Immediate Threat: 80 Small Tech Companies in Danger of Closing Within Three Months

A survey conducted by the Israel Innovation Authority (IIA) and Israel Advanced Technologies Industries (IATI) paints a dark outlook for local tech companies following the coronavirus (Covid-19) outbreak, many of which sent employees on unpaid leave, cut salaries and are now facing great difficulties raising money.

According to the survey that was conducted in the middle of May, 80 tech companies, which make up 20% of those surveyed will close down within three months unless they are able to raise new investments. The survey’s findings indicate a harsh and sudden freeze in investments in young companies, with 40% of those surveyed saying their funding has halted completely and an additional 51% noting that the funding process is progressing slowly and only 9% indicating that the funding process is progressing as expected. Furthermore, according to the survey half of the companies that have submitted requests for loans from a financial entity or a bank have been denied, and a large share (30%) has yet to receive an answer. More than 90% of the surveyed companies reported a drop in sales, with a quarter of them reporting sales dropping by more than 50% in April. Of the companies that employ more than 10 people, 65% said they would be forced to shut down within six months unless they are able to secure investments.

The survey was conducted in mid-May, 2020 among 414 high-tech companies in Israel, most of which employ no more than 50 people. The survey was carried out among software companies (41%) healthcare companies (41%) and communications companies (18%). Most respondents (65%) were from smaller companies, employing 1-10 employees, 20% employ 11-30 workers, 6% employ 31-50 workers and the rest (9%) employ 50 or more people.

“The survey indicates a problem in the tech sector in general and for smaller companies in particular. If the circumstances continue in this way, we may see many good companies close shop,” Hagai Levine, the IIA’s vice president of strategy and economics told Calcalist. “If the investment freeze continues for the next three to six months, successful projects may not survive.”

Roughly a quarter of the survey’s respondents reported having laid-off workers, with 15% saying they fired more than 15% of their personnel. If the circumstances remain the same going forward, 57% of companies reported plans for extensive layoffs in the next six months. In addition, 71% of companies have reported that they have frozen hiring processes due to the coronavirus crisis.

The survey found that more than a third of companies have reported placing employees on leaves of absence, with smaller companies reporting a higher share of employees on leaves than larger companies. With regard to wages, 33% of companies confirmed extensive wage cuts (of over 15%), with a significantly higher rate among growth companies. So, for example, 49% of companies in their Series B funding round have reported extensive wage cuts, of over 15%, compared to 16% of publicly traded companies. A further quarter of companies are considering making such cuts, according to the survey’s findings.

An overwhelming 91% of companies have reported a slowdown in funding, with investors having already notified 40% of tech companies that they are halting the process. Of those surveyed, 51% noted that the fundraising process is progressing slowly and only 9% indicated that the funding process is progressing as expected. When asked about requesting additional funds from their investors, 51% said they had and of those, 46% reported that investors are still weighing their options, 19% have received additional capital and 35% have reported that investors have notified them that they cannot provide any support. Half of the companies who submitted requests for loans from a financial entity or a bank have been denied, and a large share (30%) have yet to receive an answer.

A majority of the survey’s respondents (60%) said they are considering applying for assistance being offered by the Innovation Authority – 32% of them using the authority’s fast-track channel. The IIA recently received NIS 500 million to help support small companies via a fast-track grant process and is reporting a strong flow of applications.

“The Innovation Authority continues to monitor conditions in the tech industry, and is committed to providing tools to assist its recovery and the growth of the entire Israeli economy,” IIA CEO Aharon Aharon said in a statement.

“The results of the survey show that many young technology companies are facing bankruptcy, and the industry is not receiving sufficient assistance from the Israeli government. The additional support approved for high-tech companies, valued at NIS 1.2 billion, is not sufficient and is not based on a thoughtful and methodical response. The innovation industry is the main growth engine of the economy, and has been carrying the Israeli economy on its back towards unprecedented growth and prosperity, almost without any government support,” Karin Meir Rubenstein, CEO and President of IATI, said in a statement. “In light of the figures we have, the government must provide a response to the immediate needs that came up in the survey, and provide financial solutions that will allow the industry to continue to exist. Otherwise, we are gravely concerned for a potential collapse of the high-tech industry as we know it, which would lead to an undermining of the entire economy.”