Readers of VC Cafe will know that I’m a big fan of startup landscapes. A new report by F2 Venture Capital, Google Cloud and Deloitte Israel shines a spotlight onto the buzzing emerging AI landscape in Israel so I couldn’t resist covering it.
On a high level:
- The Israeli AI startup ecosystem is booming, with over 2,150 active AI companies, representing ~30% of the local tech sector.
- Startups leveraging AI attracted over 60% of all capital raised in 2023.
- The country ranks 3rd globally in private AI investment, demonstrating its strong position in the global AI market.
The new AI landscape included in the report (below) is a great evolution of the Israeli Generative AI landscape we (Remagine Ventures) published in Calcalist in May 2024. I’ve added it to my 2024 Israeli startup landscape collection.
What categories do Israeli startups thrive in and what are the key opportunities?
Since 2022 Israeli startups attracted $13.5 billion in venture funding. Foundational models developed by companies like OpenAI, Anthropic, Meta, Cohere and Mistral, have until now required deep pockets as they require expensive GPUs for training and data. Nevertheless, there are two foundational models represented in Israel with AI21 Labs on the LLM side. The majority of Israeli startups operate either at the application layer or the infrastructure layer.
Overall, Israel’s AI ecosystem presents numerous opportunities for startups. The report also includes a landscape of vertical and horizontal AI companies.
Vertical AI is a stronghold. Examples include: AI-driven diagnostics in healthcare, fraud detection in finance, predictive maintenance in manufacturing, and personalised shopping experiences in retail.
Vertical AI attracts the largest share of private funding (50% of total funding in 2023, reaching $6.6 billion). Life Sciences, Healthcare and Fintech (banking, financial services and insurtech) leading the charge. Israel’s deep domain expertise in these sectors positions it as a potential global leader.
Opportunities for Israeli startups in Vertical AI:
- Develop solutions for industries where Israel has deep domain expertise, such as Defense, Life Sciences and Healthcare, and Banking, Financial Services and Insurance.
- Develop Small X Models (SXMs) trained on industry-specific datasets to address unique challenges, offering more targeted and effective solutions.
- Focus on specific problems and pain points within an industry to enhance operational efficiency and drive innovation.
Autonomous Enterprise (Horizontal AI) shows promise. Examples include: Robotic Process Automation (RPA) for streamlining business processes, AI-powered chatbots for customer service, predictive analytics for workforce management and end-to-end enterprise cross-industry cyber solutions.
Cybersecurity is a particular strength, capturing 56% of the segment’s funding However, the development of multi-modal, end-to-end solutions and AI agents presents further opportunities for cross-industry applications.
Opportunities for Israeli startups in horizontal AI:
- Develop multi-modal, end-to-end solutions integrating text, image, and video to enhance corporate functions.
- Create AI agents using SXMs to manage complex business processes, automating tasks and fostering innovation.
- Focus on areas like cybersecurity where Israel has a strong reputation and proven capabilities.
- Establish strong relationships with global enterprises to demonstrate successful proof-of-concepts and build trust in their solutions.
AI & Data Ops is a key area for growth. Israel’s strong talent pool and focus on enhancing existing infrastructure make it well-suited to address the growing demand for cloud-based AI Ops platforms and efficient data management solutions.
Opportunities for startups in AI Data Ops:
- Develop solutions that support and enhance existing infrastructure, focusing on robustness, efficiency, and manageability.
- Address infrastructural challenges in handling extensive data and complex computations, leveraging expertise developed in fields like the military.
- Provide seamless integration with existing platforms, enhancing their capabilities without full-scale overhauls.
Hardware, Infrastructure & Cloud: The growing demand for more powerful and efficient computing solutions for AI creates opportunities for startups to:
- Develop specialised hardware capable of supporting intensive AI tasks, such as AI-specific chips.
- Leverage Israel’s well-developed semiconductor ecosystem and the presence of major global companies like Intel.
- Benefit from talent spillover from larger companies and attract experienced professionals to drive innovation.
Challenges abound
In addition to the current war in Israel, which present a major challenge to any startup, there are several specific challenges for AI startups.
- Talent Competition: Despite having the highest concentration of AI talent globally, competition for skilled professionals, especially C-level executives with AI expertise, remains fierce. Attracting and retaining top talent is crucial for startups to develop cutting-edge solutions and compete effectively.
- Funding Sustainability: Although funding for Israeli AI companies is currently strong, maintaining this momentum as the market matures and competition intensifies is essential. The high capital requirements for developing advanced AI technologies, particularly in areas like Foundation Models, can pose a significant challenge for startups seeking to scale.
- Global Competition: Israel faces increasing competition from other AI hubs worldwide, including Singapore, San Francisco, Montréal, Toronto, and Boston5. These hubs often benefit from strong government support, robust academic research, and well-established tech ecosystems. Staying ahead of the curve and maintaining a competitive edge in the global AI landscape requires continuous innovation and adaptation.
- Limited Government Support: Israel ranks relatively low in government support for AI initiatives compared to other countries. The limited availability of funding, data training sandboxes, and regulatory frameworks that encourage cross-industry collaboration can hinder the growth of the AI ecosystem.
- Barriers to Entry in Specific Sectors: Some AI sectors present significant challenges for Israeli startups, such as the development of new foundational models, as mentioned above.
The future of Israeli AI startups
Israel is poised to be a major player in the AI revolution. By focusing on its strengths and addressing key challenges, the country can further establish itself as a global AI hub. For further reading, visit the Israel AI blueprint report website. At Remagine Ventures, about half of our portfolio companies are building in the vertical and horizontal AI categories. Four of them are mentioned in the landscape: Hour One, Munch, Vault AI and Playo. We’ve made 5 new investments in this space in 2024 that are still in stealth but we’re excited to share more information about them soon. If you’re an Israeli startup building in the AI space, it’s never too early to speak with Remagine Ventures.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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