For years, budding Israeli tech executives have asked Yanki Margalit, a veteran entrepreneur, where they should start their startups. For years, he has offered the same advice: Here in Israel, where software engineers abound, international investors are eager, and friends and family live.
But as Margalit prepares a new company of her own, one focused on combating climate change, she has reluctantly come to the conclusion that Israel is the wrong place to start.
“Given the atmosphere right now, it’s almost irresponsible to start a company here,” said the 60-year-old, “and that’s heartbreaking.”
The luminaries of Start-Up Nation, as Israel has been known for decades, are eyeing the exits. Several have already announced they will move or take money out of the country, including the CEO of Papaya Group, a payroll company valued at more than $1 billion.
The reason is that a right-wing government, led by Prime Minister Benjamin Netanyahu, recently announced plans for a radical reform of the country’s judiciary that many believe will end its 75 years as an independent institution.
The proposed changes would severely reduce the court’s ability to strike down laws passed by the Knesset, the country’s parliament, and give the ruling coalition far more influence over who sits on the court.
That has sparked so much civil unrest and mass protests that Israel’s President Isaac Herzog declared in a televised address last week that the country was “on the brink of constitutional and social collapse.”
More quietly, people like Margalit are reassessing what it means to operate here and deciding that if the government reshuffles the judiciary, it’s time to go.
“This is about risk management and the risk is for the brand that is Israel,” said Assaf Rappaport, CEO and co-founder of Wiz, a $6 billion cloud security company. “It took a long time to build this brand, and today every company in the world can trust Israel as a partner in their cyber defense. These reforms will put all of that into question.”
While the judicial changes will affect all Israeli companies, the reaction from the tech sector is of great concern because it provides much of the power to the economy.
About 54 percent of Israel’s exports are high-tech products and services, according to the Israel Innovation Authority, a government support arm. The Israelis have created more than 90 so-called unicorns, private companies valued at more than $1 billion, including Wix.com, which offers cloud-based web services; gaming company Moon Active; and the financial services company eToro.
Losing top-level workers and the corporations they run would have a devastating impact in a country where 81 percent of tax revenue comes from just 20 percent of the population.
The new government, formed in late December, includes members of the ultra-Orthodox and ultra-nationalist political parties. Both are heavily dependent on government subsidies: the former because few of their members participate in the labor market, and the latter because it wants funds to sustain settlements in the West Bank.
That’s why Eran Yashiv, an economics professor at Tel Aviv University, sees judicial reform as a kind of resource grab.
“It is a redistribution of the high-tech sector to religious and nationalist minorities,” he said. “And it would turn Israel into an illiberal country.”
In Israel’s parliamentary system, the administration generally controls the legislature, so gaining more influence over the courts would give Netanyahu and his ministers influence over all three branches of government and far fewer checks on their powers.
Earlier this month, a group of 56 American economists sent a letter to Mr. Netanyahu arguing that his government’s court proposals would “negatively affect the Israeli economy by undermining the rule of law and thereby driving Israel into the direction of Hungary and Poland”.
“There is a wealth of research over the last 25 years showing 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 are concerned that reduced property rights for individuals and corporations will create uncertainty and that a weaker judiciary will increase the likelihood of government corruption. Both of these things will cause the economy to slow down substantially.”
If Israel’s democratic institutions are undermined, investors and executives argued, it will keep blue-chip clients and investors at bay. And if a company has a hard time attracting clients, it will have the same problem with talent.
Many Israeli-led companies, including Wiz, are already headquartered in the United States and maintain a subsidiary in Israel because that makes it easier to attract investors and employees. Israeli tech executives living in the United States often return 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 to 2024, and now it’s like we don’t talk about it, which is a big deal for us,” said Nadav Weizmann, an entrepreneur launching his third company, Cardinal, a tool for product managers. in Austin, Texas. “For the founder of a start-up, it is now much more difficult to imagine going back to Israel, because you don’t know what it will be like.”
If the government goes ahead with its court plans, the outflow of Israeli tech leaders will increase and the influx will dwindle, said Adam Fisher, co-founder of Bessemer Venture Partners, which has backed more than 30 startups in the country. The money from Bessemer and other venture capital firms (90 percent of all investment in Israeli technology comes from foreign sources) will simply follow the entrepreneurs.
“When I invest in Israel, I’m not really investing in the Israeli economy; I’m not looking at the shekel or rail infrastructure or GDP growth,” Fisher said. “I invest in entrepreneurs, and if those entrepreneurs want to set up shop somewhere else, that’s fine.”
The office of Israel’s finance minister, Bezalel Smotrich, declined to comment. In a mid-February statement, he said that claims that the reforms damaged democracy were part of a “scare-mongering campaign.” He and other coalition members have said they are simply correcting an imbalance that gives the Supreme Court too much power.
In a Fox News interview this month, Netanyahu said: “We probably have the most activist court of law on the planet.”
Since 2020, Mr. Netanyahu has been on trial on charges of bribery, fraud and breach of trust, which he has denied. His interest in revamping the court was seen as enough of a conflict that the country’s attorney general earlier this month ordered him not to get involved in the effort. Mr. Netanyahu’s office called the demand “unacceptable.”
That a government led by Netanyahu would jeopardize Israel’s technological miracle puzzles many because he has long been one of the most vocal champions of the industry. But he has already started a capital flight.
“I am hearing specific instructions from my clients to move money out of Israel, to Switzerland or London,” said Eran Goren, co-founder of the Fidelis Family Office, which manages money for wealthy Israelis. “We work closely with the private banking departments of the big banks and they say it’s from all directions: people are just taking money out.”
A withering tech industry would make Israel poorer, weaker and more religious, Yashiv said. That should worry anyone concerned about the stability of the Middle East, he added.
“Weaker states tend to be more aggressive, and a weaker Israel will be a more aggressive Israel,” he said.
Few of Israel’s tech leaders said they would leave happy. Although she hurt her, Margalit is weighing the pros and cons of cities like London, Paris and New York.
“If they pass this legislation,” he said, “what are my options?”
