Massachusetts-based Two Lanterns Venture Capital, a seed fund that invests in US and Israeli software startups, plans to invest 50% of its second fund in Israeli startups.
It does not mean that the VC sympathizes with Israel during a difficult year of war. The decision was based on dollars and logic, said Two Lanterns founder and managing director John Harthorne at a recent online Israel Innovation Webinar.
“Within the Two Lanterns venture portfolio, our 12 investments in Israel are currently outperforming all other startups by nearly 1.7x,” said Harthorne, adding that “Israeli startups will likely outperform the average as a group over time.”
The webinar explored why that is, how the current controversy is affecting the startup ecosystem, and which parts of the ecosystem are most attractive to investors.
Harthorne, who previously founded and led the MassChallenge non-profit accelerator for high-impact startups, including many in Israel, said the reason “Israel produces amazing startups” is simple.
“I believe that Israelis are the most stable people on earth,” he said. “Taking tanks is a very difficult battle … so being strong is one of the most important things to be successful.”
Yoni Cheifetz, a partner at Lightspeed Venture Partners, which funds disruptive business, consumer, fintech and healthcare developers in Israel and other countries, said investors look for three things: innovation, access to capital and the ability to invest and take money.
“I believe that all these things will grow in Israel. I don’t see any danger [relation to] that.”
New numbers seem to back up these claims.
Despite the ongoing war that has severely affected businesses on many levels, the Israel Innovation Authority reports that Israel has maintained its position as the world’s third-largest tech investment hub, raising $900 million between October 2023 and August 2024.
Cyber ​​over
Cybersecurity companies (startups but mostly established firms) hold a large slice of that pie. Case in point: Cyber ​​​​startup Torq of Tel Aviv recently closed $70 million, bringing its fortune in 2024 to $122,200.
“On the cyber front, we have almost a complete flywheel at this point in terms of the initial evolution,” said journalist Udi Mokady, founder and executive chairman of Petah Tikva-based CyberArk, which has a market capitalization of more than 10 billion dollars and is about to. 3,000 employees in 15 countries serving more than 8,000 business customers.
Many Israeli startups are developing security solutions for new threats from technologies such as artificial intelligence, he said.
“Israel will probably not be the one that creates the kinds of languages ​​and infrastructure around AI, but trust and security and governance around AI,” said Mokady, who was one of the angel investors earlier this year in Israel’s startup Clarity, which it protects from the deep.
He agreed with Harthorne that resilience is the key to Israel’s success.
“Like during covid, we have seen an incredible resilience and even an increase in productivity. Everyone got out and leaned in. The mantra of ‘Israel rescues at all costs’ was just that, across the industry.
Mokady said he is seeing more US investment knowing that “this is a good time to invest in Israel because we will come out of this and we will come out of it strong.”
AI and defense
Cheifetz, of Lightspeed Ventures, acknowledged that cyber will remain “really big” and that starting to use AI in innovative ways should also raise investor interest.
“AI moves faster, unlike quantum computing where the speed is slower,” he said.
Back entrepreneur Micha Kaufman, the founder of Tel Aviv-based Fiverr, the world’s most advanced platform, listed “everything related to digital transformation” as attractive to investors in Israeli tech.
He chose cyber, consumer Internet, SaaS (software as a service) and even defense as sectors of greatest interest.
Cheifetz noted that “VCs have stayed away from the defense industry but there is a lot of experience in Israel in that area.” (Mokady explained he argued that this is because “with defense technologies you want to test them in real time, and unfortunately in Israel you can do that.”)
Cheifetz said another big reason that “Israel is an attractive, competitive place like the Valley, from an investment standpoint” is that the military cherry-picks outstanding STEM students at the high school level.
The IDF “places them in categories that accelerate them in their careers by 10 years. Our two biggest deals in Israel are people who come out of these categories and repeat entrepreneurs who come out of successful companies,” he said.
“We are investing as much as ever and will continue to do so.”
High-tech will win
The panelists agreed that the current situation is not good, given the decrease in early-stage funding, the lack of new initiatives, and the strong talent and staff shortage due to the military security operation since October 7.
“The current conflict has occurred in a difficult economic and geopolitical landscape around the world. Besides, we have our own conflicts. From the oppressor’s point of view, less exposure to Israel is an easy choice,” said Kaufman.
“On the other hand, the startup had all the reasons in the world to continue to thrive and find ways to solve the situation. In the long run, I believe that Israel in general, and the highest in particular, will prevail. We have a community of perfect heroes and patriots who want to build a better future here. “
Despite the many anti-government protests and military threats in many places, Kaufman added, “Israeli society and its high-tech facilities are bigger and stronger than any government or crisis. It is important that we continue to support high technology through this crisis as we see the next wave of technology from Israel.”
To view the entire webinar, click here.
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