Is this the end of Start-Up Nation?
Hi-tech may have helped Israel out of the coronavirus crisis, but the sector is also suffering from severe problems. The Israel Innovation Authority's annual Innovation Report warns that if government policy doesn't change, local tech could steam ahead and detach itself from the rest of the economy
Hagar Ravet | 11:36 17.06.2021
Israeli hi-tech pulled Israel out of the coronavirus crisis, but without a change in policy by the government, high-tech growth will benefit the high-tech sector alone, the Israel Innovation Authority's annual Innovation report claims. The report highlights several warning signs that should be keeping the new government up at night, in particular, due to the important role that hi-tech plays in the local economy. According to the report, the number of new startups established on an annual basis is at a new low, the difficulty of entering the hi-tech job market is at an all-time high, and regulation is outdated. 1. Drastic drop in the number of new startups over the last five years The first warning sign is the consistent drop in the number of new startups founded in the country. The report reveals that the number of new startups established on an annual basis in Israel has plummeted, from 1,404 startups established in 2014 to 850 new startups in 2019 and an estimated 520 new startups in 2020. The reason for this could be the drop in the number of investors taking part in Seed funding rounds. The maturation of Israeli tech and the unprecedented surge in the number of new unicorns, the IPOs, and of course the massive funding rounds are what have garnered most of the attention over the past year. However, the number of new startups founded each year, which is what assures the existence of growth companies in 5-10 years, is what is preserving Israel's status as an innovative nation that multinational corporations flock to in order to set up R&D centers. That is another area in which there has been a decline, with only four new R&D centers being opened in Israel by multinationals in 2020 (coronavirus of course also played a part in this). Israel is currently ranked in 13th place in Cornell University's Global Innovation Index, dropping three spots over the past three years.
Sagi Dagan (from right), Orit Farkash-Hacohen and Ami Applebaum. Photo: Orel Cohen, Yariv Katz, Yair SagiThe Authority points to the funding programs it launched over recent years for early-stage companies as a partial solution for this crisis, and in particular, the fast-track Seed incentive program which was launched during the pandemic and was meant to provide funding to companies that encountered liquidity problems during the crisis, and to indicate to investors that the government is doing its part. Some 283 requests were approved and NIS 650 million (approximately $200 million) were handed out on the condition that companies raised supplementary funding.
2. Roadblocks: No entry for juniorsOnly about 10% of Israeli employees work in the high-tech sector, but they are responsible for 25% of the total income tax paid in Israel, while employees of multinational companies' R&D centers pay six times more income tax relative to their share of the workforce. These figures are likely what caused incoming Prime Minister Naftali Bennett, a former tech entrepreneur himself, to announce a target of having 15% of all Israeli employees working in hi-tech. However, this aspiration is set to hit a serious roadblock with many Israeli companies simply not hiring junior employees, i.e. workers without experience for entry-level positions. As local companies mature and their funding rounds grow, it becomes easier to set up R&D centers abroad. These centers employ relatively junior developers while the management and talents remain headquartered in Israel. The drop in the number of new startups, the already high salaries in Israel, and even the wish of big companies to gain a global foothold, all contribute to the fact that employees without practical experience currently find it very difficult to enter the tech market. One in every four students in Israel is studying for a bachelor's degree in technological fields, including engineering, which leads the way with 18% of the country's bachelor’s degree students. Should this trend continue, by 2030, more than 25,000 employees with limited or no experience are expected to join the high-tech sector each year, but according to the Israel Innovation Authority and Start-Up Nation Central’s Human Capital Report, only 45% of companies recruit "junior employees." The Innovation Authority launched training programs and boot camps for specific positions in the industry more than two years ago, but that has only provided a partial solution to the problem. The boot camp program trained 660 people and had a 75% job placement rate in its first year of existence (2019) and 709 trainees in the year of Covid-19, for which there is still no placement data. In addition, it seems that even though the Authority was hoping that the private sector would warmly adopt the solution of training due to the governmental support, that is not the case, and Israel is ranked in 76th place in training programs being operated by the companies themselves. While there seems to be a contradiction between the fact that there are so many openings in tech and the fact that almost half of the companies aren't offering entry-level positions, that is exactly the reason there is such fierce competition for employees in the sector. A large portion of the companies are competing for the same pool of experienced and high-salaried employees, not only between themselves but also against the deep-pocketed multinationals. In fact, in some cases, companies struggle to such an extent to fill positions that jobs remain open for many months. This raises the question of whether, at least in some of the cases, it wouldn't have been better for companies to invest the lost money and time in training an inexperienced employee instead of insisting on a perfect resume. In addition, the coronavirus crisis widened the gaps in Israeli hi-tech. Most of those tech employees who lost their job during the pandemic earned relatively low salaries for the sector, according to the report, making monthly salaries of under NIS 15,000 (approximately $4,860). Therefore, it can be deduced that the biggest occupational hit in the sector was suffered by juniors and non-engineering employees who earn less than the average in the sector, which stood at NIS 25,300 ($8,200) in 2020. Another figure which testifies to the difficulty of breaking into the sector is the average age of employees, which is now higher than the average age of employees in the rest of the economy. Contrary to the image of high-tech as a young sector, the average age of high-tech employees in 2019 was 40.1, compared with the average working age in the rest of the economy which stood at 39.6. As of April 2021, the unemployment rate in the high-tech sector was 8.2%, four times higher than it was prior to the outbreak of the pandemic. The number of openings dropped from 19,000 pre-Covid to 13,000. "Hi-tech has matured and it also needs to act maturely," Head of the Growth and Strategy Division at the Israel Innovation Authority, Sagi Dagan, told Calcalist. "There shouldn't be a situation in which a company that is worth more than one billion isn't recruiting junior employees in Israel. I'm not saying that out of Zionism but as something that an investor in the company needs to consider."