It's far from the markets and on the wrong side of trade barriers most startups serve (EU, NAFTA, etc). Other markets (including some pretty large countries) are completely inaccessible. Flying in and out is expensive and inconvenient. It's not a place people can arbitrarily migrate to so workforce is largely limited to locals. They speak a language and use a currency no one else does. It's not a financial hub, not even in the VC/startup niche. etc.
Then there is also the fact that the country is in a constant^ threat of existential war which means your employees are doing active reserve. Long term anxiety is real.
Of course there are the major positives that do make it work. I think that's an interesting point. Maybe the pluses get multiplied in a way that minuses don't in the case of startup hubs. That would imply that optimizing around the edges (eg living cost, CGT, typical "ease of business" measures) are not as important as complaints might suggest.
^By constant I mean that if you look at a 10-20 year horizon from any point in history, there is a substantial risk that conflict will affect your life as a citizen. Many Israelis hold foreign passport in case things go south.