Israeli tech startups move to US amid domestic uncertainty.

Israeli tech startups move to US amid domestic uncertainty.

Israeli Tech Startups Look to the US as Judicial Overhaul Rattles Investors

In a surprising reversal, an increasing number of Israeli tech startups are choosing to incorporate in the United States instead of their home country. Several factors are contributing to this trend, including the allure of deep-pocketed US investors, pro-business policies, and a planned judicial overhaul in Israel that has left investors feeling uncertain.

One of the main reasons behind this shift is the attractiveness of incorporating in the state of Delaware, which is known for its pro-business environment and tax benefits. With low corporate taxes and no state sales taxes, Delaware is seen as a tax haven by many startups. Entrepreneurs and investors are drawn to these favorable conditions, which can impact where taxes are paid and ultimately impact government revenue.

However, it’s not just the allure of tax benefits that is driving Israeli tech startups away. The planned judicial overhaul proposed by Israeli Prime Minister Benjamin Netanyahu’s right-wing government is also causing concern among entrepreneurs. While the reforms do not directly affect the tech sector, the uncertainty surrounding the changes has left some feeling uneasy about the future of the business climate in Israel.

Ian Amit, the founder of an artificial intelligence-based cloud security firm called Gomboc, explained, “It mainly revolves around corruption and uncertainty of what system is there to protect me as a business, from a tax perspective, from a legal perspective, or an intellectual property perspective.” This sentiment is shared by many others in the industry who worry that the judicial overhaul could have unintended consequences for the tech sector.

The potential economic risk for the Israeli government is significant. The tech industry currently accounts for almost a fifth of the country’s gross domestic product and approximately 30% of tax income. With as many as 80% of new Israeli tech startups in 2023 choosing to incorporate in Delaware, up from 20% in the previous year, the government may face a loss of tax revenue if this trend continues.

Ami Applebaum, Chairman of the Israel Innovation Authority (IIA) and Chief Scientist at the Ministry of Innovation, Science, and Technology, expressed concern about the impact the judicial overhaul could have on investor confidence. “The fact that you are shaking up the judicial system puts Israel in a very high level of uncertainty and investors don’t like uncertainty,” he said.

The shift towards incorporating in the United States is not solely driven by political factors. Many entrepreneurs and investors see it as a pragmatic business decision. Israel’s tech sector relies heavily on foreign investment, and recent changes in interest rates and the collapse of major tech investor Silicon Valley Bank have made it more challenging to secure funding domestically. Ronen Feldman, founder and CEO of ProntoNLP.ai, explained, “If you want to operate in a global world and you want American investors… then that’s the way it is. It’s pure business.”

The decision to incorporate in Delaware is seen by some as mostly psychological, with a perception that the Israeli judicial system may not be as stable as it once was. Ayal Shenhav, head of hi-tech and venture capital at law firm Gross & Co, remarked, “It’s not something concrete that you can say ‘judges in Israel are corrupt’. No one is saying that. It’s just a feeling that it is not as stable as it used to be, and a lot of people follow the crowd.”

While the trend of Israeli tech startups incorporating in the US raises concerns about potential job losses and tax revenue for Israel, experts believe that the country’s tech industry will continue to thrive. Despite the shifting corporate structures, Israel’s tech ecosystem remains strong due to its talented workforce and innovation. Yaron Samid, managing partner of the TechAviv Founder Partners fund, affirmed, “Israel tech is not going anywhere because we have an incredible bunch of talent that is producing more and more great companies, so whether they are structured as US or Israeli corporations is really not significant for the tech ecosystem.”

While it is too early to determine the long-term implications of this trend, it highlights the importance of creating a stable and transparent business environment for startups. Governments around the world are now competing to attract innovative companies, and the choices made by Israeli tech startups serve as a reminder that business-friendly policies and a reliable legal system can make all the difference in this increasingly globalized economy.

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