A fragile recovery in Israel's all-important tech sector is set to be derailed by the spiraling conflict with the Palestinian resistance group Hamas, according to investors and analysts, after a global slowdown and the government's divisive judicial reforms saw funding drop sharply this year.

One of the world’s most innovative high-tech economies, Israel relies on the sector for 14% of its workforce and nearly a fifth of its overall economic output. They added that it has weathered decades of turmoil and is ultimately expected to see investment return once the fundraising globally recovers from the conflict ends.

"Overseas investment will slow for the next couple of weeks and months, especially to the extent that there are still hostilities going on," said Jon Medved, Chief Executive of OurCrowd, one of Israel's largest venture capital firms.

"This is not a particularly easy time to get investment," he added, noting the number of flights to Israel that have been canceled.

Israel declared war after a surprise incursion of Israeli towns near the seaside territory by Hamas early Saturday. Israel has launched fierce air strikes into the blockaded Gaza Strip.

At least 950 people have been killed and over 5,000 others injured in Israeli airstrikes on Gaza, its Health Ministry confirmed Wednesday.

At least 1,200 people were reportedly killed in Israel and around 2,700 others injured, the military claimed on Wednesday morning.

Before the conflict, investment in Israel's high-tech startups had dropped as the global economy slowed, the collapse of Silicon Valley Bank (SVB) removed a key funding source and a proposed judicial overhaul threatened the bedrock of corporate law and intellectual property rights.

According to the IVC Research Center and LeumiTech, Israeli high-tech firms saw a 70% fall in fundraising in the first half of the year but added that the rate had stabilized to a drop of 14% in the third quarter compared with the second.

LeumiTech CEO Maya Eisen Zafrir said the figures were "the first signs of stabilization in the amount and scope of fundraising, data that bring us back to the levels of 2018-19."

In all, startups have raised some $5 billion so far in 2023 versus $16 billion last year and a record $26 billion in 2021. It was $10.4 billion in 2019. Investment has been broad-based but led by cybersecurity and artificial intelligence (AI) companies.

"Certainly, while we are in the midst of the war, it's hard to imagine major deals happening," said Avi Hasson, CEO of Startup Nation Central and a former venture capitalist.

Confidence earned

That said, Hasson and others expect Israel's tech sector to rebound in the same way it has in past conflicts with Palestinian and Hezbollah militants.

"Israeli tech has earned the confidence of investors in terms of being able to function during conflict and also recover from it," Hasson said. "So, I don't see investors losing faith in Israel so quickly."

Medved said that he believes that Israel will prevail as a tech investment destination.

"Historically, every time Israel has gone to war, long term has been a buy side," he said.

With much of the country reeling from the attacks, tech firms have been using their offices to collect supplies for soldiers since many of the 300,000 reservists Israel has called up are tech employees.

U.S. venture capital fund Insight Partners said it would match up to $1 million in donations to a pre-approved list of charitable organizations in Israel, saying it was a "critical opportunity to stand with our Israeli friends and partners."

Gem Security, a cloud security startup that just raised its Series A funding of $23 million from U.S. investors, has 30 staff split between Israel and New York. It was expanding the team when the conflict broke and some staff in Israel had to report for reserve duty.

"What's happening in Israel, in my perspective, won't change anything with our plans to stay within Israel when it comes to technology," said Arie Zilberstein, Gem's co-founder and CEO.

Ariel Efergan, vice president of growth at startup MDI Health, estimated that about a fifth of its 40 Tel Aviv employees had been put on reserve duty. The rest are now working remotely.

Startup marketing adviser Hillel Fuld was ultimately optimistic about the industry, pointing to a wave of support from the global venture capital community and a shift in world opinion in Israel's favor.

"That shift may even help push those investors who might have been reluctant (to invest in Israel)," he said. "I don't see this situation affecting Israel in a negative way."