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Health of Israel’s COVID-Battered Tech Sector Questioned

Health of Israel’s COVID-Battered Tech Sector Questioned

Despite promising investment figures, economic uncertainty could spell wide-scale layoffs in the near future, industry experts warn

Israel’s high-tech ecosystem has been plowing ahead despite the economic shock triggered by the pandemic but many startups may not being able to hold on much longer, industry experts warn.

“The Israeli high-tech sector is holding up so far but we do expect a slowdown as the pandemic continues,” Aviv Alper, head of research and analysis at Start-Up Nation Central, told The Media Line. “According to recent surveys, the majority of startups didn’t lay off employees or send them home on unpaid leaves, but rather froze hiring, at least partially.

“However, sales began falling and startups are looking for ways to cut costs,” she added.

Aviv Alper, head of research and analysis at Start-Up Nation Central. (Courtesy)

Start-Up Nation Central is an independent nonprofit that connects business, government and NGOs around the world to the Israeli innovation scene.

According to Alper, the global economic crisis has not yet significantly impacted Israel’s startup sector.

In fact, a report released last week by the Israel-based IVC Research Center showed that despite the pandemic, Israel’s high-tech industry raised $5.25 billion in funding – spread out across 312 deals – in the first half of 2020. By comparison, in 2019 the sector secured a record $8.36 billion over the same period.

While the report emphasized that investor behavior appeared to be “normal” for the first half of the year, it added that the “full magnitude of the economic impact could still be felt in Q3/Q4 and prove devastating to a large number of Israeli companies.”

Even though figures were “great” for the second quarter of 2020, Alper said, many of those investments might have already been in the pipeline before the outbreak began and are thus not reflective of the current situation.

“Some corporations in the US and Europe reported they are planning to cancel or delay innovation investment in the short-term due to financial difficulties,” she remarked. “Moreover, venture-capital firms that raised funds recently will continue to invest in startups but [companies] that planned to raise funds in the coming year may face difficulties doing so.”

Startups that might find it increasingly difficult to stay afloat include early-stage startups, Alper warned, adding that many will struggle to survive if they do not manage to raise capital soon.

Some corporations in the US and Europe reported they are planning to cancel or delay innovation investment in the short-term due to financial difficulties. Moreover, venture-capital firms that raised funds recently will continue to invest in startups but [companies] that planned to raise funds in the coming year may face difficulties doing so.

Itai Green, founder and chief executive officer of Innovate Israel, which connects global corporations to Israeli entrepreneurs, agreed the startup environment appeared resilient. Nevertheless, he remains concerned about changes in investor behavior.

Itai Green, founder and CEO of Innovate Israel. (Gideon Markivich)

“The pandemic has resulted in a trend among investors – which one could say is justified as a result of current uncertainties – in thinking that cash is king,” Green told The Media Line. “This leads investors to be a lot more restrained with their investments, especially regarding seed and A-round investments. While it may seem as if things are back to normal, this uncertainty is dangerous, and investments could easily decline once again.”

Because of this, he believes the government needs to ensure startups are not left in the lurch, by instituting a broad range of loans, grants, tax reductions and unemployment benefits for owners.

Many Small Companies Are Planning Wide-Scale Layoffs

Several startups have so far emerged unscathed from the pandemic, but others have not been as fortunate.

In a recent report, the Bank of Israel revealed that as of the end of May, 4.2% of tech workers in the country have been let go. Perhaps more significantly, roughly 26% have had their salaries cut, in contrast to an average of 18% of workers in other sectors.

Rafi Nevo is the CEO of the Mashtela startup fund and vice president of innovations and entrepreneurship for the Kibbutz Industries Association. In 2018, Nevo helped launch a tech hub in Nir Am, near the Gaza border. The hub, managed by the nonprofit SouthUp organization, houses startups in robotics, software, agritech, biotechnology and other sectors.

“Before the pandemic, [the hub] was full but since then a few have decided to stop their activities,” Nevo told to The Media Line. “The startups that closed are those that are not dealing with core agricultural or industrial [solutions], but were those that were developing various types of applications.”

The hub, managed by the nonprofit SouthUp organization, houses startups working in a range of sectors, including robotics, software, agritech and biotechnology. (Courtesy SouthUp)

At the moment, some 20 startups have divided their workspaces between Nir Am and the neighboring Sha’ar Hanegev area in order to maintain social-distancing regulations, Nevo said. Some startups, he noted, were unable to keep running as investments began to level off.

“Startups dealing with advanced solutions such as 3D [printing], remote power generation, precision agriculture, etc., continue to operate,” he specified, adding that companies that already had a product ready could also be approved for government assistance.

“These [businesses] can enter the Israel Innovation Authority and the Israel Investment Center’s aid programs,” Nevo said. “Both have become much more flexible in terms of which companies they approve for grants and funding.

The Israel Innovation Authority – the government’s tech investment arm – has widened its criteria for financial aid and grants as the pandemic unfolds. It recently launched a fast-track grants program to support research-and-development plans for companies in early and advanced stages of development. As part of the initiative, companies can receive up to NIS 15 million (about $4.3 million).

“The Israel Innovation Authority took immediate action once the coronavirus crisis broke out, implementing several dedicated incentive programs designed to provide the necessary support to help high-tech companies in all stages and sectors,” Anya Eldan, vice president of the Israel Innovation Authority and head of its Startup Division, told The Media Line.

Anya Eldan, VP of the Israel Innovation Authority and head of its Startup Division. (Courtesy)

“An immediate, measured, supportive government policy will help prevent critical damage to exports, production, and the income of hundreds of thousands of high-tech employees,” Eldan continued. “This policy will be the main anchor supporting the renewed growth of the Israeli economy once this crisis begins to subside.”

It appears as though the aid cannot come soon enough.

[The high-tech industry] is expected to experience a decrease of about 25% in private-capital investments and about a quarter of total sales revenues will be lost. As a result, many companies have halted recruitment, are furloughing employees and are even planning wide-scale layoffs.

A recent survey carried out by the Israel Innovation Authority and the IATI (Israel Advanced Technology Industries) found that an alarming number of small high-tech companies are on the brink of shutting down.

“Sixty-five percent of startup companies with one to 10 employees reported that they would be unable to continue operating for more than six months,” Eldan said. “[The high-tech industry] is expected to experience a decrease of about 25% in private-capital investments and about a quarter of total sales revenues will be lost. As a result, many companies have halted recruitment, are furloughing employees and are even planning wide-scale layoffs.”

Topping the list of startups that are in danger of failing as a result of the pandemic, she continued, are those that are in the middle of conducting clinical trials and partnership discussions for new medical devices, as well as businesses that make physical products rather than software. These companies face significant challenges in securing future funding.

Crisis or Opportunity?

However, Eldan believes that Israel’s startup ecosystem can weather the COVID-19 storm in the long run.

“We have a very strong base and Israeli entrepreneurs and tech companies are very good at seizing opportunities,” Eldan said. “Case in point: as soon as the COVID-19 pandemic reached Israel, the Authority spearheaded collaboration with relevant players from government and industry by issuing a joint call for proposals for R&D and demos of systems, products or technological solutions designed to meet the challenges created by the COVID-19 pandemic. Within a very short time span (two weeks), we received over 900 proposals for addressing the various challenges posed by the coronavirus.”

Israeli startups have entered the pandemic and ensuing economic slowdown after years of record growth in terms of investments, exits and success stories. This could spell opportunities further down the line, especially in the blossoming fields of digital health and cybersecurity.

A crisis is an opportunity. It’s the perfect time for entrepreneurship that will come up with smart-tech solutions for updated challenges that are totally different from those of 2019

“Israeli startups have expertise in technologies such as artificial intelligence, the internet of things, cybersecurity and sensors, all of which are expected to be in growing demand following the pandemic,” Alper, of Start-Up Nation Central, said.

Green, of Innovate Israel, agrees, underlining that while some startups may fail as a result of the crisis, the sector as a whole will continue to grow as new disruptive ideas and products are brought to fruition.

“A crisis is an opportunity,” Green said. “It’s the perfect time for entrepreneurship that will come up with smart-tech solutions for updated challenges that are totally different from those of 2019.”

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