The greatest challenge for Israeli tech companies at the growth stage is creating suitable infrastructure and establishing a sales network overseas, according to a study that examined 250 tech companies and was carried out by the accounting firm KPMG-Israel. In a surprising twist, recruiting manpower wasn’t considered a main challenge for companies at the growth stage, nor was raising capital.
The change in the Israeli tech market, which is seeing more companies reach the growth stage, has had a significant influence on some of the central challenges that companies face. According to figures from the IVC Research Center, investments during 2021 grew by 150% compared to the year prior, from $10 billion in 2020 to $26 million in 2021. The size of the average funding round leapt twofold in 2021 and reached $33 million, while the share of the foreign venture capital firms in investments climbed to 73%. During a survey conducted over the past two months by KPMG-Israel, participating tech companies from seed to growth stages were asked about their main challenges as they grow.
Despite the extensive discourse over the manpower shortage in the tech industry, that issue was only ranked number three in importance (with 30% of companies noting it). “When we conducted the study, our central hypothesis was that the manpower shortage would be a significant challenge,” Ella Avnon-Shar, who serves as Head of Strategy & Change at KPMG-Israel, told Calcalist. “Everyone is familiar with the ‘battle over talent,’ and the perks aimed at attracting talent that keep re-emerging ad nauseum. In light of that, we were surprised to find that the manpower shortage was only ranked third in importance. We also didn’t find a significant difference in this issue between companies at various growth stages.”
Despite the data showing the large influx of money entering the industry, raising capital is still a central challenge for growth, with 79% of companies reporting that to be the case. With that said, only 39% of growth-stage companies noted that raising capital presented a challenge, and not the central one.
“That figure aligns with discussions that we held with partners at different investment firms who claimed that the balance of power has shifted. In the past, tech companies once courted investors, and invested great efforts in forming bonds between venture capital groups through entities like Start-Up Nation Central and others. However, now it seems that firms are struggling to schedule a meeting with some of the best growth-stage companies,” noted Avnon-Shar. “This is a struggle for venture capital firms and causes them to conduct internal audits, re-brand themselves, and improve the added value they bring to companies aside from funds, so that tech companies will consider them as an attractive option.”
According to the survey, the main challenge for tech companies at the growth stage is establishing a sales structure, increasing sales volume, and recruiting salespeople abroad. Some 53% of respondents noted that the main challenge is expanding overseas. When asked what type of government assistance they’d prefer to receive, 78% of companies asked for grants to help cover costs, while 65% preferred help in establishing business connections and international ties.
“This challenge raises questions as to what types of tools the Israel Innovation Authority is currently using. Its main activities are focused on issuing grants for R&D, and 95% of the authority’s funds are set aside for that matter. But parallel entities around the world are devoting a larger portion of their budgets to help companies form ties and prep them before they enter new markets. It seems as if a more mature market will also demand changes at the policy-level,” she said. Avnon-Shar believes that the transition to the growth stage will require companies around the world to cope with new difficulties that aren’t necessarily related to technology. Those challenges will include altering operating models or forming new guidelines for entering new target markets, with a physical presence at those target locations, forming collaborations, and expanding marketing and sales lineups.