Israel is set to surf the global AI investment wave

A new report from Startup Nation Central confirms Israel’s status as ‘a global AI powerhouse’ where startups have started to figure out significant optimization and cost efficiencies, with major price reductions that will allow AI to scale and reach its promise

November brought three items of major news for investors in Israel’s high-tech economy and its fast-growing artificial intelligence sector.

First was the publication of a report from Startup Nation Central confirming Israel’s status as “a global AI powerhouse,” according to Avi Hasson, SNC’s CEO.

“Israel stands at the forefront of global AI innovation, driven by an exceptional ecosystem of startups, academia, and strategic support from both local and multinational players,” Hasson says. “Leading corporations – including NVIDIA, Microsoft, Google, Amazon, Meta, and Apple – have deepened their investments in Israel’s AI landscape through significant R&D and acquisitions, pointing to Israel’s standing as a global AI leader.”

Second was the publication of NVIDIA’s third-quarter earnings, growing 94% year-on-year to surpass estimates with a record $35.1 billion in quarterly sales, cementing its position as the world’s biggest company and confirming the role of AI as the main driver of high-tech investment worldwide.

Third was the welcome news of a ceasefire between Israel and Hezbollah in Lebanon, ending 14 months of constant rocket and drone attacks by the Iran-sponsored terror group that provoked an Israeli ground invasion in October. We now hope that there will be similar good news from Gaza, where the return of all Israeli hostages and the final defanging of the deadly Hamas terror network can end the war triggered by Hamas’ brutal massacre and kidnappings of innocent Israelis on October 7, 2023.

Major factor

As the conflict winds down and Israel’s economy starts returning to normal, its prominent position in the emerging AI landscape will become a major factor in the coming Israeli economic boom. High tech is already the single major driver of Israel’s economy, contributing 53% of Israel’s exports, 24% of its tax revenue and 20% of its GDP. AI is now the fastest-growing venture investment sector in Israel, capturing 47% of total funding – a much larger proportion than other regions.

“Israel’s share of AI investment has consistently outpaced those of the US and Europe, often by three to four times, since 2018,” SNC reports. “Despite a recent surge in US AI investment due to high-profile deals, Israel retains a unique competitive position within the global AI landscape.”

As a result, the number of AI startups in Israel has grown faster than all other tech sectors.

“This surge has created a significant quantitative advantage, establishing a strong ecosystem of over 2,000 AI-driven companies and more than 400 multinational research centers operating within Israel,” SNC says.

But investors are asking when or even whether the huge investments in AI, in Israel and elsewhere, will actually pay dividends.

NVIDIA’s historic results were not universally celebrated. NVIDIA stock actually fell up to 3% immediately after the announcement. Some analysts have queried whether it is even appropriate for corporations like Microsoft and Apple to invest in technology whose benefits for their shareholders won’t be seen for years, or even decades.

In June, Goldman Sachs issued a report titled Gen AI: too much spend, too little benefit?

“The promise of generative AI technology to transform companies, industries, and societies is leading tech giants and beyond to spend an estimated ~$1 trillion on capex in coming years, including significant investments in data centers, chips, other AI infrastructure, and the power grid,” Goldman Sachs said. “But this spending has little to show for it so far. Whether this large spend will ever pay off in terms of AI benefits and returns, and the implications for economies, companies, and markets if it does—or if it doesn’t—is Top of Mind.”

Exceptionally expensive

“Even in its infancy, the internet was a low-cost technology solution that enabled e-commerce to replace costly incumbent solutions,” says Jim Covello, Goldman Sachs’ Head of Global Equity Research. “While the question of whether AI technology will ever deliver on the promise many people are excited about today is certainly debatable, the less debatable point is that AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do.”

Even if AI can deliver, the ROI is so many years away that corporate shareholders are becoming skeptical about the risks involved.

“AI is not delivering the returns that they were expecting,” D.A. Davidson analyst Gil Luria told CNN. “If you’re going to invest now and get returns in 10 to 15 years, that’s a venture investment, that’s not a public company investment. For public companies, we expect to get return on investment in much shorter time frames. So that’s causing discomfort, because we’re not seeing the types of applications and revenue from applications that we would need to justify anywhere near these investments right now.”

But corporate leaders appear to be driven more by FOMO than by P&L.

“When we go through a curve like this, the risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where if it turns out that we are over-investing… these are infrastructure which are widely useful for us,” said Sundar Pichai, CEO of Alphabet, in a July earnings call, echoing similar statements from Mark Zuckerberg and other tech pacesetters.

This debate over risk and returns is familiar to venture investors. We are much more comfortable than corporate shareholders with 10-year investment horizons, and if AI is the most attractive venture investment in the world today, then an Israel re-emerging from conflict promises to be a magnet for major opportunities.

Key sectors

The early signs are good. Israeli AI startups are already developing game-changing technology in healthcare, robotics, cyber, financial security, defense, climate tech, agriculture and other key sectors.

There is always a huge risk in venture investing. But in an environment where the markets are surging, where the biggest corporations in the world are investing like venture capitalists, and proven leaders are saying that they must invest despite the risks, I expect Israel to demonstrate some real leadership.

Israeli companies are smaller than their US counterparts, so they are unable to throw vast sums of money at problems or even compete in raising millions of dollars at high valuations. Israel’s tech advantage lies in its roots in the military, where young engineers are imbued with the culture of doing more with less. Israeli engineers have never been dazzled by piles of riches because the dollars were never there in the same amounts. Existence. Their military training teaches them to solve huge problems with small budgets. Faced with immediate threats to their family and community, they learn to cut corners and move fast because the stakes are so high.

AI technology is currently prohibitively expensive but, like all new technologies that are widely adopted, the business opportunity demands that the unit economics will drop exponentially, bringing down the cost to put AI within reach. Motorola’s DynaTAC 8000X mobile phone first hit the market in 1983 with a price tag of $3,995. By 2006, BlackBerry’s Pearl, with vastly superior functionality, was launched for just $350. Just like the cost of computers, smartphones, screens, solar panels and tablets, the cost of AI will fall to the point where it becomes cost effective.

This is the role I expect Israel to play – and it has already begun. Israeli startups have started to figure out significant optimization and cost efficiencies, with major price reductions that will allow AI to scale and reach its promise.

Removing bottlenecks

We are already seeing some Israeli companies leading the way to this more accessible AI, starting with AI chip architecture retooled to dramatically cut costs and energy usage for specific AI uses. NeuReality is developing an AI inference chip that is “opening the doors for new AI innovators across industries and removing CPU bottlenecks, complexity, and carbon footprints,” says Moshe Tanach, its CEO and Founder, who previously served as Director of Engineering at Marvell and Intel. The Hailo-10 AI processor from Hailo, which raised $120 million at a $1.2 billion valuation earlier this year, is specifically designed for AI edge computing, and consumes less power while supporting a range of AI services, including large language models.

ZutaCore has developed the most advanced waterless liquid cooling systems to meet the requirements of the data centers which power AI and cloud computing, reducing energy consumption and the associated costs. Cytoreason is using AI to optimize the multibillion-dollar drug development process, where even modest percentage savings in cost can translate into significant upside for the pharmaceutical industry, health providers and patients. In the education market, startups like Sense Education are freeing students from the limited resources of teachers who cannot give them the personalized attention and feedback they need to develop their dull educational potential – allowing teachers to concentrate their efforts on the students who most need human assistance. OneAI and D-ID are creating AI-powered humanoid avatars to replace clumsy chatbots, boosting the efficiency of customer service and online interactions.

These game-changing technologies will carry us into a new era of technology, and Israel can help lead the way. The country will need a significant accumulation of capital, because AI development is expensive, and that will require a coherent public-private partnership to encourage international investors to participate in this new wave of innovation.

Building out the infrastructure to train and to test numerous AI data sets will cost billions. To make it happen, Israel will have to provide R&D grants, tax incentives and regulatory support to move fast so we do not get left behind. Israel needs a national AI policy as a matter of economic prosperity and national security.

I expect the Israeli government, once it is released from the headache and pain of daily attacks by Hamas, Iran and their enablers, to seize this major economic opportunity to propel Israel to the forefront of global AI innovation.

About ‘Investors on the Frontlines’

I’m the CEO and Founder of OurCrowd, the global equity investment platform that gives individual accredited investors access to pre-IPO startup deals alongside top-tier VCs. If you are an investor, private family office or financial advisor, subscribe here for my biweekly commentary or follow me on Twitter. I welcome your comments in the response section below.