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From what I understand from people in the industry here in Israel, investors are now primarily looking for advanced-stage startups, and are no longer interested in early-stage companies. Startups must have a prototype, revenue, and proof-of-concept to even be in the game.
In any case, while it appears that VC investment is down overall in Israel, foreign direct investment is up - 106%. According to The UN Conference on Trade and Development (UNCTAD) World Investment Report 2012, investment in Israel totaled $11.37 billion in 2011, 106% more than in 2010 (http://www.globes.co.il/serveen/globes/docview.asp?did=1000763929&fid=1725). The Israeli startup scene is vibrant and exciting, but Israel is so much more than that. Israeli innovation extends far beyond tech startups (like in medicine - did you know that Israeli scientists are the first to have cured ALS/Lou Gehrig's disease symptoms in a patient? I know, not so relevant, but totally awesome), so in the bigger picture, the Israeli entrepreneurial spirit is alive and kicking.
10 months, 1 week ago on Investment in Israeli Startups Falls 20% This Year — Can We Finally Admit There Is a Problem?