How Israeli Startups Thrive Against the Odds: Government’s Surprising Role

“Israel’s high-tech landscape has flourished primarily because the government has taken a backseat, allowing the free market to spur innovation and growth,” shares Shahar Tzafrir. “Startups in Israel have thrived not due to government initiatives, but rather in spite of them. The key for the government is simple: stay out of the tech ecosystem’s way.”

In partnership with CTech, TLV Partners has embarked on a journey to explore the future of Israeli high-tech for its 2025 VC Survey. Despite the turmoil and government actions surrounding the ongoing war, the ecosystem has shown remarkable resilience. The fund identified three focal points that require urgent attention to safeguard the sector’s growth: stabilizing the economy, revitalizing education, and enhancing infrastructure—without meddling.

“I have profound concerns about the current government’s ability—or willingness—to effectively tackle these issues,” Tzafrir adds. “The best strategy may be for them to step aside entirely, allowing the ingenuity and resilience of Israeli entrepreneurs to propel the sector forward.”

Dive deeper into this insightful interview below!

Fund ID





Name of fund/funds:


TLV Partners


Total sum of the fund:


Over $1 billion in assets under management


Partners:


Eitan Bek, Rona Segev, Shahar Tzafrir, Adi Yarel Toledano, Yonatan Mandelbaum, Brian Sack


Notable/select portfolio companies (active):


70+ companies including Aidoc, SilverFort, Buildots, Immunai, Aqua Security, Next Insurance, Unit, Oligo Security, Port, Qodo, Mesh Payments, Deepcure, Quantum Machines.


Notable exits:


Run:ai (acquired by Nvidia), Granulate (acquired by Intel), Oribi (acquired by LinkedIn), Neosec (acquired by Akamai), Stoke (acquired by Fiverr), Laminar (acquired by Rubrik), SeaLights (acquired by Tricentis), Rookout (acquired by Dynatrace), Odo Security (acquired by Check Point), Puresec (acquired by Palo Alto), Skyline (JLL), Stoke (Fiverr), and Guesty (secondary transaction).

2024 is almost over. How can you summarize it in terms of the Israeli high-tech industry?

As we approach the end of 2024, it’s clear this year has been a game-changer for Israeli high-tech. The sector has witnessed a record surge in M&A activities alongside an explosion of dynamic early-stage startups. TLV Partners led 11 new seed investments this year, an impressive leap from our typical six in 2023. This uptick is a testament to the burgeoning optimism and vibrancy within the ecosystem, even amidst significant trials.

The aftermath of the October 7, 2023, war was a catalyst for this wave of innovation. For many completing their military service in 2024, the conflict led to profound self-reflection that inspired them to embark on meaningful ventures, including launching their own startups. Some faced extended military service, pushing their transition to civilian life right into this entrepreneurial boom. Additionally, reserve duty offered a unique opportunity for potential founders to step back and reassess their professional lives, fostering new connections with fellow reservists who later became co-founders. This dynamic highlights how creativity can thrive amidst adversity.

Established startups also demonstrated remarkable adaptability in 2024. Despite the challenges posed by reserve duties and broader disruptions, many startups not only survived but achieved significant milestones. For instance, within our portfolio, Silverfort and Flip both secured over $100 million in follow-on financing rounds. Numerous companies reported increased sales, skillfully adjusting their strategies to meet evolving market demands, underscoring the resilience of the Israeli tech ecosystem.

A pivotal factor in maintaining momentum was the unwavering support from U.S. funds. Rather than retreating in uncertain times, many American investors doubled down on their commitment to Israeli tech. They provided crucial capital to existing portfolio companies while actively pursuing new opportunities, showcasing their faith in the long-term potential of Israeli innovation. This heightened engagement fortified stability and growth among startups in 2024.

Ultimately, 2024 has reaffirmed the robustness and resilience of Israel’s high-tech industry. In the face of unprecedented challenges, the ecosystem has not only endured but thrived, laying the groundwork for even greater achievements in the years to come.

Looking ahead to 2025 – What challenges and opportunities await the Israeli high-tech sector in the coming year, and how are you, as investors, preparing for them?

The Israeli high-tech industry lives in a global ecosystem; hence, the challenges it faces often reflect broader trends rather than unique local conditions. However, emerging mid- to long-term concerns could impact Israeli innovation’s trajectory. First is the economic strain from increased war spending, exacerbated by government fiscal mismanagement, which could undermine investor confidence and the overall business climate. The second is the worrying decline in Israel’s education quality, highlighted by falling global rankings, threatening the talent pipeline essential for future growth.

While these factors may not pose immediate risks for 2025, they represent significant challenges that warrant urgent attention. For now, the tenacity and creativity of Israeli entrepreneurs and high-tech professionals continue to drive this ecosystem, allowing it to flourish despite external pressures.

How will new American leadership affect the global high-tech industry or economy? And where does this place Israel and its entrepreneurs?

I’m optimistic that the new American leadership will embrace a pro-business stance, focusing on reducing red tape and bureaucratic hurdles. This could serve as a springboard for global economic growth, positively influencing the high-tech industry and spurring innovation worldwide. We’ve witnessed how restrictive regulations have slowed M&A activities in recent years, creating uncertainty for businesses and investors alike. A more conducive business environment could rejuvenate the M&A landscape, providing essential liquidity and exit opportunities crucial for fueling the startup ecosystem.

For Israel and its entrepreneurs, this shift would be particularly advantageous. The Israeli high-tech sector is tightly woven into the fabric of U.S. investment, collaboration, and market access. Growth-oriented policies in America would likely encourage U.S. funds to remain active in Israel, continuously seeking opportunities to invest. This would enhance the flow of capital into Israeli startups, equipping them with the resources they need to scale and succeed on the global stage.

What are the three most important things the Israeli government should do today to accelerate the high-tech engine in the coming year?

The success of the Israeli high-tech sector stems from a government that has largely kept its distance, fostering a free-market environment ripe for innovation. Startups have flourished despite—rather than because of—government initiatives. Given this, the government’s best strategy is to avoid interfering in the tech ecosystem. Instead, its focus should be on addressing broader systemic issues that threaten the sector:

Unfortunately, I have deep-seated concerns about whether the current government can—or even wants to—effectively address these challenges. The best course of action may very well be to step aside completely, allowing Israel’s vibrant entrepreneurs to continue driving the sector forward.

Are there new sectors you see as relevant? Are there any fields you anticipate will weaken significantly in the coming year?

While defense-tech is currently the hot topic in Israeli high-tech, I feel it’s somewhat overhyped. Historically, across all sectors, only a handful of truly great companies emerge each year—sometimes even fewer. The fallout from the October 7 war has understandably drawn founders and funds toward this area out of moral obligation, but I don’t foresee it consistently producing breakthrough companies year after year.

On the flip side, I expect continued breakthroughs in AI across diverse sectors, especially in what I term “vertical AI solutions.” These applications of AI address specific industries—like healthcare, biotech, construction, and developer tools—among many others. Recent AI advancements have given developers “superpowers,” enabling them to create software solutions that were once deemed unfeasible. This transition is fueling innovation across sectors where AI is tackling intricate problems.

At TLV Partners, we’re proud to be a “generalist” fund, investing across a wide array of sectors while maintaining a primary focus on enterprise software. Our interests also span healthtech (like Aidoc), biotech (such as Immunai, Deepcure, Canopy), and emerging realms like quantum computing—fields we deemed exotic when we first ventured into them years ago. Ultimately, our investments are driven by the ambition and vision of the entrepreneurs we meet, allowing us to adapt to emerging opportunities and support transformative technologies across diverse industries.

Is Israel missing out on the AI revolution in the global arms race? If not, what should the local industry focus on to join the global race?

It’s become quite fashionable to claim that Israel is lagging in the global AI race, but I strongly oppose this narrative. Before the spike in large language models (LLMs)—led by innovators like OpenAI, with significant contributions from companies like Meta, Anthropic, and Google—the AI space was largely dominated by vision AI. This is an area where Israel has historically excelled, thanks to expertise from the IDF, academia, and a vibrant startup culture. Companies like Aidoc in healthtech and Buildots in construction exemplify Israel’s prowess in using vision-based AI to address real-world challenges.

When it comes to LLMs, building foundational models now demands billions in infrastructure investment, making it an area where Israel cannot realistically compete on a broad scale. However, there are exciting prospects in narrow-domain foundational models, as seen with Aidoc’s health-specific AI initiatives. Attempting to compete head-to-head with global giants in general-purpose LLMs would be impractical for Israeli startups, given the enormous costs and uncertain monetization paths for many foundational-model initiatives.

The real opportunity lies in vertical AI applications—leveraging AI innovations to solve specific business challenges that were previously too complex or costly for traditional software development methods—and in developing tools that enable the AI revolution. Startups like Run:ai, focused on orchestration tools for AI infrastructure, exemplify this direction. Their recognition as leaders in the field and acquisition interest from Nvidia underscores the strength of Israeli companies in creating critical tools and enablers for the global AI landscape.

When it comes to government involvement, I remain skeptical. In the current political climate, there’s a significant risk of misallocation or politicization of government funding. The ongoing success of Israel’s high-tech sector is rooted in its entrepreneurial spirit, global connections, and free-market dynamics. Far from falling behind, Israel is carving out a unique and invaluable niche in the rapidly evolving AI terrain.

Could the global IPO drought end in the coming year?

We certainly hope so! However, as early-stage investors, we don’t claim to have expertise in public markets. That said, macro trends appear promising. An uptick in investor confidence and the solid performance of select tech companies in public markets could create a more favorable environment for IPOs. Should this momentum persist, it may reignite the IPO pipeline, providing vital liquidity to late-stage startups and invigorating the broader tech ecosystem. Yet, it’s still too soon to make definitive predictions, and we don’t claim expertise in this area.

From an investor’s perspective: will the coming year be better for early-stage startups or more mature companies?

The outlook for early-stage startups in Israel appears exceptionally bright for the coming year. Both local and international funds are flush with capital and eager to invest in early-stage opportunities, making it an ideal time for founders to secure funding and gain traction.

For more established companies, we remain cautiously optimistic. The challenging “two-year savings” period has compelled many of these firms to become leaner, more focused, and efficient, positioning them favorably for funding opportunities. While the market isn’t yet back to pre-downturn levels, the discipline and adaptability these companies have cultivated during this time are likely to translate into stronger fundamentals and renewed investor interest.

In essence, while early-stage startups will enjoy robust enthusiasm, more mature companies are also stepping into a healthier and more balanced landscape for growth and financing.

Did you raise fund money in 2024 for an existing fund or a new one? What are your expectations regarding this matter for 2025?

In the second quarter of 2024, we proudly launched our fifth fund, TLV Partners V, raising $250 million mid-2023. This smooth transition allowed us to dive straight into investing after wrapping up the deployment of TLV Partners IV. Since launching Fund V, we’ve already made seven exciting new investments, reflecting the robust opportunities we’re uncovering in the Israeli startup ecosystem.

Looking toward 2025, we don’t plan to raise a new fund as TLV Partners V will serve as our primary investment vehicle for the next 2-3 years. Based on our current momentum, we expect to start planning our next fundraising effort around mid-2027. This strategy allows us to remain focused on backing exceptional founders and maximizing the potential of our existing portfolio.

How many investments did you make in 2024, and how does it compare to previous years?

2024 has been an exceptionally vibrant year for us, driven by the trends we’ve previously highlighted. We led 11 new seed investments, often at or before the official establishment of the startups. This marks a significant increase compared to our usual pace, reflecting both the surge in entrepreneurial activity and our confidence in the Israeli high-tech ecosystem.

In addition to these new investments, our portfolio companies collectively raised over $400 million in follow-on investment rounds, led by both global and local funds with our active participation. This robust activity underscores the strength of our portfolio and the continued interest from leading investors in the companies we’ve backed.

Provide an example of an intriguing investment you made in 2024. What sets this company apart, or what is distinctive about its sector?

Choosing just one from the 11 new seed investments we led in 2024 is challenging, but Converge Bio stands out as an extraordinary example. We met the two founders just weeks before the October 7 war, and both were immediately called to reserve duty in combat units. Despite formidable challenges, they continued to refine their concept during any downtime, gathering market feedback and keeping us in the loop—all while serving on the front lines. Their determination and resilience are nothing short of inspiring, and we led their seed round early in 2024 during a brief reprieve from their reserve duty. The company was officially incorporated shortly thereafter.

Converge Bio is set to revolutionize biology by employing large language models to treat biological data as a “language.” This paradigm shift not only enables groundbreaking predictions in drug discovery but also provides scientists with explainable insights they can trust and act upon. Their integration of generative AI into the core of biology is a transformative leap, bridging cutting-edge technology with practical applications in life sciences.

What truly distinguishes Converge Bio is its potential to reshape our understanding and manipulation of biology—not only advancing drug discovery but also fundamentally changing how scientists engage with biological data. Their platform represents a significant leap forward in making AI-generated biological insights both actionable and transparent.

In a testament to the founders’ remarkable spirit, they remain active in reserve duty. Recently, one of them shared a photo of a makeshift workstation he set up in a combat zone to continue advancing their product while serving the country. Their combination of vision, resilience, and commitment makes Converge Bio not only an exciting investment but also a profoundly inspiring one.

Two notable companies that you think will thrive in 2025. These can be from your portfolio or not.

Company Name:


Buildots


Sector + description of the product/service:


AI for construction


Investment amount + total:


The company has raised more than $120M


Founding Year:


2018. TLV Partners led the seed round and co-led and participated in all subsequent rounds.


Reasoning why this is their year:


Buildots is an Israeli construction technology company that leverages artificial intelligence and computer vision to revolutionize construction sites by transforming them into fully digitized environments. Their platform provides AI-powered progress tracking, consolidating all site data into a single source of truth. With predictive analytics, delay forecasting, and real-time actionable insights, Buildots enables project managers and owners to optimize outcomes and streamline operational efficiency by automating manual processes and delivering tailored reports. Their cutting-edge approach has garnered industry recognition, positioning them as a leader in construction technology.

2025 is set to be a defining year for Buildots, as they solidify their role as a trusted partner for some of the world’s largest construction companies. By embedding their technology deeply into clients’ operations, Buildots is driving dramatic cost reductions and delivering unprecedented improvements in project timelines. Their advanced AI and computer vision technology, powered by years of real-world data collected from massive construction sites, creates a competitive edge that no other company can replicate. This immense dataset forms a robust moat around their business, making their platform uniquely accurate and effective.

With the construction industry increasingly demanding efficiency and digitization, Buildots stands at the forefront of this transformation. Their unique combination of innovative technology, proven results, and deep integration into client operations positions them to lead the sector into a new era of productivity, making 2025 a milestone year for the company and its impact on the global construction landscape.

Company Name:


Qodo


Sector + description of the product/service:


Qodo is a quality-first generative AI coding platform that helps developers write, test, and review code within IDE and Git.


Investment amount + total:


$50M


Founding Year:


2022. TLV Partners co-led the seed round and participated in the A round.


Reasoning why this is their year:


As AI takes center stage in software development, maintaining code quality is no longer optional—it’s essential. Without rigorous validation, the speed and efficiency promised by AI-generated code can quickly be undermined by unforeseen complexities and costly setbacks later in the development cycle.

The future of software development isn’t just approaching—it’s already upon us. Companies globally are increasingly harnessing AI to build their software. Recently, Google CEO Sundar Pichai revealed that 25% of Google’s internal code is now AI-generated—a staggering statistic marking just the beginning of this transformation. Qodo is poised to lead this new era by ensuring that the highest standards of code quality and integrity are upheld.

Qodo stands as a quality-first generative AI coding platform, equipping busy developers with tools for writing, testing, and reviewing code. Developers can leverage AI’s power directly within their IDE and Git, ensuring that the generated code is both accurate and high-quality. Qodo’s platform emphasizes code integrity, with features like automated code reviews, contextual code suggestions, and comprehensive test generation. By seamlessly integrating into existing workflows, Qodo empowers developers to produce robust, reliable software efficiently, helping teams maintain high standards of code quality and integrity throughout the development lifecycle.