Venture Capital in Israel

Venture capital occupies an unusually prominent position in the Israeli economy. The high-tech sector, which venture capital helped build, accounts for roughly 12% of the workforce, 20% of GDP, and 53% of exports, according to the U.S. Department of State's 2025 investment climate statement.[5] The business sector accounts for approximately 86% of all R&D activity in Israel — the highest proportion among OECD nations — and more than 300 international technology corporations have established R&D centers in the country.[6]

Israel is identified as a consistent net importer of venture-capital deals in a peer-reviewed study drawing on deal-level data spanning three decades and approximately 100 countries. The study found that high-end human capital, a favorable business environment, military expenditure, and deep financial markets were the local factors most strongly associated with attracting international venture capital, and it listed Israel alongside France, Canada, India, and China as persistent net importers.[7] Investment in Israeli start-ups reached a record $26 billion in 2021.[3] The sector's significance extends beyond aggregate numbers: venture capital supplied start-ups with both equity capital and management expertise, and backers have included global financial investors and multinational technology companies seeking access to Israeli start-ups.[8]

Israel's technology investment environment did not emerge spontaneously. An INSS account traces its roots to a combination of state-supported research and development, knowledge accumulated in academia and defense industries, and private initiative, with the 1984 Law for the Encouragement of Research and Development in Industry and the Office of the Chief Scientist playing key institutional roles in implementing government technology policy.[9] Chief-scientist offices were established in several ministries as early as 1968 to promote science-based high-tech industries, assist R&D projects, guide new enterprises, and fund technological incubators.[10] The 1984 law supported science-based, export-oriented industry; failed projects did not require repayment, while successful ones repaid 3% of the grant yearly until the sum was returned.[10]

By the late 1980s, a government report found that 60% of technology companies considered worthy of grants could not raise follow-on capital to market their products.[4] The Office of the Chief Scientist offered matching grants, but these were often insufficient to carry companies through commercialization. The U.S.-Israel BIRD Foundation, established jointly by the two governments in 1977, provided an alternative: grants of $500,000 to $1 million over two to three years to support joint U.S.-Israeli business ventures, recouped through royalties from successful projects.[4][11] Shimon Peres, writing in a first-person account, described these arrangements as valuable but insufficient to generate broad economic benefits without a vigorous private venture-capital industry.[11]

Research on the industry's emergence identifies 1993 as the start of the emergence process and describes the preceding period, from 1989 to 1992, as the essential pre-emergence phase.[12] Before that transition, high-tech in Israel was dominated by a defense-oriented electronics industry; the venture-capital model associated with Silicon Valley — many small start-up companies, early-stage private equity, and serial entrepreneurship — had barely taken hold.[12] Academic researchers characterize the growth of venture capital not as arising in a vacuum but as part of a reconfiguration of an existing electronics industry built on decades of military and academic R&D.[12][13]

The military dimension of this foundation is well documented. Israel's defense and security ecosystem helped create conditions for civilian technology entrepreneurship, and many intelligence and cybersecurity start-ups are staffed by graduates of military technology units, particularly Units 8200 and 81.[3] Approximately 100 former Unit 81 personnel established around 50 start-ups between 2003 and 2010, and those companies collectively raised over $4 billion.[3] Public investment in military programs and their associated companies had also served as incubators by fostering technologies with commercial applications.[14] The cancellation of the Lavi fighter jet project amid economic difficulties released a large cohort of technical experts who moved into private companies and start-ups, connecting the growth of venture capital to a broader economic transition.[11]

The early 1990s brought a structural shift in Israel's skilled technical workforce that fundamentally altered the conditions for technology investment. After the Soviet Union's collapse, hundreds of thousands of Soviet Jews immigrated to Israel; an INSS report characterizes most of them as highly skilled engineers and scientists.[9] A U.S. Treasury Department speech delivered in June 2000 provided more precise figures: nearly a quarter of the one million immigrants from the former Soviet Union were engineers, and more than half were highly skilled.[14]

The INSS report links the integration of this cohort into civilian R&D to Israel's broader shift from a manufacturing economy toward one focused on research and development.[9] It also describes a three-way relationship among scientists, entrepreneurs, and foreign investors that accelerated the growth of international companies' Israeli R&D centers and the recruitment of local engineers.[9] Technological incubators established in 1991 were designed in part to absorb scientists from the new immigration wave, providing early-stage resources including staff, facilities, feasibility and marketing studies, and professional and managerial guidance.[10] Twenty-four incubators were created in that year, each able to provide up to $300,000; the program funded hundreds of companies.[4]

Israeli high-tech industry exports reflected this transformation: they grew fourfold between 1990 and 1999, rising from $2.8 billion to $12 billion.[14] Foreign investment in Israeli companies — virtually all of it in high-tech — accelerated through the decade, driven in part by reduced perceptions of political risk associated with the Middle East peace process, early commercial successes such as Scitex and ECI Telecom, and Israeli entrepreneurs in Silicon Valley encouraging their employers to invest in Israeli companies.[8] Direct and financial foreign investment reached a reported $2.4 billion in 1998 and $3.7 billion in 1999.[8]

The central policy intervention in the creation of Israel's venture-capital industry was the Yozma program — its name is the Hebrew word for "initiative." The Israeli government designed Yozma alongside a companion program called Inbal, with both intended to encourage local investment and attract foreign capital; their shared principle, as Peres described it, was having the government assume most of an investment's risk while leaving the reward to investors.[11]

Yozma was established to build a private Israeli venture-capital industry and connect it to foreign capital and experience.[4] The government committed $100 million to create ten funds, each involving Israeli venture capitalists, a foreign venture-capital firm, and an Israeli investment company or bank.[4] A separate $20 million Yozma vehicle was created for direct investment in technology companies.[4] Funds were directed toward export-oriented high-technology companies with strong growth potential.[15] The government took a minority equity stake of up to 40% of each fund's capital, capped at $8 million per fund.[15] Private partners could buy out the government's interest under preset terms during the first five years, giving them a clear path to full ownership and upside.[4][15]

Yozma began actual operations in January 1993.[15] The matching mechanism initially offered $8 million in government funding when private partners raised $12 million; after strong demand, the private fundraising requirement was raised to $16 million for the same $8 million government contribution.[4] By September 1995, nine funds had been established with approximately $200 million in capital, and foreign investors supplied slightly less than 45% of the funds' capital.[15]

The required foreign venture-capital partners were expected to contribute more than money. The aim was to bring international experience in managing and mentoring technology companies, as well as links to investors, customers, potential acquirers, and overseas markets.[4] The first Yozma fund, the $36 million Gemini Israel Fund, partnered Discount Israel Corporation with Boston-based Advent Venture Partners and was led by Ed Mlavsky and Yossi Sela.[4][15] The $33 million Walden-Israel Fund was among the other early and larger funds established under the program.[15]

Gemini's role in the early company Ornet Data Communications illustrates how the Yozma model was intended to work in practice. Gemini invested $1 million in Ornet in November 1993; when the company struggled, Yossi Sela became interim CEO and worked with the founders while also bringing in Silicon Valley firm Walden Venture Capital. Ornet returned more than three times Walden's investment in approximately two years, and Siemens acquired the company in a deal finalized in 1995 for $32 million.[4]

Another participant's account reinforces the scale of returns possible. Jay Morrison reported that Jerusalem Pacific Ventures was formed with $12 million in external investment plus $8 million from the government, that the fund invested $16 million in total, and that it returned more than $140 million to its investors.[16] Morrison credited Yozma with introducing "patient capital" to Israel and with helping create the country's venture-capital industry.[16]

The ten Yozma funds established between 1992 and 1997 raised just over $200 million with government assistance, were bought out or privatized within five years, and later managed nearly $3 billion while supporting hundreds of Israeli companies.[4] Yozma also helped encourage additional funds to form without government support, because its involvement gave foreign investors greater confidence in the Israeli market.[4] Academic researchers studying the program stress that its effectiveness depended on the existing base of high-tech and R&D capabilities; they caution that a venture-capital incentive program should not be the central thrust of government policy when the aim is to create an entirely new high-tech sector where no such base exists.[13]

The speed with which Israel's venture-capital industry expanded after Yozma's launch was remarkable. Research on the sector documents that the number of venture-capital funds grew from 2 to more than 100 during the 1990s.[12] A five-phase academic model — background conditions, pre-emergence, emergence, restructuring, and consolidation — identifies venture-capital and start-up co-evolution as a critical link between the emergence of VC and the transformation of the broader high-tech cluster into a start-up-intensive configuration.[17]

A snapshot of the market around 1992 shows a single venture-capital fund with $30 million under management; within roughly six years, more than 50 venture-capital firms held $2 billion under management.[1] By 1998, the Israeli VC market comprised 32 funds with about $508 million in capital, divided among Yozma funds, Inbal public funds, other public funds, and private funds, with about 52% of total raised capital already invested.[15] The Inbal program, created in 1991 as a government-insured public-fund structure, produced two funds — Teuza and Marathon — that raised $22 million and $20 million respectively.[15] Eighteen private VC funds totaling $227 million, an average of about $12 million each, also operated in the market; Athena, established in 1985, is identified as Israel's first VC fund.[15]

Investor attitudes also shifted over this period. By 1988, Israeli high-tech leaders had become more willing to offer foreign investors equity participation and opportunities to fund local ventures — a departure from an earlier posture that one account characterizes as "If you have something good, keep it to yourself."[1]

For 1997–1999, privately controlled Israeli high-tech companies raised $430 million, $600 million, and $1.003 billion, respectively, from venture-capital funds and other investors.[8] In 1999, about 43% of the $1.003 billion came from local funds and the remainder from overseas; approximately 330 companies raised capital from venture-capital funds that year.[8] The internet was the most active investment sector in 1999, with communications, semiconductors, and software also receiving substantial investment.[8] Separately, Israeli venture-capital funds raised $712 million in 1997, $668 million in 1998, and $900 million in 1999 from their own backers — figures that measure what funds raised, distinct from the amounts companies received.[8]

In June 2000, U.S. Treasury Deputy Secretary Stuart Eizenstat described Israel as having "a well-developed venture capital market willing to invest in cutting edge technology." He reported that in 1999 alone, 50 Israeli venture-capital funds invested more than $400 million in almost 500 deals involving Israeli high-tech companies, and that more than $1 billion in U.S. venture capital was invested in Israel that same year.[14] He situated this investment within growing U.S.–Israel high-tech ties, noting that Israeli firms were opening U.S. offices while U.S. firms were investing in Israeli companies.[14]

Between 1998 and 2001, Israeli venture-capital investment amounted to 1.3% of GDP, compared with 0.7% in the United Kingdom, 0.6% in the United States and Sweden, 0.3% in the European Union, and 0.03% in Japan.[18] Half of Israeli VC investment in that period went to early- and seed-stage companies, unlike the predominantly later-stage financing reported for those comparison countries.[18] An OECD assessment from the period flagged risks: Israel's greater dependence on foreign investment could encourage rapid IPOs or foreign acquisitions and put the production of Israeli technology and intellectual property at risk; VC represented only 0.2% of investment by Israeli pension funds, insurers, and similar institutions.[18]

State support for venture capital and adjacent activities has taken multiple institutional forms across Israel's history. The Office of the Chief Scientist (OCS) in the Ministry of Economy, as described in the U.S. Department of State's 2015 investment climate statement, implemented policy to encourage and support industrial research and development, with stated goals including economic growth, technological innovation, entrepreneurship, and national and international R&D collaboration.[19] OCS support-program spending reached about $400 million per year, covering roughly 1,400 projects at 830 companies; its main R&D Fund offered conditional grants of up to 50% of approved R&D expenditure, repayable through royalties only if a project was commercially successful.[19]

The Israel Innovation Authority, which succeeded earlier government bodies, operates programs that provide R&D and start-up investment subsidies by matching private investment in Israeli start-ups with preferential loans.[5] Companies repay the loans from eventual royalties on favorable terms, and repayment terms are more generous for firms that keep their intellectual property in Israel.[5] Israeli early-stage funding policy also includes tax incentives for start-up investors under the Angels Law.[20]

An INSS account describes a $100 million government investment fund, translated as the Initiative Program, as an inspiration for private funds intended to help Israeli companies operate in high-risk technology.[9] Technological incubators introduced in 1991 were specifically designed for entrepreneurs whose ideas were too risky or whose companies were too small for the regular R&D program; 123 projects that completed their goals had signed agreements with investment, commercial, or strategic partners, with reported capital investments ranging from $50,000 to $5.2 million.[10]

A study of 3,747 Israeli high-tech firms established between 1991 and 2004 compared the outcomes for venture-capital-backed firms and incubator graduates. Venture-capital-backed firms had higher success rates, but their activity was more concentrated in central areas. Incubators attracted activity to peripheral areas and less popular technologies, though their success rates were very low on their own; incubator graduates who subsequently received venture-capital financing had significantly improved results.[21]

Foreign and domestic investors are generally treated equally under Israeli law, and Israel maintains few broad restrictions on foreign investment, with exceptions for defense and national-security concerns.[5] A centralized screening mechanism for certain inbound investments was established in October 2019 and updated in October 2022, and investments in some regulated industries require approval by the relevant regulator.[5]

Israel's venture-capital activity has been heavily concentrated in software-oriented sectors. The INSS memorandum reported that more than half of the capital raised by private technology companies in Israel in 2021 went to three sectors: organizational software at 25.3%, FinTech at 16.9%, and cyber at 13.7%.[22] Only 4% of companies that raised capital in 2021 progressed to the seed stage, representing $1.1 billion.[22]

The INSS memorandum characterizes one dominant strand of the Israeli venture-capital model as backing young companies in fashionable, often software-oriented fields, with entrepreneurs seeking an exit after proving a concept — a pattern it calls "surfing the waves." This approach assumes that over 90% of ideas will fail and prioritizes short-term returns over domestic production and long-term retention of business activity.[22] Analysts have observed that this orientation toward software and cybersecurity came at the expense of investment in semiconductors, hardware, life sciences, and energy — sectors that generally require larger and longer-term capital commitments.[23]

In 2017, Israeli venture-capital firms invested $814 million in Israeli high-tech, 25% more than in 2016.[8] Total investment in Israel's high-tech sector that year reached $5.24 billion across 620 deals, a 9% rise over 2016, with a significant contribution from four deals exceeding $100 million each.[8]

Biotechnology represents a distinct sub-sector with its own financing dynamics. About 75 Israeli life-science companies raised $238 million in venture capital in 2000, compared with $135 million in 1999.[24] About 20 funds active in Israeli biotechnology at that time held between $10 million and $100 million each, including Clal Biotechnology, a $100 million fund backed by institutional investors; BioMedica, a $10 million fund formed by Koor Industries and Medabiotech; and MAH, a $30 million plant-genomics fund operated by Makhteshim-Agan.[24] Later-stage life-science companies also needed stock-market financing and multinational pharmaceutical companies' marketing reach, making VC only one element of the sector's capital structure.[24]

Foreign capital has long held a prominent place in Israeli venture-capital investment. The U.S. Department of State's 2015 report described private venture-capital funds as having flourished in Israel.[19] A Jewish Virtual Library overview identifies their backers as including global financial investors and multinational technology companies seeking access to Israeli start-ups.[8] Foreign funds accounted for about 80% of venture-capital investment in local tech start-ups in 2021 and 2022.[25]

Chinese investment represents a notable episode in the history of foreign VC in Israel. An INSS study recorded 27 investments in Israeli venture-capital funds and approximately $1.468 billion in Chinese VC-fund investment during 2002–2020, noting that this total is incomplete because VC investments are often early-stage, relatively small, made alongside other investors, and not always publicly reported.[6] Chinese entities made deals with prominent Israeli high-tech venture-capital funds, including JVP, Carmel Ventures, Catalyst, and Singulariteam, but investment in these funds stopped in 2017.[6] Possible explanations for the decline include Chinese restrictions on capital outflows, increased scrutiny of overseas investment, the COVID-19 pandemic, and a less inviting Israeli investment climate — though the INSS study cautions against treating the observed short period as conclusive evidence of a lasting halt.[6]

Among the institutional foreign investors active in Israeli high-tech in the late 1990s were AT&T's pension fund, the Massachusetts Institute of Technology Endowment Fund, Hancock Ventures, and Chase Capital.[1] The regulations governing access to Israeli companies by foreign investors before the 2000s included requirements that companies receiving government R&D grants manufacture in Israel and face restrictions on transferring activity abroad.[9] Israeli venture-capital funds led efforts to ease these rules, arguing that export restrictions deterred foreign investors and harmed start-up growth; the subsequent easing allowed foreign capital and multinational companies to enter at larger scale.[9]

The connections between Israeli entrepreneurs in Silicon Valley and their employers proved influential in attracting U.S. capital. Early commercial successes — Scitex and ECI Telecom among them — helped reduce perceptions of political risk and demonstrated that Israeli technology companies could achieve significant scale.[8] By 1999, approximately 330 companies were raising capital from venture-capital funds, with the internet the most active sector and communications, semiconductors, and software also prominent.[8]

After the 2021 peak — when investment in Israeli start-ups reached $26 billion — the industry entered a significant contraction.[3] Israeli technology start-ups raised $7.3 billion in 2023, a 58% year-on-year decline and the lowest annual level since 2018.[25] About 42% of foreign VCs that invested in Israeli tech in 2022 did not invest in 2023, compared with an average of about 17% over 2018–2022, and 32% of Israeli VCs refrained from investing in local start-ups that year, against a prior-years average of 19%.[25] The decline came amid a global funding contraction, local political uncertainty, and the outbreak of war — factors documented as concurrent context rather than individually quantified causes.[25]

A separate IVC-Gornitzky-KPMG report found that 21 Israeli venture-capital funds raised $1.52 billion in 2023, a 73% decline and the lowest level since 2015; the number of funds raising new capital fell 66%.[2] Three funds — Qumra Capital IV, TLV Partners V, and Viola Growth IV — each raised more than $200 million and together accounted for 51% of the total.[2] Despite the fundraising drought, Israeli VC funds still held about $10 billion, including approximately $2.38 billion earmarked for new investments and $7.7 billion reserved for existing portfolio companies.[2]

The wars in Gaza and Lebanon further disrupted the economy; GDP growth in 2024 was 1.0%, compared with pre-war estimates of 4–5%.[5] Nevertheless, the State Department's 2025 investment climate statement described the high-tech sector's resilience during the war as a bright spot.[5] Israeli technology companies raised $10 billion in 2024, with Israel ranked the third-largest technology-fundraising hub globally — though that company-funding total is a different measure from capital raised by VC funds.[26] Israeli VC funds raised $1.15 billion across 21 funds in 2024, compared with $2 billion across 32 funds in 2023, with $415 million allocated to first-time investments, the lowest such amount in recent years.[26]

Fund managers' behavior during the war introduced an additional measurement complication: some made initial fund closings before announcing them and delayed announcements because of concerns about negative publicity during wartime.[27] A September 2025 estimate of $260 million raised in the first half of 2025 was later revised sharply upward, with IVC reporting $1.61 billion raised so far in 2025 and noting that eight funds announced a combined $1.37 billion in new funds after the war ended.[27]

A report dated October 15, 2026, citing IVC and the Israel Innovation Authority, said Israeli funds had raised $630 million in the first half of 2026, with a total that had since risen to $1.4 billion and a projected full-year figure of approximately $2 billion.[28] Even at that projected level, fundraising would be approximately 70% below the 2021 peak.[28] Ongoing pressures identified in reporting include weak returns at many established funds, reduced investment by Israeli institutional investors in local funds, competition from large U.S. funds, and the capital demands of artificial-intelligence ventures.[28] Cybersecurity accounted for 40% of capital in this period, with much of that capital coming from U.S. funds or Cyberstarts.[28]

The Israeli government responded to the wartime funding decline with several direct interventions. Its 2024 wartime stimulus package included more than NIS 800 million for a revived Yozma fund intended to encourage Israeli institutional investors to invest in local VC funds, expand overall funding availability, increase the share of local capital in high tech, and reduce reliance on foreign capital.[29] The same package created a start-up fund through which the Israel Innovation Authority would co-invest with VC firms or private investors from pre-seed through Series A, with the stated aim of reducing investor risk and helping companies reach their next funding milestone.[29]

The Israel Innovation Authority launched Yozma 2.0 in April 2024.[30] Its concept had originated during the 2022 technology-bubble downturn, when Israeli VC funds struggled to raise capital, and was later reinforced to sustain investment during wartime.[23] The program deployed approximately $450 million through two tracks: $365 million for a track encouraging institutional investors to invest in Israeli VC funds, and $85 million invested directly in nine deeptech funds.[23] Participating funds are required to invest at least 70% of their capital in Israeli companies.[23]

The institutional-investor track included $286 million from institutions and $79 million from the Innovation Authority, with investments in 11 Israeli VC funds expected to support about $1 billion in new fundraising.[23] The $85 million deeptech track supported nine funds focused on complex, research-intensive technologies and was expected to help them raise about $1 billion as well.[23] The program was designed in part to address a structural imbalance: Israeli VC had historically favored software and cybersecurity over semiconductors, hardware, life sciences, and energy — sectors requiring larger and longer-term investment — and the deeptech track was intended to shift that allocation.[23]

An OECD survey noted that Yozma 2.0 aimed primarily to broaden the investor base for venture capital while also creating possible links between long-term investors and high-tech companies to facilitate medium- and long-term funding.[30] The survey observed that the program's outcomes should still be assessed, as it was too early to report realized results at the time of publication.[30]

A recurring theme in accounts of Israeli venture capital is the relationship between military service and civilian technology entrepreneurship. The BESA Center paper argues that Israel's defense and security ecosystem helped create conditions for civilian technology entrepreneurship, while emphasizing that innovation shifted toward private-sector entrepreneurs and investors toward the end of the 20th century.[3] Public investment in military programs and associated companies served as incubators by fostering technologies with commercial applications — a point made both in the BESA Center analysis and in the U.S. Treasury speech of June 2000, which described this dynamic as one contributor to high-tech sector formation.[3][14]

Graduates of military technology units, particularly Units 8200 and 81, are disproportionately represented among founders of intelligence and cybersecurity start-ups.[3] The example of Unit 81 is especially striking: approximately 100 former officers and soldiers from that unit established around 50 start-ups between 2003 and 2010, with those companies collectively raising over $4 billion.[3] Cybersecurity's continued prominence in the VC investment mix — representing 40% of capital in 2026 — reflects how deeply this pipeline continues to shape the industry's direction.[28]

Shimon Peres's account adds another dimension: he described the cancellation of the Lavi fighter jet project as releasing technical experts for private companies and start-ups, framing the end of the government-run aviation program as a catalyst for the emergence of private venture capital rather than merely a defense-budget decision.[11]

Several significant debates surround Israel's venture-capital ecosystem. One concerns the relative importance of government policy versus private initiative and defense-derived capabilities in the industry's creation. INSS analyses emphasize the role of state-supported R&D, the 1984 industrial research law, and the Initiative Program, while the BESA Center paper stresses the security-driven technological infrastructure and the role of military units in producing entrepreneurs. Academic research additionally emphasizes favorable background conditions, targeted policy, venture-capital and start-up co-evolution, and links to global capital markets.[9][3] Taken together, the sources present these influences as overlapping factors rather than necessarily exclusive explanations.[12]

A second debate concerns the long-term effects of easing export restrictions before the 2000s. The INSS report presents the policy change as both enabling and problematic: it attracted foreign capital and multinational companies at larger scale, but also reduced incentives to retain production and intellectual property in Israel and encouraged rapid exits over domestic business development.[9] The INSS memorandum's characterization of venture capital as "surfing the waves" — prioritizing short-term exits over domestic retention — extends this critique, presenting the dominant VC model as structurally biased against long-term economic benefit for Israel.[22] These are contested policy assessments, not settled conclusions.

Historical accounts also use different dates for Yozma's establishment and operation. A 1998 Globes account says the program was established in 1991 and began actual operations in January 1993.[15] A 2019 Israeli government presentation labels Yozma a 1993 initiative, while Start-Up Nation describes the ten supported funds as having been established between 1992 and 1997.[20][4] The differing dates appear to reflect distinctions among the program's establishment, the creation of individual funds, and the start of operations.