For years, budding Israeli tech executives have been asking veteran entrepreneur Yanki Margalit where they should start their startups. For years, he’s been proposing the same thing: Israel, where software engineers are plentiful, international investors are eager, and friends and family live and work.
But as Margaret prepared a new venture of his own, one focused on fighting climate change, he reluctantly concluded that Israel was the wrong place to start.
“It’s almost irresponsible to start a company here given the climate right now,” said the 60-year-old. “It’s heartbreaking.”
Celebrities in the start-up nation Israel has been known for decades are eyeing exports. Several have announced they are relocating or moving money out of the country, including the chief executive of payroll firm Papaya Group, worth more than $1 billion.
The reason is that the right-wing government led by Prime Minister Benjamin Netanyahu recently announced plans to overhaul the country’s judiciary, which many believe will end its 75-year run as an independent institution.
The proposed changes would severely curtail the courts’ ability to veto laws passed by the Knesset and give the ruling coalition a greater say in who sits on the bench.
That has sparked so much civil unrest and mass protests that Israeli President Isaac Herzog said in a televised address last week that the country was “on the verge of constitutional and social collapse.”
More quietly, people like Mr Margaret are reassessing what it means to operate here and deciding that if the government restructures the judiciary, it is time to leave.
“It’s all about risk management, and the risk is with Israel’s brand,” said Assaf Rappaport, chief executive and co-founder of Wiz, a $6 billion cloud security company. “It took a lot of time to build the brand, and today every company in the world can trust Israel as their partner in cyber defense. These reforms will bring all of that into question.”
While the judicial change will affect all Israeli businesses, the tech industry’s response is the most worrisome because it provides so much economic impetus.
About 54 percent of Israel’s exports are high-tech goods and services, according to the Israel Innovation Authority, a government support agency. Israelis have created more than 90 so-called unicorns — private companies worth more than $1 billion — including Wix.com, which provides cloud-based web services; gaming company Moon Active; and financial services company eToro.
In a country where 81% of tax revenue comes from just 20% of the population, losing top earners and the companies they run would have devastating effects.
A new government was formed in late December, including members of ultra-Orthodox and ultra-nationalist parties. Both rely heavily on government subsidies: the former because few members participate in the labor market, and the latter because it needs funds to maintain settlements in the West Bank.
That’s why Tel Aviv University economics professor Eran Yashiv sees judicial reform as a resource grab.
“It’s a redistribution from the high-tech industry to religious and nationalist minorities,” he said. “It would turn Israel into an illiberal state.”
In Israel’s parliamentary system, the executive branch usually controls the legislature, so gaining greater influence over the courts would give Mr Netanyahu and his ministers influence over all three branches of the government and influence his There are far fewer constraints on power.
Earlier this month, a group of 56 US economists sent a letter to Mr Netanyahu, saying his government’s judicial proposals “would weaken the rule of law, thereby adversely affecting the Israeli economy, thereby depriving Israel of the benefits it owes to Hungary and Poland.” development direction.”
“A large body of research over the past 25 years has shown that stability and the rule of law support better economic growth,” Zvi Eckstein, a former deputy governor of the Bank of Israel, said in an interview. “As economists, we fear that reducing property rights for individuals and companies would create uncertainty, while a weak judiciary would increase the likelihood of government corruption. Both things would lead to a sharp slowdown in the economy.”
Investors and executives argue that if Israel’s democratic institutions are undermined, blue-chip clients and investors will be put off. If a company is having trouble attracting customers, it will have the same problem with talent.
Many Israeli-led companies, including Wiz, have already based their headquarters in the United States and have subsidiaries in Israel because it is easier to attract investors and employees. Israeli tech executives living in the U.S. often return to the U.S. when their children reach school age so they can acclimate to Israeli culture and serve in the military.
“We used to talk about going back in 2024, and now it seems like we’re not, and that’s a big deal for us,” said entrepreneur Nadav Weizmann, who is starting his third company, Cardinal, a Product Manager Tools, in Austin, Texas. “For startup founders, it’s hard to imagine going back to Israel now because you don’t know what it’s going to be like.”
Adam Fisher, co-founder of Bessemer Venture Partners, said that if the government moves forward with its judicial plan, the outflow of Israeli tech leaders will surge and the inflow will decrease. The company has backed more than 30 start-ups in the country. Funding from Bessemer and other venture capital firms — 90 percent of all investment in Israeli tech comes from abroad — will follow entrepreneurs directly.
“When I invest in Israel, I’m not really investing in the Israeli economy; I’m not looking at shekels or rail infrastructure or GDP growth,” Mr Fisher said. “I invest in entrepreneurs, and if those entrepreneurs want to set up elsewhere, that’s fine.”
The office of Israeli Finance Minister Bezalel Smotrich declined to comment. In a statement in mid-February, he said claims that the reforms had harmed democracy were part of an “alarmist campaign”. He and the rest of the coalition say they are simply correcting an imbalance that has given the Supreme Court too much power.
In an interview with Fox News this month, Mr Netanyahu said, “We probably have the most aggressive judicial courts on the planet.”
Netanyahu has been on trial since 2020 on charges including bribery, fraud and breach of trust, which he denies. His interest in reforming the courts was deemed conflicting enough that, this month, the country’s justice minister ordered him not to take part in the effort. Mr Netanyahu’s office called the request “unacceptable”.
That a government led by Mr. Netanyahu would jeopardize Israel’s technological wonders has puzzled many, since he has long been one of the industry’s most outspoken advocates. But capital flight has already begun.
“From my clients, I hear specific instructions to move money from Israel to Switzerland or London,” said Eran Goren, co-founder of Fidelis Family Office, which manages the money of wealthy Israelis. “We work closely with the private banking divisions of the big banks and they say it’s coming from all directions – people are just pulling money.”
A shrinking tech industry would make Israel poorer, weaker and more godly, Mr. Yashiv said. That should worry anyone concerned about stability in the Middle East, he added.
“Weaker states tend to be more aggressive, and a weaker Israel will become a more aggressive Israel,” he said.
Few of Israel’s tech leaders said they would leave happily. As painful as it is for him, Mr Margalit is weighing the pros and cons of cities such as London, Paris and New York.
“If they pass this legislation,” he said, “what are my options?”
