Why Large Investors are Returning to Israel

Warren Buffett has made his wealth on buying when the market is down and selling when the market is up. It's a simple rule that requires experience, knowledge and research in order to make correct investments at the right time.

Buffett has invested in Israel before, and no small amounts, having frequently promoted Israel and its great relationship with the US. He knows, like all intelligent investors, that the price of a company isn't in direct correlation to its value. The stock reflects the buyers eagerness to buy, and not the returned investment of the stock.

It's Buffetts ability to find, review and invest in companies that are underpriced that has made him great returns, and as most companies are underpriced during difficult times.

Israel is going through shaky times, but not because of the quality of our startups. Does that mean that an investment is due to yield a large return?

Israel is still moving forward

In Q1 2024, Startup Nation Central reported that investments in Israeli startups have fallen by 60% since October 2023. This is a stark contrast to recent years when foreign investments in the country peaked at $27 billion in 2021.

By the first quarter of 2024, that number had dropped to just $7 billion—less than half of what was raised the previous year. The sudden shift is notable for a country that has long been a leader in tech innovation and entrepreneurship.

The reasons behind this sharp decline are fairly reasonable, as investing into a war zone wouldn't classify as a secure investment for most VCs, putting deals that were in progress before October on hold or scrapped altogether.

Tens of thousands of Israeli reservists have been on active duty, which has left numerous startups in limbo as key employees were pulled to the front lines. Additionally, global political tensions surrounding the Gaza conflict and the rise of anti-Semitic movements, such as BDS, have further dampened the appetite for investment.

Adding to the conflict in Gaza in the escalation with Lebanon in the North, an enemy with far more firepower and hostile capabilities than Hamas, making tensions in Israel rise even higher.

This kind of investor caution is understandable in times of war, but as seasoned investors know, periods of uncertainty often present the best opportunities for those with a long-term view.

The Startup landscape is changing

The startup market is overpriced, with valuation going over their worth, making investors hesitant to go for even the best of companies. There will be a market correction, and thanks to the war, Israel is already offering their best startups as low valuation.

Over the last decade, Israel has established itself as a global leader in technology, with more than 70 unicorn startups popping up in the last few across sectors like SaaS, AI, and cybersecurity.

VCs have traditionally flocked to these high-risk, high-reward ventures, betting that even if only a few succeed, they will provide outsized returns. However, this strategy, which thrives in stable economic conditions, has been tested by the current geopolitical climate.

Many of these startups, while showing great promise, are not yet profitable, as they reinvest their earnings to drive growth. In times of conflict and economic instability, this model becomes much more precarious.

That said, the culture around Israeli startups is beginning to shift...

There’s now a growing emphasis on creating companies that are built to survive adversity—what some are calling the “camel” model. Unlike unicorns, which can be seen as fantastical, camels are grounded, durable, and capable of enduring harsh conditions. This shift toward sustainability rather than rapid growth could make Israeli startups more resilient as they navigate this period of uncertainty.

We've been here before. During the 2006 Lebanon War, the nation’s tech sector didn’t just endure, it flourished, which should be a great indicator for Israel today following the current war with Lebanon. Israel will survive the war, and will bounce back stronger than before, because the factors that made Israels startup ecosystem remarkable aren't dependent on the factors that raise hesitation from foreign investors today.

Major Investors Are Still Committed

In response to the investment slump, Israel’s Finance Minister, Bezalel Smotrich, has introduced a series of tax incentives aimed at attracting foreign investors. These incentives reduce the financial risks of backing Israeli startups during this uncertain period.

For investors with a long-term mindset, these tax cuts provide a compelling reason to capitalize on low valuations and the strong fundamentals of Israel’s tech scene.

It’s worth noting that despite the pullback from some investors, major players like Andreessen Horowitz are still betting on Israeli startups. Horowitz recently made significant investments in the Israeli market, signaling that leading global investors continue to see long-term potential.

Other big names like Google and Intel are also maintaining and even expanding their presence in Israel. These moves suggest that while the immediate outlook may seem uncertain, those with a broader perspective still view Israel as a critical hub for innovation.

In particular, the defense tech sector is experiencing heightened interest from venture capital firms. With global demand for cybersecurity and advanced defense technologies rising, investors are scrambling to secure stakes in Israeli defense startups.

These companies, which specialize in cutting-edge technologies like AI-driven defense systems, are attracting fierce competition from VCs. As national security becomes a top priority for countries worldwide, Israel’s expertise in this field makes it a hotbed for innovation and growth, already having VCs flock to the sector and Israel opening tens of new funds in the last 6 months alone.

For investors with the patience and foresight to navigate the current volatility, this could be a once-in-a-generation opportunity. Valuations are lower than they have been in years, and startups are eager to secure funding. Historically, those who invest during crises tend to see the biggest rewards when the market recovers.

Israel’s tech sector, particularly in high-growth areas like AI, medtech, and fintech, offers significant long-term potential. As the war subsides and the economy rebounds, those who take the risk now could see substantial gains.

Smaller investors are joining the game

The significant drop in valuations has made it easier for investors to enter the Israeli market, including smaller family offices, smaller VCs, syndicates and even angels. Startups are open to making deals, offering unusually attractive terms for those willing to invest now.

For businesses struggling to secure capital, this situation has created a sense of urgency, which could benefit those investors who recognize the long-term potential of these companies, and who would be ready to jump on a good price in order to make a fast deal.

Israel is again poised for growth

Israeli innovation has always had a global impact, and the track record is only on halt due to the war, but set to begin climbing again. This is the time to invest.

The technology developed by its startups is used worldwide, from cybersecurity systems that protect digital infrastructure to fintech solutions that are reshaping the financial landscape. Investing in these startups isn’t just a bet on Israel—it’s an investment in the future of global tech. The solutions coming out of Israel will likely influence industries far beyond the country’s borders in the years to come.

For those who hesitate, the risk of missing out is real. History has shown that waiting too long during times of uncertainty can lead to missed opportunities.

As Ray Dalio and other financial experts have pointed out, those who invest when fear is at its peak tend to see the largest returns when markets stabilize.

Israel’s tech ecosystem is resilient, and as the current crisis begins to ease, the country’s startups are likely to bounce back stronger than ever. Investors who recognize this will be well-positioned to capitalize on the recovery.