For years, budding Israeli tech executives asked Yanki Margalit, a veteran entrepreneur, where they should start their fledgling company. For years, he’s been giving the same advice: Here in Israel, where software engineers, eager international investors, and friends and family live.
But as Mr. Margalit prepared for a new business of his own, one focused on combating climate change, he reluctantly concluded that Israel was the wrong place to start.
“Given the atmosphere now, it’s almost irresponsible to start a company here,” said the 60-year-old, “and it hurts.”
Startup Nation luminaries, as Israel has been known for decades, are keeping an eye on exits. Several people have announced they are relocating or transferring money out of the country, including the chief executive officer of Papaya Group, a payroll company worth more than $1 billion.
The reason is a right-wing government, headed by the Prime Minister Benjamin Netanyahurecently announced plans for a Comprehensive overhaul of the country’s judiciary which many believe will end its 75 years as an independent organization.
The proposed changes would severely limit the court’s ability to overturn laws passed by the Knesset, the country’s Parliament, and give the governing coalition a much larger say over the occupants. bench.
That motivated a lot civil unrest and mass protests that Israel’s president, Isaac Herzog, announced in a televised address last week that the country was “on the verge of constitutional and social collapse.”
More quietly, people like Mr. Margalit are re-evaluating what it means to be active here and deciding that if the government retools the judiciary, it’s time to leave.
“It’s all about risk management and risk to the Israeli brand,” said Assaf Rappaport, chief executive officer and co-founder of Wiz, a $6 billion cloud security company. “It took a long time to build this brand, and today every company in the world can count on Israel as a partner in their cyber defense. These reforms will raise questions about all of that.”
While the judicial changes will affect all Israeli businesses, the tech sector’s response is the biggest concern as it provides so much horsepower to the economy.
About 54% of Israel’s exports are high-tech products and services, according to the Israel Innovation Authority, a government support agency. Israelis have created more than 90 so-called unicorns — private companies valued at more than $1 billion — including Wix.com, which provides cloud-based web services; game company Moon Active; and financial services company eToro.
Losing the top earners and the corporations they run would have a devastating effect in a country where 81% of tax revenue comes from just 20% of the population.
The new government, formed at the end of December, consists of members of extreme nationalist and ultra-Orthodox political parties. Both depend heavily on government subsidies: the first because few of its members participate in the labor market, and the second because it wants the money to maintain settlements on the West Coast.
That’s why Eran Yashiv, a professor of economics at Tel Aviv University, sees judicial reform as a form of resource appropriation.
“It’s redistribution from the high-tech sector to religious and nationalist minorities,” he said. “And it will turn Israel into an illiberal nation.”
In Israel’s parliamentary system, the government usually controls the legislature, so gaining more influence over the courts would give Netanyahu and his ministers influence over all three. branch of government and less control over his power.
Earlier this month, a group of 56 American economists sent a letter to Mr. Netanyahu arguing that his government’s judicial proposals “would adversely affect the Israeli economy by weakening the rule of law and thus make Israel go in the direction of Hungary and Poland”.
Zvi Eckstein, former deputy governor of the Bank of Israel, said in an interview: “There is a lot of research over the last 25 years that shows that stability and the rule of law better support economic growth. “As economists, we worry that reducing the property rights of individuals and corporations will create uncertainty, and that a weak judiciary will increase the likelihood of government corruption. government. Both of those things will slow the economy down significantly.”
Investors and executives argue that if Israel’s democratic institutions are undermined, it will keep blue-chip clients and investors on the sidelines. And if a company has trouble attracting customers, it will have the same problem with talent.
Many Israeli-led companies, including Wiz, are already based in the United States and keep a subsidiary in Israel because it makes it easier to attract investors and employees. Israeli tech executives living in the United States often return when their children reach school age so they can adapt to Israeli culture and serve in the military.
“We used to talk about going back to 2024, and now,” said Nadav Weizmann, an entrepreneur about to launch her third company, Cardinal, a tool for product managers. Looks like we don’t talk about that anymore, it’s a big deal for us. , in Austin, Texas. “For a startup founder, it’s now a lot harder to go back to Israel because you don’t know what it’s going to be like.”
Adam Fisher, co-founder of Bessemer Venture Partners, which has backed more than 30 startups in the country, said that if the government proceeds with its judicial plans, the flow of tech leaders will Israel will increase and inflow will decrease. Money from Bessemer and other venture capital firms – 90% of all Israeli tech investments come from foreign sources – will simply go with the entrepreneurs.
“When I invest in Israel, I don’t really invest in the Israeli economy; I’m not looking at the shekel or rail infrastructure or GDP growth,” Fisher said. “I invest in entrepreneurs, and if those entrepreneurs want to set up somewhere else, that’s fine.”
The office of Israeli Finance Minister Bezalel Smotrich declined to comment. In a statement in mid-February, he said claims that the reforms harm democracy were part of a “campaign of intimidation”. He and other members of the coalition have said they are simply correcting an imbalance that gives the Supreme Court too much power.
In a Fox News interview this month, Mr. Netanyahu said, “We have perhaps the most active judicial court on the planet.”
As of 2020, Mr. Netanyahu has been put on trial on charges of bribery, fraud and breach of trust, which he denies. His interest in court reform is seen as conflicting enough that this month the country’s attorney general ordered him not to participate in the effort. Netanyahu’s office called the request “unacceptable”.
The fact that a government led by Mr. Netanyahu would jeopardize Israel’s technological miracle is bewildering because he has long been one of the most vocal champions in the field. But a capital flight has already begun.
Eran Goren, co-founder of the Fidelis Family Office, which manages the money of wealthy Israelis, said: “From my clients I am hearing specific instructions for raising money out of Israel, to Switzerland or London. “We work closely with the private banking departments of the big banks and they say it’s from all directions – people are just withdrawing.”
Yashiv said that a dying tech industry would make Israel poorer, weaker and more religious. That should worry anyone interested in Middle East stability, he added.
“Weaker countries tend to be more aggressive, and a weaker Israel will be a more aggressive Israel,” he said.
Few Israel’s tech leaders have said they are leaving happily. While it hurts him, Mr Margalit is weighing the pros and cons of cities like London, Paris and New York.
“If they pass this legislation,” he said, “what are my options?”
