Israeli tech startups flock to US amid uncertainty at home – Today at 09:00

A growing number of Israeli tech startups are settling in the U.S., lured by U.S. funds and pro-business policies that have left investors reeling from a planned domestic judicial review.

This marks a turning point, as Israel has convinced many of its startups over the past decade to establish their legal identities domestically.

That doesn’t mean jobs are moving abroad in large numbers — the technology sector accounts for 14% of Israeli jobs — but companies or registering intellectual property (IP) abroad can affect tax havens and thus government revenues.

Entrepreneurs and investors told Reuters there are good business reasons for moving to the US, particularly Delaware, which is considered a pro-business and tax haven because of its low corporate taxes and no state sales tax.

But some have cited Israeli Prime Minister Benjamin Netanyahu’s judicial overhaul, which his right-wing government says is necessary to address the excesses of the courts, but which critics see as an attack on democracy.

While the change won’t directly affect the tech industry, Ian Amit, a former Israeli military veteran, is taking his startup across the Atlantic to worry about the consequences.

“It’s a very high level of uncertainty,” said Amit, who signed up Delaware-based artificial intelligence-based cloud security company Gombok.

“It’s about corruption and uncertainty about what system is in place to protect me as a company, from a tax perspective, from a legal perspective or from an intellectual property perspective,” he said.

The economic risk for the Israeli government is that its plans, which have sparked unprecedented protests across the country, will hamper the tech sector, which accounts for nearly a fifth of the country’s GDP and 30% of its tax revenue. It seems some entrepreneurs are already voting with their feet.

80% of new Israeli tech startups have so far chosen to locate in Delaware in 2023, up from 20% in 2022, according to a survey by the Israel Innovation Authority (IIA), which companies plan to register future IP abroad. . The IIA did not give the number of companies surveyed.

“The fact that you’re shaking up the justice system puts Israel at a very high level of uncertainty and investors don’t like uncertainty,” said IIA chief Ami Applebaum, chief scientist at the Ministry of Innovation, Science and Technology.

Yair Geva, a partner who leads the technology group at the law firm Herzog, Fox and Nieman, said not only are new Israeli companies establishing themselves in Delaware, but some existing companies are expanding their research and other activities outside of Israel.

“So it’s a bigger problem than the institutional aspect,” he said.

In a Startup Nation Central survey of 615 companies, 8% of Israeli startup/tech companies have begun moving their headquarters abroad, and 29% plan to do so soon.

Startup Nation

For some entrepreneurs and investors, the decision to register in the United States is a business decision, not a political one.

After all, Israel’s tech sector relies heavily on foreign investment, and a drop in funding for startups following interest rate hikes and the demise of major tech investor Silicon Valley Bank will encourage companies to go where the money is.

“If you want to operate in a global world, if you want American investors…so be it,” said Ronen Feldman, founder and CEO of ProntoNLP.ai. “It’s purely business.”

Tomer Tzach, CEO and co-founder of agricultural technology company CropX, is considering moving his company to Delaware.

“At the end of the day, as CEO, I have to do what’s right for my shareholders, my investors, my company, and I feel bad about that,” Tzach said.

Michael Ferdik, founder of Silicon Valley-based venture capital firm Heroic Ventures, has invested in a dozen Israeli startups since 2015. He’s pushing the Delaware company and existing Israeli startups to transfer another round of funding from him.

“It’s better to have a Delaware C corp from the start. That’s true in all cases without exception,” he said.

But the Israeli government’s judicial overhaul casts a shadow over some.

Adam Fisher, a partner at Bessemer Venture Partners and a longtime investor in Israeli startups, has enjoyed investing in Israeli tech companies for the past decade. He does not urge existing portfolio companies to change, but advises entrepreneurs to now locate in Delaware and open an Israeli branch.

“I don’t see ‘Israel is no good anymore.’ We don’t know what’s going to happen. Nobody knows. It’s uncertainty and certainty,” Fisher said.

According to Ayal Shenhau, head of high-tech and venture capital at law firm Gross & Co, settling in Delaware is largely psychological.

What you say “Judges in Israel are corrupt” isn’t a solid one. Nobody’s saying that,” he said. “It’s not as stable as it used to be, and it’s a feeling that a lot of people are following the crowd.”

Yaron Samid, managing partner of the TechAviv Founder Partners fund, told US investors that the Delaware company removes “a variant of the very risky business of a startup” but that investments in Israeli startups will continue.

“Israeli technology isn’t going anywhere because we have an incredible amount of talent that’s building more and better companies, so it doesn’t really matter whether they’re structured like American or Israeli companies. The technology environment.” (Reporting by Steven Scheer and Emily Rose Editing by Mark Potter)