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Wednesday, July 24, 2024

Israel’s Tech Companies Are Fighting Netanyahu—or Leaving the Startup Nation

Wix and Wiz are quintessential Israeli success stories. Founded in 2010, website builder Wix is one of the country’s best-known tech companies, and among the sector’s most highly valued on New York’s Nasdaq stock exchange. Wiz, a much-hyped cybersecurity company launched a decade later, reached a $10 billion valuation in two years, almost half the time it took the likes of Uber and Snapchat.

But the companies’ paths are forking. Wix is doubling down on Israel; Wiz is cutting ties.

For the past seven months, Israel has been locked in a political crisis. In January, Benjamin Netanyahu—in his sixth term as prime minister and backed by a coalition that includes far-right parties—introduced a bill designed to weaken the powers of the country’s supreme court. Supporters of the plan say it’s needed to prevent the court from intervening in politics. Critics say weakening the reform will erode democracy and hand unchecked power to the government. Despite huge protests, Israel’s lawmakers backed the first part of the judicial overhaul this week.

This conflict has been felt sharply in the “Startup Nation”—a name conferred by Israel’s influential tech sector. Many tech workers have been involved in protests against the judicial reform bill, and executives have openly expressed fears about the effect it could have on economic and social stability. Before the vote, around 200 tech companies pledged to join the protests. Yesterday, the day after the vote, a group called the Hi-Tech Protest movement paid for ads to black out the front pages of at least four different newspapers, declaring a “black day for democracy.”

“The Israeli high-tech industry is very involved, very engaged in what’s going on,” says Merav Bahat, CEO of the cyber security company Dazz. She says she supports employees who have taken time off work to strike or attend protests.

Data, published on the weekend by Start-Up Nation Central, a nonprofit that promotes Israeli tech abroad, shows that almost 70 percent of Israeli startups are taking measures to distance themselves from their home country, withdrawing cash or moving their legal headquarters overseas.

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Wix says it’s staying. “We'll stay here and fight for what's right,” Nir Zohar, co-founder and chief operations officer, told WIRED in an interview in May. The company confirmed in July that was still its position. In October, Wix moved into a new Tel Aviv campus. The company’s headquarters, as well as the vast majority of its employees, are still based in Israel.

The politics that are pushing other companies to move their headquarters overseas are doing “massive damage” to Israel, Zohar says. “If this continues as a trend, we’re basically trading away the future of our industry,” he says. “Eventually these companies are going to drive revenues that's going to be counted in the US GDP, not in the Israeli GDP.”

The judicial reform has introduced uncertainty not just for business but also for people who want to live a liberal life in Israel, he adds. “[That’s] scary and it has a massive impact on the kind of talent that at the end of the day populates the tech industry.” This week, Wix employees joined a general strike to protest the outcome of Monday’s vote.

Wix’s position is increasingly rare, especially among startups. . More than 50 percent of new companies established in March 2023—the same month the bill advanced through Israel’s parliament the Knesset—were incorporated as foreign companies, rather than Israeli ones, according to a May report by the Israel Innovation Authority.

Tech is responsible for more than half of all exports, and the country collects 50 billion shekels ($13.5 billion) a year from the sector.

Wiz is among those distancing itself from its home country. Israeli companies have long operated with one foot in Israel, and the other in bigger markets like the US, where they can get more access to funding and customers. Wiz’s cybersecurity business has always technically been US-based but the company is deeply ingrained in the Israeli tech ecosystem, says Yinon Costica, co-founder and VP of product.

But Wiz withdrew tens of millions of dollars from Israel in February, according to Reuters, and when the company raised $300 million that same month, its CEO said that none of the cash would be invested in Israel. “Given the uncertainty about the independence of institutions in Israel and following an acute risk assessment of the situation, we will keep funds in US banks,” the company’s cofounder, Assaf Rappaport, told the Times of Israel.

Some founders have been very outspoken in their criticism of the bill and the Netanyahu government. When Eynat Guez, CEO of the payroll business Papaya Global, launched the business back in 2016, she was proud to be a cofounder of an Israeli incorporated company. Would she make the same decision today? “100 percent no,” Guez says. “If I had the ability to change this decision, I would do that.”

In an open letter sent to investors on Monday, Guez wrote that Israel had been “hijacked by a group of fanatics” and that Netanyahu was willing to “sacrifice Israeli democracy” to secure his own political survival. “Following this political overhaul, Israeli entrepreneurs will set up entities abroad,” she added in the letter. “It’s simply too risky to expose investors to a shady judicial system, with no real oversight, in which they have no protection and no legal remedy.”

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The company announced in January that it would move all of its money out of Israel, and Guez told WIRED that Papaya was no longer managing any investment funds in the country.

For Guez, the problem is that being incorporated in Israel leaves her intellectual property exposed to a government that now cannot be reined in by the courts. And she believes investors are already spooked. “We went from a place where investors and multinational VCs would arrive in Israel on a weekly basis,” she says. That has dramatically changed since January, when Prime Minister Benjamin Netanyahu unveiled his reforms. “I can count on less than 10 fingers the amount of investors that arrived in Israel this year,” Guez says.

The day after the vote, Israel’s credit rating was lowered by Morgan Stanley and risk assessment firm Moody’s warned of a “significant risk” linked to political tensions. 

Thousands took part in demonstrations the night before, as police fired water cannons into the crowd. Military reservists threatened to not report for duty. The law is expected to face challenges, including from the very supreme court whose powers it is designed to curb—although the bill was passed as a “basic law,” a type of legislation that justices have never previously struck down.

While Israel waits for whatever happens next, protestors have pledged to fight on—with many tech workers among them. “All of us never believed that this moment would really arrive,” says Guez. “We need to adapt to the changing economy and changing facts.” For some that means helping lobby the government, for others it means making contingency plans. This is an existential battle for Israeli tech, with democracy—but also the sector’s talent and investor support—at stake.

“We must remain a liberal democracy in order to remain one of the most attractive places for young, talented individuals that have other options,” says Nadav Zafrir, cofounder and CEO of cybersecurity venture capital firm Team8. “We also need to be a part of the league of nations that are liberal democracies because those are our investors, predominantly Europe and the US.”

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