Israeli Tech Startups Found To Flock To The US: Here's Why

While some entrepreneurs emphasise that their decision to register in the US is purely business-driven, it's essential to acknowledge that Israel's tech sector heavily relies on foreign investments.

The ongoing debate surrounding Israel's judicial reform underscores the complexity of the situation.

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A surge in the number of Israeli tech startups opting to establish themselves in the United States is becoming increasingly noticeable. This shift is being driven by the allure of well-funded American investment firms, favourable pro-business policies, and an impending judicial overhaul within Israel that is causing unease among investors. This marks a significant departure from the trend observed over the past decade, during which Israel had successfully persuaded a greater number of its startups to establish their legal presence within its own borders.

While this trend might not result in a wholesale migration of jobs overseas, given that the technology sector currently employs about 14 per cent of Israel's workforce, the decision to register companies or intellectual property abroad can significantly influence tax payments, potentially affecting government revenues.

According to entrepreneurs and investors who spoke with Reuters, there are compelling business justifications for choosing incorporation in the United States, particularly in Delaware, known for its pro-business stance and tax advantages due to its low corporate taxes and absence of state sales taxes.

Nonetheless, the upheaval caused by the proposed judicial changes by Israeli Prime Minister Benjamin Netanyahu's administration is also playing a role in driving this trend. While the government frames the overhaul as necessary to curtail judicial overreach, critics perceive it as an attack on democratic principles.

Although the judicial overhaul isn't directly aimed at the tech sector, some like Ian Amit, a former Israeli military officer, are concerned about its potential impact and have chosen to move their startups across the Atlantic. Amit, who is registering his AI-based cloud security startup Gomboc in Delaware, cited concerns about corruption and uncertainty regarding the protective mechanisms for businesses from a tax, legal, and intellectual property standpoint.

The potential economic fallout for the Israeli government lies in the risk that its policies, which have sparked unprecedented nationwide protests, might instil fear in a tech industry that contributes nearly a fifth of the country's GDP and around 30 per cent of tax revenue. Some entrepreneurs are already demonstrating their concerns by taking action.

According to a survey conducted by the Israel Innovation Authority (IIA), up to 80 per cent of new Israeli tech startups in 2023 have chosen to incorporate in Delaware, a sharp increase from the 20 per cent observed in 2022. The survey also revealed that companies plan to register future intellectual property overseas. While the exact number of surveyed companies wasn't provided by the IIA, this shift is evident and noteworthy.

Amid this scenario, Ami Applebaum, Chairman of the IIA and Chief Scientist at the Ministry of Innovation, Science, and Technology, noted that the uncertainty caused by the judicial system overhaul is unsettling to investors, highlighting the aversion to such unpredictability.

Yair Geva, who heads the tech group at Herzog, Fox and Neeman law firm, further elaborated that beyond mere incorporation, some existing Israeli companies are diversifying their operations beyond the country's borders, indicating a broader trend.

While some entrepreneurs and investors emphasise that their decision to register in the United States is purely business-driven, not political, it's essential to acknowledge that Israel's tech sector heavily relies on foreign investments. Thus, a potential decrease in funding, prompted by interest rate hikes and the collapse of major tech investor Silicon Valley Bank, might be pushing startups to seek more promising funding environments.

Ultimately, the move to register in the United States, especially in Delaware, appears to offer some startups a sense of stability amidst the current uncertainties stemming from domestic policies. Nonetheless, the ongoing debate surrounding Israel's judicial reform underscores the complexity of the situation, with some investors and entrepreneurs viewing it as a catalyst for reevaluation and decision-making.