Since the end of the 2008 financial crisis, Israeli high-tech has presented tremendous growth. Israeli high-tech companies raised $1.12 billion in 2009 and $25.6 billion in 2021; the number of multinational corporations has grown from around 125 to 400. While the first Unicorn founded by Israelis emerged in 2014, today we have 97 Israeli-funded unicorns (while China has 180 Unicorns, India 64, the United Kingdom 43, Germany 26, and France 23 Unicorns). We have more Unicorns per capita than any other country. A true move from the Start-Up Nation to the Scale-Up Nation. It is a truly incredible achievement in a dozen years
Israel's high-tech had a powerful contribution to the Israeli economy. High-tech employees represent more than 10% of all employees and pay 25% of all income tax. High-tech’s share of Israeli exports exceeds 50%. From 2009 until 2021, the Gross Domestic Product per capita of Israel has increased from $27,780 to $51,430 according to the World Bank Data and it has passed the GDP per capita of Germany, Hong-Kong, New Zealand, United Kingdom, France, Japan, Spain, and many other countries.
However, the remarkable success of Israeli tech companies indirectly harmed entrepreneurs’ desire to establish new startups; it has made it difficult to establish and grow new startups in Israel.
Since 2014, the number of new Israeli start-ups has dropped dramatically (approximately 1,400 in 2014; 850 in 2019, 730 in 2020 and less than 300 in 2021). The 2021 Innovation Report of the Israeli Innovation Authority pointed out the following concerns for new startups: the declining number of new startups; stagnation of the number of funding rounds and average investment in seed stage startups since 2015; the declining number of investors taking part in seed investments; and the rise in average salary in the high-tech sector as a reason for preferring to work in managerial roles in established companies rather than taking a risk in the world of entrepreneurship.
2022 brought a challenging time for the world in general and Israeli high-tech in particular. Political instability and the war in Ukraine, world inflation, high-interest rates, employee cut-offs, the U.S. Stock market in the bear market territory, companies’ valuations plummeting, potential recession on the horizon, and some Israeli high-tech public companies saw their stock price declining by 60%-80%. As the focus shifted from growth to profitability, it became harder for companies to support their company valuation, raise funds, and build a sufficient financial cushion to support their R&D and ongoing operations.
History has taught us that a crisis may be an opportunity. Economic crises may play a catalytic role in various changes, including, among others, international or national politics, structural changes, and social changes.
Once the 2022 economic crisis is in motion, we could and should turn it into an opportunity to go back to the basics: focus on Israeli high-tech by increasing support for new start-up companies.
This is the time to establish and support new startups. When salaries and bonuses may decrease in multinational corporations and other established companies, options being out of money due to a decline in valuations and potential layoffs are on the horizon, potential entrepreneurs may find it easier to leave their employment to fulfill their dreams and establish their startups and find good talent to join them along the way.
As valuations are lower at the pre-seed and seed stages and many of the questions involving valuation raised by the crisis are less relevant to those new start-ups, it is time for investors to get back to focusing on investing in new startups. The fear of missing out, which had driven some investors to make quick investments in dream companies at insane valuations, eroded during this crisis and investors now have the time to make sound investment decisions. Venture capital funds have sufficient “dry powder” to make those investments and hopefully, their fund’s mandate enables them to invest in early-stage start-up companies.
Patience is a virtue. This is the time to be patient and plan to build a company within three to five years (and not run for an IPO or SPAC within 24 months) with a conservative cost structure. This time we can increase our focus on areas of activities that may progress humanity even if it may take a longer period such as FoodTech, AgroTech, Med/HealthTech, Space Tech and Climate Tech (including water and energy solutions). Impact investments may be the key at this moment. This is an opportunity to increase state funding for the innovation of new startups in Israel and channel those funds through funding requirements to those areas of activities.
John F. Kennedy noted that “When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.” Although it may be the incorrect interpretation of the Chinese characters, the wisdom from it is valuable. So, let us focus on the opportunity and revive the Israeli Start-Up Nation for a better future.
Written by Dr. Ziv Preis, co-head of Technology, Corporate, and M&A Department at Lipa Meir law firm