With a possible end to the war in sight, will 2025 bring a startup ‘baby boom’?

In 2024, Israel’s main share indices, a barometer for a country’s economic performance, were up almost 30%. The business sector, led by the tech industry, stepped up and adapted while a large portion of its employees were away on IDF reserve duty for extended periods.

Fundraising by local startups reached almost $10 billion and merger and acquisition deals are set to hit a new peak even though the suspension of foreign airlines’ flights disrupted business operations and relations with investors abroad.

In isolation, these figures portray the much-talked-about resilience of Israel’s tech ecosystem while the country contends with a multifront war. So where is the catch?

A closer look at the figures shows that a large chunk of funding was raised by more established tech companies with global operations that are less identified as Israeli and less exposed to local risk compared to younger and smaller startups that are in dire need of investment for their survival. In addition, cybersecurity, which stood out as an anomaly, attracted most of the investment despite the war.

Speaking to The Times of Israel, Avi Hasson, the CEO of Startup Nation Central, noted that the impressive fundraising and M&A figures are marred by a number of worrying trends and challenges that have only increased during the war. They include a steady decline in the number of new startups, shortage of engineers due to reserve duty call-ups, stagnation in tech employment, and company founders moving abroad.

“The M&A activity is a reflection of how we are seeing Israel transforming from a startup nation to a scale-up nation as we have more mature companies to offer,” said Hasson. “The flip side of that is that we have fewer deals, fewer new company creations, and the decline is an issue because it impacts the funnel for future years.”

The pace of founding new startups in Israel continues to decline, challenging the country’s image as a beacon of technological innovation and a hotbed in which large companies can be built.

Over the past decade, the number of newly created startups has plunged about 45% from an annual 1,432 to about 788 in 2023, with a lower trajectory expected for the past year, according to a recent study by the RISE Israel institute, formerly known as the Startup Nation Policy Institute.

In Israel’s tech ecosystem, startups are the lifeblood of future M&A, tax income, and employment creation. Tech employees pay more than a third of all tax income, which underpins the vital importance of the sector as a key driver for the recovery of an economy that has been stumbling through the repercussions of more than 15 months of war with the Hamas terror group.

The tech industry contributes about 20%, or NIS 340 billion ($92 billion), to local GDP, versus 6.2% in 1995. It also makes up more than 50% of total exports.

War broke out after Hamas-led terrorists murdered 1,200 people in southern Israel and took 251 people hostage during its October 7, 2023, onslaught. Amid a round of renewed negotiations to reach an agreement with the terror group for a hostage deal and truce, fund managers and market players The Times of Israel has spoken to view 2025 as year of optimism but also of caution.

Hasson is confident that in 2025, following a de-escalation of fighting, the local tech industry will experience a “startup boom.”

“We are going to see a startup boom similar to the baby boom experienced after war periods,” said Hasson. “There is a purpose-driven intent in setting up new companies, which we have seen always after major conflicts.”

“Some of these startups will be directly linked to technologies or needs that emerged in the war such as trauma, mental health, rehabilitation, and defense,” he added.

Driven by growing local and global demand for defense-related technologies, the Israeli defense tech landscape now counts about 300 startups, according to data by Startup Nation Central.

“In the eyes of a lot of global players, the war is already almost done and there is a lot of talk about Israeli military victories so far, which is contributing directly to defense technologies, cybersecurity, and everything that is related to security,” said Ben Topor, founder and managing partner of venture capital fund Titan Capital Partners. “With the sentiment of the war slowly ending, which will hopefully bring back foreign airlines, there could be a huge resurgence in investments in Israel.”

Topor has raised about $100 million for Titan’s flagship fund, which was founded in 2021, and invested in companies including WSC Sports, eToro, Guesty and Verbit.

For Elron Ventures chairperson Lisya Bahar Manoah, 2024 marked the year of M&As and resilience but she echoed Hasson’s concerns about the shortage of manpower and skilled engineers.

“There is a shortage of manpower, engineers, and new startups, which didn’t start because of the war — but the absence of employees because of reserve duty didn’t help,” said Manoah. “The fast developments in AI require Israel to work harder to adapt manpower to the new high-tech startups.”

“We can do more outsourcing but if we want to support our ecosystem, we need to make sure that we have the talent from the inside,” she said.

Manoah cited the need to adapt non-engineers to the tech sector for positions in sales, marketing or product management by creating upskilling programs in educational institutions.

The ongoing call-up of reserve soldiers, many of whom are employed in local tech firms and companies, and the continued uncertainty about the duration and extent of the war with the Hamas terror group in Gaza, presented challenges, in particular for early-stage startups, both in terms of attaining critical funding for their survival and their daily operations.

“Not all companies were able to deliver on time,” Manoah said. “Delays have happened, including delayed fundraising rounds especially for early-stage startups, which were affected more compared to growth-stage companies because they needed to prove the product, they needed to prove market fit, and they needed people also doing that.”

“Going forward, we need to make sure that other sectors [besides cybersecurity] are getting investments and the innovation continues also in other verticals such as life sciences, medtech, agritech, and food tech,” said Manoah.

Established in 1962, Elron manages $255 million in assets under management and holds a portfolio of 25 companies, including autonomous drone startup Wonder Robotics and cloud security startup Tamnoon.

Manoah, Topor, and Hasson all agreed that the flow of M&A deals is set to continue to grow this year as Israeli entrepreneurs may decide to sell up rather than continue to operate in a challenging environment, and as the demand for cyber and defense technologies continues.

“Cybersecurity is a sector in which Israel is a gorilla and it’s a sector that survives the technology cycle,” said Hasson. “For example, the AI revolution doesn’t take away the need for cybersecurity, it just increases the cybersecurity threat and the need for solutions.”

Revival of Israeli tech IPOs

Another reason to be optimistic about 2025, according to Manoah, is that the window for initial public offerings by Israeli tech companies with mostly US stock exchanges is expected to have a renaissance this year. The global IPO market has been largely closed as an avenue to raise capital due to a high-interest rate environment, a global economic slowdown, and sharp declines in technology stock values.

“Historically every three years, there is an opening of the IPO market, and the end of 2024 is marking that end of the third bad year,” said Manoah. “When there is a signal that the IPO market is opening, that also drives optimism for private investments into early-stage startups.”

At least five Israeli companies are expected to go public and list their shares on global stock exchanges this year, according to a recent survey conducted among dozens of venture capital investors and investment bankers by Poalim Tech and research company Meidata.

Still, Hasson raised concerns about the “uncertainty that still exists in Israel with regards to economic policies and attempts to revive the contentious judicial overhaul,” which in 2023 led to an outflow of funds and startup founders.

“Israel’s biggest asset is talent,” said Hasson. “We need to monitor that it doesn’t impact the competitiveness of the sector because people are choosing to set up their company elsewhere or relocate.”

Hasson emphasized the need for the government to play a more proactive role in making sure that Israel keeps pace with the global advancements in AI technologies by investing in infrastructure and labs in areas such as quantum computing and other sectors, and providing incentives, R&D grants to investors, multinational companies and entrepreneurs.

“Israel is underinvested in the sectors representing the global challenges of the future, such as health, food, compared to our legacy sectors, enterprise software, financial technologies, and cybersecurity,” Hasson said. “There’s a reason why these sectors are underinvested: they are capital-intensive, high-risk, and are influenced by government regulation.”