Covid-19 May Have Hurt the Economy, but Israeli Innovation is Here to Stay

The Israeli economy may have suffered a severe blow from Covid-19 with GDP falling by 7% in the first quarter of the year and a newly installed government facing a deep budget deficit, but Aharon Aharon, the CEO of the Israeli Innovation Authority (IIA) feels secure he’ll have the resources to help the Israeli tech sector tow the economy out of the mud.

“Though like all other government agencies we were operating without a budget in the first three months of the year, because of the coronavirus crisis we received a large influx of funds that put us in a good position for 2020,” said Aharon, whose organization functions as the government’s investment arm for anything related to research and development and who last year rained down $500 million on 1,400 projects of various sizes and stages of maturity.

Raining down money may not be the best way to describe what the IIA does though. Truth be told, it has a pretty strenuous acceptance process, which includes several rounds of application submissions, deep vetting of the projects by IIA personnel, strict due diligence, evaluation by a committee of experts, and demands for private matching of funds. Last year, it was able to offer funding to a bit fewer than half of the projects that applied for it.

Aharon is confident that despite the challenges, the IIA’s 2021 budget will be generous too, simply because all the stakeholders understand its immense value, especially during a national effort to exit a major economic downturn.

“The authority proved that it is at the forefront of the response. Today, any government ministry knows that they must come to us for technological solutions. We work quickly and efficiently. We produce results,” Aharon told CTech in a special interview marking the pivot from crisis to exit mode in the Israeli tech sector. “There is no denying that the tech sector is the growth engine of the Israeli economy. In 2019 it employed 9% of the workforce, made up 13% of the GDP and 46% of total exports. Everybody is aware of that and nobody will risk losing that.”

When Aharon speaks of being at the forefront of the response, one of the things he’s referring to is the authority’s flash infusion of funds into R&D work to help cope with the coronavirus outbreak and the fast-tracking of more than $140 million to startups with short runways, who may have not survived the crisis otherwise.

“Israel is a country of entrepreneurs. When we sent out the call for proposals for the coronavirus research projects, 900 companies applied in no time, within two weeks. Some of the companies proposed restructuring entire production lines. It’s a testament to Israelis’ agility,” Aharon said.

For its part, the IIA showed it too was agile. Aharon recalled how the organization, working at 35% capacity because of the workplace restrictions put in place because of the virus, nonetheless managed to process the applications and respond to the companies within three to four weeks, expediting a process that would otherwise take months.

“It required a very strenuous and concerted effort. Even people who were sent on so-called vacation continued to work, simply because there was no choice. I would receive emails at 1 a.m. and when I woke up at 5 a.m., I’d have another email from the same person. They worked like crazy. The committee was examining cases well into the weekend. It was a huge effort, but we did our part,” said Aharon.

During the coronavirus crisis the IIA also aided medium-sized companies, which don’t often seek grants from it, by providing $140 million in collateral for investments and just last week approved its program to promote institutional investment in advanced-stage companies by offering a state guarantee for equity portfolios that invest in established projects.

The Israeli Innovation Authority is a uniquely Israeli invention. The agency grew out of the Government’s Chief Scientist Office, which was established as far back as 1971, out of the early understanding that the young country had to take full advantage of its knowledge-based abilities and to do that would require the government to step in, locate the most promising projects, help nourish them and aid them on the path to market.

“There were similar efforts, particularly by the Americans, but they focused on the defense sector, not the civilian industry. Israel was the first to invest, back when there was really nothing going on here and hi-tech was a barely known term,” said Aharon, who around that time was studying for a degree in computer science at the Technion Israel Institute of Technology. “At that time, in the 70s and early 80s multinational companies like Motorola, IBM and Intel just began setting up research centers in Israel.”

Since then similar national or regional agencies have been established, on the state level in the U.S. and in the central government of countries like Germany and France, but none appear so tightly linked to the local community of entrepreneurs.

“It is a very good model of private public partnership. Essentially it means that the government matches funds raised in the private market to help boost companies’ achievements,” said Aharon. “Many countries adopted the model but not in quite the same way. The Swiss model for example is very successful, but in their case they deal more with the academic world than with the business and innovation sector. Nowadays we commonly work opposite an equivalent counterpart in other countries.”

With some degree of pride, Aharon added that his agency tended to be much faster than its foreign counterparts, doing in weeks what takes government agencies in other countries six months to a year.

Sometimes, however, efficiency comes at a price. In the beginning of April, the IIA published its 2019 annual report. The 110-page report provided a thorough survey of the innovation and tech ecosystem, its strengths and weaknesses, and the opportunities and challenges that the sector faced. The problem was that the Covid-19 outbreak had disrupted the industry so severely that the report was to a large degree no longer reflective of reality. “There is no doubt that the entire situation has changed - and the importance of this report is mainly as a reference to the state of the high-tech industry prior to the break of the pandemic and to serve as a comparative infrastructure for the data to be published when the crisis ensued,” the IIA wrote to tech reporters when the report came out.

Aharon is a veteran of the tech industry, starting his career in the early 80s at IBM’s research labs, moving on to work at and run half a dozen tech companies prior to joining the IIA. He experienced the 2000 and 2008 crises first hand and is well positioned to put the current crisis in perspective.

“We analyzed the previous crises and found that the one most similar to the current one we’re experiencing is the dot com crisis, in 2000-2001, when companies crashed to zero in an instant. What happened was that the economic model was unsustainable, companies didn’t sell anything, there was a blow to valuations and everything collapsed,” said Aharon. “What happened with the coronavirus similarly affected sales. Many companies suddenly were unable to sell anymore either because of travel restrictions and closed borders, or simply because people and companies just weren’t buying. Sales dropped by 25-30% pretty much at once.”

“Another effect of the outbreak was a major freeze in funding,” he said. “Funding also dropped by roughly 25% and primarily hurt the startups who were most in need of it, who had been planning to conduct a round later in the year and were left with nearly no runway. When you combine the two factors, you get a major crisis.”

According to IIA figures, venture capital investments in Israeli tech companies will decrease by more than $2 billion in 2020 and companies total income is expected to drop by more than $4.7 billion. According to a Central Bureau of Statistics report from the end of April, 14% of tech sector workers were laid off or sent on unpaid leave. A third of the companies reported that they couldn’t remain open for longer than three months and 27% said they couldn’t hold out for six months.

After the dot com bubble burst, it took the market roughly three years to bounce back. But amid the gloomy numbers and predictions, Aharon finds room for optimism. “Since at heart this was a health crisis, rather than a financial crisis, the rebound will be very quick, within less than a year according to our estimates. The companies that were hurt, and there are many of them, will need to be supported with smart money,” said Aharon.

The question of whether to dig into the public coffers in order to aid the Israeli tech sector has been the topic of fierce debate in recent weeks. Some, even within the tech sector, argue that startups are risky by their very nature and that it is a risk that should be assumed by the private market, that financial aid to startups are effectively bailouts for venture capital companies and miss the mark on helping working Israelis. Others meanwhile say that aiding the industry is vital to keeping it alive, cite examples of previous cases that government aid was put to good use and note the tech sector’s significant contribution to the wider economy.

“I went to school with Mickey Berkovitch (a star Israeli basketball player who played for the national team and led his team Maccabi Tel Aviv to major achievements in European competition). I was a mediocre basketball player. He was a very good player. I didn’t understand why the school invested in him and not me. It’s the same with the economy. One school of thought says you should invest in the strongest players, in this case the tech industry, another says, ‘why don’t you throw a bone to Aharon?’”

Looking ahead beyond the coronavirus crisis and the recovery Aharon is confident will come, the IIA will continue doing what it does best - identifying budding and potential technological trends, locating the companies that are well suited to meet the challenges they pose, and allocating smart money to help them reach the market. The overall goal remains benefitting the Israeli economy with the tax shekels they generate and the international links they create.

The fostering of research and development has proven itself a successful strategy so far, with Israel considered a world leader in industries like cybersecurity, machine learning and digital medicine. Ahraon said that in addition to advanced AI and Quantum Computing, two fields that show huge potential going forward, the IIA has a plan to focus on bio-convergence, a new multidisciplinary industry that is based on the synergy between different technologies from the fields of biology and engineering.

As the world recovers from Covid-19 and prepares for the next major health threat, it looks like Israel’s substantial innovation efforts will be guided on the right path.