Tech Leaders in Israel Wonder if It’s Time to Leave

For years, budding Israeli tech executives have asked Yanki Margalit, a veteran entrepreneur, where they should start their fledgling companies. For years, he’s offered the same advice: Here, in Israel, where software engineers are plentiful, international investors are eager and friends and family live.

But as Mr. Margalit prepares a new venture of his own, one focused on combating climate change, he has reluctantly concluded that Israel is the wrong place to launch.

“Given the atmosphere now, it’s almost irresponsible to start a company here,” the 60-year-old said, “and that is heartbreaking.”

The luminaries of Start-Up Nation, as Israel has been known for decades, are eyeing the exits. Several have already announced that they are relocating or moving money out of the country, including the chief executive of Papaya Group, a payroll company valued at more than $1 billion.

The reason is that a right-wing government, led by Prime Minister Benjamin Netanyahu, recently announced plans for a sweeping overhaul to the country’s judiciary that many believe will end its 75-year run as an independent institution.

The proposed changes would severely curtail the court’s capacity to strike down laws passed by the Knesset, the country’s Parliament, and give the ruling coalition far greater say in who sits on the bench.

That has prompted so much civil unrest and mass protests that Israel’s president, Isaac Herzog, stated in a televised speech last week that the country was “on the brink of constitutional and social collapse.”

More quietly, people like Mr. Margalit are reappraising what it means to operate here and deciding that if the government retools the judiciary, it is time to leave.

“It’s all about risk management and the risk is to the brand that is Israel,” said Assaf Rappaport, the chief executive and co-founder of Wiz, a cloud security company worth $6 billion. “It took a lot of time to build this brand, and today every company in the world can trust Israel as a partner in their cyberdefense. These reforms will put all that in question.”

The office of Israel’s minister of finance, Bezalel Smotrich, declined to comment. In a mid-February statement, he said claims that the reforms harmed democracy were part of a “scaremongering campaign.”

While the judicial changes will affect all Israeli businesses, the tech sector’s reaction is of greatest concern because it provides so much of the economy’s horsepower.

Some 54 percent of Israel’s exports are high-tech products and services, according to the Israel Innovation Authority, a support arm of the government. Israelis have created more than 90 so-called unicorns — privately held companies valued at more than $1 billion — including the gaming company Moon Active and the financial services company eToro.

Losing top-level earners and the corporations they run would have a devastating impact in a country where 81 percent of tax revenue comes from just 20 percent of the population.

The new government, formed in late December, includes members of the ultra-Orthodox and ultranationalist political parties. Both rely heavily on government subsidies: the former because few of its members participate in the labor market, and the latter because it wants funds to sustain settlements in the West Bank.

Which is why Eran Yashiv, a professor of economics at Tel Aviv University, sees judicial reform as a kind of resource grab.

“It’s a redistribution from the high-tech sector to religious and nationalist minorities,” he said. “And it would turn Israel into an illiberal country.”

In the Israeli parliamentary system, the administration usually controls the legislature, so gaining more sway over the courts would hand Mr. Netanyahu and his ministers influence over all three branches of government and far fewer checks on his powers.

Early this month, a group of 56 American economists sent a letter to Mr. Netanyahu arguing that his government’s judicial proposals “would adversely affect the Israeli economy by weakening the rule of law and thereby moving Israel in the direction of Hungary and Poland.”

“There’s a huge amount of research in the last 25 years that shows that stability and the rule of law support better economic growth,” Zvi Eckstein, a former deputy governor of the Bank of Israel, said in an interview. “As economists, we worry that reducing property rights of individuals and corporations will introduce uncertainty, and that a weaker judiciary will increase the likelihood of government corruption. Both of those two things will cause the economy to slow substantially.”

If Israel’s democratic institutions are undermined, investors and executives contended, it will keep blue-chip customers and investors at bay. And if a company has difficulty attracting customers, it will have the same problem with talent.

Many Israeli-led companies, including Wiz, are already based in the United States and keep a subsidiary in Israel because that makes it easier to appeal to investors and employees. Israeli tech executives who live in the United States often return when their children reach school age so they can acclimate to Israeli culture and serve in the military.

“We used to talk about going back in 2024, and now it’s like let’s not talk about it, which is a big deal for us,” said Nadav Weizmann, an entrepreneur who is launching his third company, Cardinal, a tool for product managers, in Austin, Texas. “For a start-up founder, it’s now a lot harder to imagine moving back to Israel, because you don’t know what it will look like.”

If the government moves ahead with its judicial plans, the outflow of Israeli tech leaders will surge and the inflow will subside, said Adam Fisher, a partner in Bessemer Venture Partners, which has backed more than 30 start-ups in the country. Money from Bessemer and other venture capital firms — 90 percent of all investment in Israeli tech comes from foreign sources — will simply follow the entrepreneurs.

“When I invest in Israel, I’m not really investing in the Israeli economy; I’m not looking at the shekel or railroad infrastructure or G.D.P. growth,” Mr. Fisher said. “I invest in entrepreneurs, and if those entrepreneurs want to set up somewhere else, that’s fine.”

Mr. Smotrich and other members of the coalition have said they are merely redressing an imbalance that gives the Supreme Court too much power.

In a Fox News interview this month, Mr. Netanyahu said, “We probably have the most activist judicial court on the planet.”

Since 2020, Mr. Netanyahu has been on trial for bribery, fraud and breach-of-trust charges, which he has denied. His interest in revamping the court was deemed enough of a conflict that this month, the country’s attorney general ordered him not to get involved with the effort. Mr. Netanyahu’s office called the demand “unacceptable.”

That a government led by Mr. Netanyahu would imperil Israel’s tech miracle bewilders many because he has long been one of the sector’s most vocal champions. But a flight of capital has already begun.

“From my clients I’m hearing concrete instructions to mobilize money out of Israel, to Switzerland or London,” said Eran Goren, a co-founder of Fidelis Family Office, which manages the money of wealthy Israelis. “We work closely with private banking departments of big banks, and they say it’s from every direction — people are just pulling money out.”

A withering tech industry would make Israel poorer, weaker and more religious, Mr. Yashiv said. That ought to worry anyone concerned about the stability of the Middle East, he added.

“Weaker states tend to be more aggressive, and a weaker Israel will be a more aggressive Israel,” he said.

Few of Israel’s tech leaders said they would depart happily. Even though it pained him, Mr. Margalit is weighing the pluses and minuses of cities like London, Paris and New York.

“If they pass this legislation,” he said, “what are my options?”