Israel’s strong startup ecosystem is starting to migrate abroad

Category: Ecosystem

Over the past decade, Israel has found astronomic success in the tech startup scene, earning the title of “the startup nation.” As of today, the country has developed 98 unicorns with a combined value of 275.433.000.000 US dollars and 44.361.865.339 US dollars raised in total. Not long ago, the city of Tel Aviv was ranked as the seventh most attractive startup ecosystem, surpassing Shanghai, Tokyo, Washington D.C., and Seattle. 

It’s not merely a matter of innovative ideas. Several factors contribute to Israel’s booming startup ecosystem, including tax incentives and government-led programs. About 30 grants and tax incentive programs for research and development lower taxes or offer tax exemption. VC funding from foreign firms has also been progressively increasing for the past decade, rising to $10 billion USD in 2021. The nation has taken advantage of globalization by holding a yearly summit, which welcomes guests from over 81 countries and 42 international funds. 

However, despite its tremendous success over the past decades, Israel’s strong startup ecosystem might begin to crumble. Prime Minister Benjamin Netanyahu’s government has sparked widespread fear of totalitarianism, which has led to numerous protests and a climate of political unrest. So, what does this mean for Israel-based startups?

Fewer startup investments and increased money transfers 

Israel’s ballooning crisis started in January 2023 when Netanyahu’s government announced plans for a judicial reform that would see fundamental changes in the makeup of the nation’s nine-member committee that elects judges. This would give the government an automatic majority of seats on the committee. The plan would considerably weaken the Supreme Court, limiting its power to review laws and strike them down. Despite the Prime Minister’s claims that this move would strengthen democracy, many have argued that it would have the opposite effect. The decision has caused strains in Israel’s international relationships with allies like the United States and triggered massive protests—of a scale the nation hasn’t seen in decades—from those who fear an imminent threat to their freedom and way of life.

While the judicial reform has yet to become a reality, Israel has already seen a shift in its startup ecosystem and greater economy. In the first quarter of 2023, investments in the high-tech sector reached $1.7 billion. Even though this might seem like a robust figure, it is a significantly lower amount when compared to the previous years, being the lowest volume since 2018. What’s more, the country’s currency, the Shekel, has experienced volatility ever since Netanyahu’s government plans were laid out. As of February 2023, bank officials claimed that about $4 billion were moved out of Israel, sparking calls for banks to report such transactions more frequently.

Will Israel cease to be the “startup nation”? 

With the judicial reform, Israel might no longer be the “startup nation” that it once was. In late January, successful tech startup Papaya Global made headlines after CEO Eynat Guez moved the company’s funds out of Israel. Guez cited the ongoing political turmoil and risky business climate as the catapulting factor for the decision. However, Papaya Global is not the only one. Dozens of public and private tech companies, whose aggregated value is $40 billion, have announced their intentions of moving funds out of the country, leading to an increased flow of money transfers from Israel abroad

In addition to withdrawing funds, company higher-ups have stated that they will refrain from transferring funds to Israel in the near future. Israeli unicorn Wiz, for example, announced $300 million in funding at a $10 billion valuation, yet reported that the new funding will not be transferred to the country amid the turbulent climate.

In a February memo, U.S.-based Bessemer Venture Partners expressed “significant concerns” about the effect of the current situation on startups. The firm advised their portfolio of startups to “hold only six months’ worth of shekels.” If the reform is successful, investments coming into the country (which mostly come from abroad) could freeze, significantly shrinking Israel’s startup ecosystem.

How can funds be moved out of Israel?

There are several available options to move money from Israel to abroad in these turbulent times. It is possible to use a wire transfer or international bank transfer, which requires a bank account in both Israel and the receiving country. All five major banks in Israel, including Leumi, Ha’Poalim, and Mizrahi, support international money transfers to the U.S., United Kingdom, European Unions, and a host of other countries. 

However, Israeli banks charge a fixed fee per transfer for any funds moved abroad. Usually, this fee ranges from 200 shekels per transfer, which is equivalent to $50-60, €50-60, or £50, depending on the exchange rate at the time. This fee is much higher than that charged by banks in other countries like the UK, Europe, the U.S., or Australia, including those known for their high international payment fees such as NatWest in the UK and Commonwealth in Australia.

In addition to the fixed fee, Israeli banks also charge a commission of around 0.2% of the total amount transferred, which is another layer of payment fees that does not exist in most other countries. It’s also worth noting that Israeli banks apply a hidden markup that is difficult to determine before opening an account with them and initiating a money transfer. This markup can be as high as 2% on its own. Overall, understanding all the costs involved requires expertise and comprehensive knowledge of the Israeli banking system.

Even so, it is worth noting that some Israeli banks are open to negotiating terms and fees for their customers, including international transfer fees from Israel and other banking charges. Customers with greater assets and a stronger banking relationship are typically able to secure reductions of up to 80% on the cost of transferring money to and from Israel. Business clients and high-net-worth individuals may even enjoy margins as low as 0.1% or 0.2%, which is superior to any money transfer provider available worldwide.

Can banks be avoided?

Companies and private individuals might turn to other money transfer services such as Western Union or PayPal. These methods are safe and secure, yet also charge a fee for each transfer. Another alternative is to use a foreign currency exchange service to convert Israeli shekels into the desired foreign currency before transferring the funds. Covercy, for example, prides itself on making international bank transfers “almost daily”. The company offers transparent fees and competitive prices compared to existing banks.

To conclude

Amid political unrest and a volatile economy, Israel’s once unshakable startup ecosystem has begun to migrate abroad. More and more startups are moving their money and operations to other countries. Transfers through traditional banks and alternative money transfer services are some of the tools available to carry out these operations. 

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