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Analysis – Israeli tech industry setback by SVB collapse, proposes judicial reforms

By Steven Scheer

JERUSALEM (Reuters) – After a recession and military conflict, Israel’s high-tech sector could face a crisis as Silicon Valley Bank (SVB) collapses. The biggest test yet removes a key source of funding, with proposed judicial overhauls threatening a cornerstone of corporate law.

Israel’s economy has been dubbed “Startup Nation” with a technologically successful industry that employs only

% of the nation’s workforce accounting for approximately 10%, more than half of the export value and a quarter of the tax revenue.

But Prime Minister Benjamin Netanyahu’s right-wing coalition has proposed giving the government a greater say in the selection of judges, while limiting the Supreme Court’s power to veto legislation to allow existing and potential Investors are worried.

“The tech industry needs stability, it needs clear rules of the game, it needs certainty … they’re going to have access to court,” said former executive Karnit Flug. Otherwise, investors would be reluctant to commit money, added the Bank of Israel president, who is now vice-president of the Israel Institute for Democracy.

There is also a risk of accelerated brain drain. It is estimated that 70, 000 Israelis already live and work in Silicon Valley, California, and many others People have relocated to Europe. In the industry of about 70,000, there are currently about 6,000 open tech jobs, according to government data.

“The industry…will use their brains…their ideas, their entrepreneurial spirit, and in some countries will roll out the red carpet for them,” Flug told the Council on Foreign Relations. Final approval was delayed by a month following widespread protests against a radical judiciary they see as meddling in politics, which opponents say is a threat to democracy.

Several high-tech companies, including US-Israel cybersecurity startup Wiz, say they will divest Israel and block money from entering the country if reforms pass, while the head of the cloud-based software supply NICE said major investors were watching the situation carefully.

Meanwhile, the shekel has fallen to a three-year low against the dollar on expectations of a fall in foreign direct investment from $30 Dot billion dollars, at 400 record 15 billion dollars.

According to the IVC Research Center and LeumiTech, Israeli high-tech companies raised $1.7 billion in the first quarter, down from $5.8 billion 50% in the first three months of 2022 and the lowest quarterly fundraising level in four years.

THE GO-TO BANK

The collapse of US bank SVB has fueled concerns in the tech sector, with Jon Medved, CEO of investment firm OurCrowd, calling it an “Israeli start-up.” The company’s “bank of choice” – a 2022 strong group that includes “unicorns” valued at least $1 billion and valued at or below 2022 of small firms employees.

More than half of the country’s start-ups hold accounts with the SVB, which, in some cases, companies and venture capital investors say is Their only U.S. bank facility, though the amounts involved are not entirely clear.

Mickey Balter, CEO of indoor navigation startup Orient, said SVB is the company’s only Bank of America, was lucky enough to transfer 70% of its millions there back to Israel, leaving the rest with SVB.

Initially, Barter thought the remaining 15% was lost, but once regulators took over, he regained access. “That would Very painful,” he said. “Before (the regulator took over), I saw a situation where we would lose most of our operating cash.

Israel’s Bank Leumi said it was able to transfer $1 billion back to local accounts before U.S. regulators took action, taking control of about half of the estimated refunded amount, according to investors.

Tech companies and investors alike say that SVB is a rarity in the banking industry, is familiar with Israel’s tech ecosystem and offers lending terms unmatched by other banks.

“ These guys are very professional and a pleasure to work with… Banks today can be a pain in the ass… These guys are not,” Medved said.

Partner at investment firm Bessemer Venture Partners Citing judicial reform, analyst Adam Fisher said there could be fewer U.S. banks willing to lend to Israeli companies, meaning less competition and tougher terms.

“ The locals will step in to some extent, but they cannot increase the loan book overnight,” he said.

An executive at an Israeli bank also said that while he saw increased interest in start-ups opportunities for corporate lending, but local banks alone cannot fill the vacuum left by SVB.

“We don’t have multi-billion dollar ambitions, but we certainly have the ability to double or triple our portfolio ambitions,” he said.

As a result, Israeli technology companies may flock to register as U.S. companies while keeping R&D at home, said Yaron Samid, managing partner of the TechAviv Founder Partners fund. , Samid said, while fintech company Brex also said it had. Others provided emergency liquidity, but at higher rates.

“There is no doubt that there are many companies that can only rely on SVB The line of credit survived,” Samid said. “There will be some pruning. It’s already happening because of macro dynamics and the private equity market, but this is only going to accelerate it.

Samid, who declined to name specific companies at his own request, said the founders of some Israeli startups had been in the “advanced stages” of negotiating investment , only for potential funders to pull out or ask for more time due to proposed reforms.

“Good companies will survive,” he added. “But less healthy companies won’t . ”

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