The Mercury News

Tech leaders in Israel wonder if it's time to leave

Planned judicial changes have many rethinking investment in country

- By David Segal

TEL AVIV, ISRAEL >> For years, budding Israeli tech executives have asked Yanki Margalit, a veteran entreprene­ur, where they should start their fledgling companies. For years, he's offered the same advice: here, in Israel, where software engineers are plentiful, internatio­nal investors are eager, and friends and family live.

But as Margalit prepares a new venture of his own, one focused on combating climate change, he has reluctantl­y concluded that Israel is the wrong place to launch.

“Given the atmosphere now, it's almost irresponsi­ble to start a company here,” the 60-yearold said, “and that is heartbreak­ing.”

The luminaries of StartUp Nation, as Israel has been known for decades, are eyeing the exits. Several have already announced that they are relocating or moving money out of the country, including the CEO of Papaya Group, a payroll company valued at more than $1 billion.

The reason is that a rightwing government, led by Prime Minister Benjamin Netanyahu, recently announced plans for a sweeping overhaul to the country's judiciary that many believe will end its 75-year run as an independen­t institutio­n.

The proposed changes would severely curtail the court's capacity to strike down laws passed by the Knesset, the country's parliament, and give the ruling coalition far greater say in who sits on the bench.

That has prompted so much civil unrest and mass protests that Israel's president, Isaac Herzog, stated in a televised speech last week that the country was “on the brink of constituti­onal and social collapse.”

More quietly, people like Margalit are reappraisi­ng what it means to operate here and deciding that if the government retools the judiciary, it is time to leave.

“It's all about risk management, and the risk is to the brand that is Israel,” said Assaf Rappaport, the CEO and cofounder of Wiz, a cloud security company worth $6 billion. “It took a lot of time to build this brand, and today every company in the world can trust Israel as a partner in their cyberdefen­se. These reforms will put all that in question.”

The office of Israel's minister of finance, Bezalel Smotrich, declined to comment. In a midFebruar­y statement, he said claims that the reforms harmed democracy were part of a “scaremonge­ring campaign.”

While the judicial changes will affect all Israeli businesses, the tech sector's reaction is of greatest concern because it provides so much of the economy's horsepower.

Some 54% of Israel's exports are high-tech products and services, according to the Israel Innovation Authority, a support arm of the government. Israelis have created more than 90 socalled unicorns — privately held companies valued at more than $1 billion — including, which offers cloud-based web services; the gaming company Moon Active; and the financial services company eToro.

Losing top-level earners and the corporatio­ns they run would have a devastatin­g impact in a country where 81% of tax revenue comes from just 20% of the population.

The new government, formed in late December, includes members of the ultra-Orthodox and ultranatio­nalist political parties. Both rely heavily on government subsidies — the former because few of its members participat­e in the labor market, and the latter because it wants funds to sustain settlement­s in the West Bank.

Which is why Eran Yashiv, a professor of economics at Tel Aviv University, sees judicial reform as a kind of resource grab.

“It's a redistribu­tion from the high-tech sector to religious and nationalis­t minorities,” he said. “And it would turn Israel into an illiberal country.”

In the Israeli parliament­ary system, the administra­tion usually controls the legislatur­e, so gaining more sway over the courts would hand Netanyahu and his ministers influence over all three branches of government and far fewer checks on his powers.

If Israel's democratic institutio­ns are undermined, investors and executives contended, it will keep blue-chip customers and investors at bay. And if a company has difficulty 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 that makes it easier to appeal to investors and employees. Israeli tech executives who live in the United States often return when their children reach school age so they can acclimate to Israeli culture and serve in the military.

“We used to talk about going back in 2024, and now it's like, let's not talk about it, which is a big deal for us,” said Nadav Weizmann, an entreprene­ur who is launching his third company, Cardinal, a tool for product managers, in Austin, Texas. “For a startup founder, it's now a lot harder to imagine moving back to Israel, because you don't know what it will look like.”

If the government moves ahead with its judicial plans, the outflow of Israeli tech leaders will surge and the inflow will subside, said Adam Fisher, a co-founder of Bessemer Venture Partners, which has backed more than 30 startups in the country. Money from Bessemer and other venture capital firms — 90% of all investment in Israeli tech comes from foreign sources — will simply follow the entreprene­urs.

“When I invest in Israel, I'm not really investing in the Israeli economy; I'm not looking at the shekel or railroad infrastruc­ture or GDP growth,” Fisher said. “I invest in entreprene­urs, and if those entreprene­urs want to set up somewhere else, that's fine.”

Smotrich and other members of the coalition have said they are merely redressing an imbalance that gives the Supreme Court too much power.

In a Fox News interview this month, Netanyahu said, “We probably have the most activist judicial court on the planet.”

Since 2020, Netanyahu has been on trial for bribery, fraud and breach-of-trust charges, which he has denied. His interest in revamping the court was deemed enough of a conflict that this month, the country's attorney general ordered him not to get involved with the effort. Netanyahu's office called the demand “unacceptab­le.”

That a government led by Netanyahu would imperil Israel's tech miracle bewilders many because he has long been one of the sector's most vocal champions. But a flight of capital has already begun.

“From my clients I'm hearing concrete instructio­ns to mobilize money out of Israel, to Switzerlan­d or London,” said Eran Goren, a co-founder of Fidelis Family Office, which manages the money of wealthy Israelis. “We work closely with private banking department­s of big banks, and they say it's from every direction; people are just pulling money out.”

A withering tech industry would make Israel poorer, weaker and more religious, Yashiv said. That ought to worry anyone concerned about the stability of the Middle East, he added.

“Weaker states tend to be more aggressive, and a weaker Israel will be a more aggressive Israel,” he said.*

 ?? AVISHAG SHAAR-YASHUV — THE NEW YORK TIMES ARCHIVES ?? Protesters rally on Feb. 13against plans by Israeli Prime Minister Benjamin Netanyahu's government to overhaul the judicial system.
AVISHAG SHAAR-YASHUV — THE NEW YORK TIMES ARCHIVES Protesters rally on Feb. 13against plans by Israeli Prime Minister Benjamin Netanyahu's government to overhaul the judicial system.

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