in Israeli VC investment strategy. And 65% of investors already see signs of recovery in the US venture capital market or believe they will see them in the coming six months, compared with only 12% in Israel.

The survey conducted by Start-Up Nation Central was of leaders of the Israeli tech ecosystem (founders and CEOs of startups and managing directors of VC funds) and was carried out from July 18-19. The purpose of the survey, said the organization, was to understand implications thus far in 2023 and the industry’s expectations into the future, in light of the judicial reform legislation and civil unrest that has now plagued Israel for the last six months.
The survey questionnaire was completed by 734 professionals, representing 521 companies, according to the following breakdown: Startup/tech companies – 615 respondents; Investors – 119 respondents.

Start-Up Nation Central CEO Avi Hasson said, “Companies and investors are taking active steps to move activity away from Israel and this behavior has increased significantly over the past three months. Concerning trends like registering a company abroad or launching new start-ups outside Israel will be hard to reverse. As an organization with a mission to strengthen the technology industry in Israel, it is our duty to share this data with decision makers in Israel and provide an up-to-date picture of the situation as it unfolds.”

Massive protests have rocked Israel since January, when Justice Minister Yariv Levin revealed the government’s plans to alter the nature of Israel’s judicial system. The government’s judicial reform plan would greatly curtail the power of Israel’s Supreme Court to nullify legislation passed by the Knesset and also limit the authority of Israel’s attorney general. The opposition charges this would harm Israel’s democracy, eroding foreign confidence in the country and hurting its economy. And this is why the country is now on the brink of what some are describing as the biggest societal clash in Israel’s history.

Start-Up Nation Central calls itself the prime connector and facilitator of Israeli innovation that boosts business growth.

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