When Private Equity Optimizes the Wrong Thing
Over the past years, a troubling pattern has become increasingly visible in Israeli tech. Companies founded and grown in Israel, often on the back of exceptional ingenuity, speed, and informal problem solving, are acquired by private equity firms and then gradually or abruptly stripped of their Israeli core. Functions are relocated, investment is reduced, leadership is replaced, and the original teams are slowly starved or shut down.
This pattern is usually justified as rational cost optimization. On paper, it often is. Labor arbitrage, tighter budgets, standardized processes, and a relentless focus on margins tend to look very good in spreadsheets. For private equity firms, whose success is measured by financial performance within a relatively short time horizon, this logic is consistent and even necessary.
The problem is that many of these companies were never built to compete on efficiency alone.
Israeli tech companies succeed for structural reasons that are easy to underestimate and even easier to destroy. Their advantage rarely comes from cheap labor or perfect processes. It comes from dense collaboration, fast decision making, flat hierarchies, and a cultural tolerance for friction, disagreement, and rapid iteration. Ideas move quickly because people sit close to the problem, talk directly, argue openly, and ship before consensus is fully formed. This is not a cultural curiosity. It is a productive system.
Resilience Is Not a Cost Center
Another often overlooked factor is resilience.
Over the past two years, Israeli companies have demonstrated an extreme level of operational and mental resilience. Even while operating under ongoing war conditions, with dozens of rocket attacks, prolonged uncertainty, and a significant portion of the workforce repeatedly called up for reserve duty, companies continued to support customers, meet commitments, ship products, and innovate. In parallel, new startups were founded, teams were built, and investment continued.
This is not normal. It is not easily replicable. And it is not accidental.
That resilience is tightly coupled to the same characteristics that drive Israeli innovation: ownership mentality, adaptability, informal leadership, and a deep sense of responsibility to customers and teammates. When Israeli teams are reduced to a line item in a cost optimization exercise, that resilience is lost along with the ingenuity.
The Ownership Model Collision
Private equity ownership tends to introduce a very different operating model. Decision making becomes centralized. Risk tolerance decreases. Headcount is viewed primarily as a cost. Geography becomes an optimization variable rather than a strategic one. Innovation is expected to follow process rather than emerge from proximity, context, and debate.
In the short term, this often works. Margins improve. Costs go down. Financial metrics stabilize or even spike.
In the long term, something else happens. Differentiation erodes. Products become incremental. The company loses its edge and increasingly competes on price, scale, or sales execution rather than originality or depth.
This Is Not a Fringe Argument
This dynamic is not unique to Israeli companies, and it is not anecdotal. It has been widely discussed and criticized in recent years. A growing body of books, research, and investigative journalism has highlighted the long term economic and organizational damage caused by extractive private equity practices.
One example is this article from The Guardian: Slash and burn: is private equity out of control?
The article describes how short term profit maximization, aggressive cost cutting, and asset stripping can hollow out companies while delivering attractive returns to investors in the interim.
This does not mean private equity firms are malicious or incompetent. It means their incentives are different. They are not rewarded for building enduring innovation cultures. They are rewarded for extracting value efficiently within a defined time frame. Expecting them to behave otherwise is naive.
Matching the Model to the Value
The real mistake is assuming that the same optimization logic applies equally to all companies.
For businesses whose core value lies in operational efficiency, consolidation, or mature markets, private equity ownership can be an excellent fit. For companies whose advantage depends on speed of learning, deep domain understanding, resilience under pressure, and creative problem solving, it is often destructive.
The Israeli ecosystem has produced a disproportionately large number of companies in the second category. Treating them as if they belong to the first is not just a cultural loss. It is a business error.
The question, then, is not whether private equity is good or bad. The question is whether the ownership model matches the nature of the value being created. Founders, boards, and employees would do well to ask this early and honestly, before the optimization begins and the original engine of success quietly disappears.