Illustration: High-tech development centers in Herzliya, October 30, 2020. (Gili Yaari/Flash90)
Israeli tech continues to show resilience despite contending with a challenging two-year war period, as startup fundraising continues to recover and 2025 is poised to be a record year for tech exits.
At the same time, there are alarming indicators that call into question whether the local tech sector will be able to maintain its status as the largest and fastest growth engine in the country's economy, the Israel Innovation Authority cautioned in a new report on Wednesday.
After a decade of accelerated growth, the tech sector faces stagnation in employment growth and output, as the recovery in startup investment has not been translated into increased recruitment. In addition, the tech ecosystem suffers from a decline in the formation of new startups and a sharp drop in fundraising by Israeli venture capital funds, warned the 2025 High-Tech report by the Israel Innovation Authority, which is in charge of directing the nation's tech policies.
"2025 reveals the dual story of Israeli high-tech," said Israel Innovation Authority CEO Dror Bin. "Israel is consolidating its position as a global Deep-Tech center, second only to the US in the Western world, with more than 1,500 active companies and a share exceeding one-third of all capital invested in local High-Tech."
"However, high-tech output has been stagnant; the number of R&D employees is shrinking; new venture creation is lower than in the previous decade; and VC fundraising is decreasing -- these are not marginal data points but indicators of risk that we take very seriously," Bin remarked.
Tech output, accounting for about 17 percent of the country's GDP and more than half its exports, has remained unchanged for two years, according to the report.
After years of rapid expansion, the annual growth rate in tech employment since 2023 has slowed to less than 2%, compared with over 5% for most of the previous decade. In the first half of 2025, about 403,000 people, or 11.5% of the country's workforce, were employed in the Israeli tech sector. The report showed that the number of R&D jobs in 2025 declined by 6.5%, compared to the same period last year.
Israel's tech employees pay more than a third of all tax income collected, which underpins the vital importance of the sector as a key catalyst for growth of the country's war-battered economy.
Meanwhile, the adoption of AI technologies at this stage "reveals no measurable impact on changes in the sector's labor productivity," the report found.
"The current period is characterized by other local and global events of macro-economic importance that may influence output, including the high level of interest rates, global geopolitical conflicts, the ongoing war in which Israel is engaged, and the lengthy reserve duty of employees in the sector," according to the report.
2025 is emerging as a record year for Israeli tech exits, led by mega deals, including Google's $32 billion acquisition of Wiz and Palo Alto's $25 billion buy of CyberArk, the innovation authority said.
Israel is still ranked as the fifth-largest hub in the world for startup fundraising after San Francisco, New York, London, and Boston. However, investments in Israeli startups this year continue to be concentrated in two sectors -- cybersecurity and enterprise software -- signaling a lack of dispersion across new technology areas and a decline in innovation diversity, the innovation authority said in the report.
In another worrying sign, the number of new tech startups and companies continues to shrink, the innovation authority emphasized. The number of new startups in Israel is less than half of those founded a decade ago, and most of them are focused in sectors where Israeli tech is already concentrated, mainly enterprise software, fintech, e-commerce and cybersecurity.
In 2024, about 500 new startups were founded in Israel, compared with 622 in 2023, and more than 1,000 a decade ago.
"Governments are investing hundreds of billions, becoming direct players in technology and shaping national value chains in areas like semiconductors, AI, and energy and Israel must respond to these shifts to avoid losing its comparative advantage," Bin urged. "This is a moment of truth that only a broad strategic move, which involves combining public policy with private investment, will ensure that today's achievements become the foundation for growth and leadership in the race that defines the economy of the future."