VC's Dark Bet

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The Israel-Hamas Conflict: Tech in the Crossfire

Background

A couple of weeks ago, Hamas launched an unprovoked bombing campaign against innocent civilians in Israel.

Israel retaliated, and the conflict has since escalated as the nation prepares for ground war with Hamas in the Gaza Strip.

Human Rights and Moral Equivocations

To be very clear, Israeli treatment of Palestinians has long been appalling. The Israeli military has systematically imposed what can only be described as apartheid conditions on non-Jewish communities—burning homes, restricting freedom of movement, and perpetuating racial discrimination. This is not just unjust; it's inhumane and criminal. Such behavior calls for unequivocal condemnation.

Yet, acknowledging these injustices doesn't preclude us from examining Hamas's violent ideology with equal disdain. There's no justification for the indiscriminate killing of innocents, often framed as part of a religious war aimed at the total annihilation of the Jewish State. This, too, is repugnant and deserving of universal condemnation.

Economic Repercussions

While the immediate and most tragic impact of this conflict is human suffering, we can't overlook its ripple effects on the economic landscape, especially in the technology sector. The Middle East’s status as the world’s battery (the mitochondria you might say) enables the region to wield disproportionate influence over the global economy.

Unsurprisingly, oil markets experienced a seismic shock, with U.S. Crude Futures soaring nearly 6%, their best day of the year.

INot to be outdone, the equities market also felt the tremors. The Defense industry, represented by iShares U.S. Aerospace & Defense ETF, saw a 6% surge, injecting nearly $30 billion in value on the backs of industry titans like Lockheed and Northrop.

The geopolitical tremors aren't limited to the Middle East. Remember the Russian invasion of Ukraine? That event also sent commodities markets into a tailspin, with staple food items like grain surging a whopping 20%. The world suddenly woke up to the unsettling reality that one of its primary breadbaskets was under siege, sparking panic among traders and nations reliant on Ukraine for sustenance. The resulting market volatility could rival the fluctuating fortunes of the NFT space during the pandemic.

An Online War?

You might even argue that Russia's incursion into Ukraine heralded the first 'War of the Online Era.' Sure, iPhones existed during the U.S. deployment in Afghanistan, but we weren’t as chronically online as we are now. 

The evidence? TikTok feeds bursting with real-time content from soldiers on the front lines, some even live-streaming their parachute jumps into hostile territory.

The undercurrents of tech’s central position in geopolitical affairs was evident even before this, though. It is accepted that Russian hackers has influence in the 2016 Presidential campaign and spread of social media content in favor of Trump.

Unsurprisingly, the very same platforms (think Facebook, Insta, Twitter) became breeding grounds for misinformation, although they're now under increased scrutiny from Western legislatures demanding better content moderation.

An Even Bigger Impact

Given Israel’s prominent position in the tech pecking order (makes up 18% of the nation’s GDP) as well as a greater global diaspora of Jewish and Middle Eastern individuals, and this conflict isn't just destabilizing a region; it's shaking a global tech ecosystem and resonating on a personal level for countless individuals who have familial or cultural ties to the strife.

Israel’s Tech Turbulence

Even before the current conflict, Israel's tech ecosystem was no stranger to turbulence, with recent pullbacks in foreign capital and employee walkouts as a form of internal opposition to the increasingly authoritarian tendencies of Israel’s PM.

The issue of dried up capital will only exacerbate, but the tech sector is also likely to see a sudden labor supply shock as many of these young employees are called into military service. Case in point, one of the victims kidnapped by Hamas militants was an employee of Nvidia.

The irony of Israel's situation is glaring: despite high-tech border control and intelligence measures, the country has been almost defenseless against low-tech attacks like those launched by Hamas.

The Role of Crypto

That’s not to say that Hamas is not tech-savvy, though. In fact, the Israeli government has recently suspended various crypto wallets linked to multiple terrorist groups, including Hamas, which have collectively raised $41 million to fund their campaigns, not exactly dispelling critiques of crypto’s role in money laundering and illicit activities.

The Role of Social Media

As with Russia and Ukraine, social media is going to be a glance into the war itself. Unless ByteDance is able to get to them first, we’re absolutely going to see posts on our feeds from young soldiers documenting their daily lives.

The debate over the role of platforms in moderating content on their platforms is also going to be thrust back to center stage. The EU has already called for Meta and X to impose measures to prevent misinformation from spreading on their platform, something that X in particular was accused of allowing to fester during the initial invasion in Ukraine.

While X has been vocal in its claims that is is doing enough, arguing that it has removed tons of content and is complying with law enforcement, the true efficacy might leave some to be desired given the graphic and misleading posts still going viral.

As mentioned in my last premium edition of The Startup Breakdown, European regulators are already cracking down on social platforms. Companies are now burdened with much greater responsibility such as mitigating the harm caused by the spread of misinformation. It sets a grim precedent for what might be permitted on these platforms moving forward.

Defense Tech: The Winner?

Not every tech sector will feel the impact equally, though, and in a pretty 🤒 sequence of events, two defense tech startups announced major funding rounds these past couple of weeks.

• Castelion, not even a year old and founded by SpaceX veterans, just closed a $14.2 million round to focus on mass-producing defense tech, starting with hypersonic missiles. The round was led by a16z.

• Saronic, another fledgling startup founded by a former SEAL, secured a hefty $55 million from a similar investor lineup, including a16z, 8VC, Lightspeed, and Point72, to build autonomous ships for defense applications.

What's chilling here is the bullishness of investors toward the defense tech sector, which has become a veritable goldmine in recent years. In 2019, defense tech startups raised a commendable $1.7 billion. Fast forward to 2021, and that figure ballooned to $6.4 billion—a more than threefold increase. It paints a troubling picture of what investors anticipate for the geopolitical landscape.

Let's not mince words: this sort of news should terrify you. To demystify the investor mindset for a moment, they have to see a reasonable path to a 100x return on their investment in a 10 year time horizon to make an investment.

What this recent trend implies is that these very smart, very well-connected people see something happening over the next ten years that justifies pouring capital into companies that, let's be clear, profit from conflict.

So far, the geopolitical dominoes are falling right into their projections. First Russia, now Hamas. There's every reason to suspect we're far from the endgame.

Looking Forward

In this high-stakes global arena, tech startups are no longer mere innovators; they're strategic assets being weaponized, strategically provided or withheld based on political schemes in a series of geopolitical chess moves.

Case in point: the U.S. has already restricted its investors from backing Chinese ventures in sectors deemed critical to national defense. That's your AI, semiconductors, and quantum computing—the three heads of the hydra steering the next wave of tech innovation.

Now, as semiconductor manufacturers are seduced by eye-popping financial incentives to relocate from the shadow of China that is Taiwan to the safer shores of the US, the odds of another invasion seem to grow by the day.

China is scrambling to secure its tech future by hoarding chips, few of which it can manufacture itself, heightening the incentive to control Taiwan and its tech capabilities.

If the U.S. lessens its dependence on Taiwan for semiconductors, the likelihood of defending the island against a Chinese invasion diminishes.

The alternative? An all-out war involving China and its allies.

Do we really think that the US would go to these lengths if it didn’t have a strategic need to defend the island, even with the political ties to the small democracy?

I wish I had a lighter note to end on, but the age of tech-fueled conflict may very well be upon us. Given the pace of technological innovation, the frequency and magnitude of such conflicts could escalate.

It's a bleak outlook, but hey, at least those VCs are delivering on their promised returns to LPs, right?

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Cheers to another day,

Trey