For the Startup State of Israel, the clouds have been gathering on Wall Street for months. The Nasdaq Composite Index – home to the world’s tech giants and a barometer for the state of the industry – has fallen more than a quarter since its historic high last November.
The storm has yet to blow, but industry figures remain nervous. In the first half of this year, new investment in Israeli startups plunged to $9.8 billion, down nearly 30 percent from its peak in the second half of 2021, according to Israel Venture Capital Research.
But everyone in the industry agrees that the last half of 2021 sees massive amounts of unsustainable capital flooding into startups in Israel and around the world. There must be a decline, they say.
“What we don’t know is how things will develop in the global economy: will the United States have a long recession? If it does, it could be the start of a real downturn for high-tech Israel,” said Uri Gabai, CEO of Start-Up Nation Central’s Start-Up Nation Policy Institute. “It’s too early to call this a crisis. Hopefully, it won’t be one. ”
Other Israelis should also hope. Israel has felt a slight slowdown in global economic growth stemming from supply chain disruptions, the war in Ukraine, accelerating inflation and rising interest rates. The Bank of Israel said earlier this month that the Israeli economy would grow 5 percent this year – a healthy rate of expansion, but down from its previous estimate of 5.5 percent.
A global high-tech decline – much less like the bursting of the dot-com bubble in 2000 – will hit Israel badly. Two decades ago, high technology was the main driver of the economy; today, its role is much, much bigger.
Technology accounted for 16 percent of Israel’s gross domestic product last year, up from 12 percent five years earlier, making it one of the highest in the world. But the headline figure understates how important technology is to Israel’s economy.
High technology accounts for more than half of Israel’s exports of goods and services. Tech workers make up only 10 percent of the workforce, but because the average salary is 2.2 times the national average, their contribution to consumer spending and government tax revenue is much greater.
A major slump in high-tech will reverberate throughout the economy: shops and restaurants will lose customers; real estate companies will be left with empty office towers; and the government will be short of tens of billions of shekels in tax revenue – not just from jobs in lesser tech, but the windfall it makes in taxes collected from mergers and acquisitions deals.
People walked past the Nasdaq MarketSite earlier this month. Credit: Julia Nikhinson/AP
To someone unfamiliar with the high-tech world, it seems that the ups and downs on Wall Street should have had little impact on the teams of entrepreneurs and startup engineers in Tel Aviv or Herzliya. But there is a direct connection that has happened in a big way – once after the 2000 tech bubble and again after the 2008 financial crisis.
Startups depend on a steady flow of capital to finance their research and development, and to bring their first products and services to market. The last decade has been particularly lucrative for them: Low interest rates have not only fueled a booming stock market, increasing the valuations of publicly traded companies, but forcing investors to look elsewhere to put their money where they can earn higher returns. Startup is one such place.
The result has been rising valuations on Wall Street for tech giants like Apple and Amazon, which are bait for startups in Silicon Valley and Israel. Meanwhile, the coronavirus pandemic is proving to be a boon for the tech industry by increasing demand for remote services.
By 2021, Israeli startups raised $26 billion, six times what they raised five years earlier, according to IVC data. Unicorns – companies that were worth more than $1 billion before they went public – were once as rare as their name suggests. But Israel sees no fewer than 52 appear when startup valuations skyrocket in 2021.
Rising inflation, and the rate hikes ordered by central banks around the world to combat it, have suddenly made the fundraising environment a lot easier. However, industry figures note, Israeli start-ups still raised more money in the first half of the year than ever before (excluding the boom year 2021). IVC figures show that 20 new unicorns were born in the first half of 2022.
Beyond financial flows, things are also looking tough for Israel’s technology exports, which are also showing a moderate decline.
On the one hand, technology services exports fell nearly 13 percent in the first four months of this year compared to the last four months of 2021, according to government figures. On the other hand, they are up nearly 24 percent from the same time in 2021.
“People are talking about the 2008 scenario – a global financial crisis and the world will enter another recession where everything is affected,” Gabai said. “But there’s no sign now that that’s where we’re going. If this were a normal recession – and macroeconomists knew there was a recession every few years – Israeli companies would come out of it stronger.”
One way companies become stronger is by cutting spending by laying off employees, which seems to have happened based on evidence from media headlines.
On Sunday, the Israel-based Soluto unit of US firm Asurion said it was closing and firing 120 of its staff. Last week, US-based Zencity said it had laid off 20 Israeli employees, D-Fend and Lusha each said they were releasing 30 workers, and Intuition Robotics gave notice to 20 staff.
The US-based startup’s zen city houses 20 Israeli employees.Credit: Sergey Melnik/Zencity
However, Eyal Solomon, CEO of high-tech workforce firm Ethosia, said he had not seen a major wave of layoffs so far. Even if the numbers increased, he noted, it would only help alleviate Israel’s chronic shortage of engineers and other key personnel. He didn’t see tens of thousands of unemployed engineers.
“We have about 20,000 positions that remain open both before and after the financial crisis,” Solomon said. “Starters who cut back are those that have no real business or value to offer investors. The market is getting healthier economically. But we still see a shortage of talent and employees.”
Where there are layoffs, they happen outside of the company’s core research and development operations, he said. Employees who slipped pink were junior staff and new hires, and underperformed. “What we are seeing is something very natural after the bubble [in 2021] which is unreal and unsustainable.”
The Central Bureau of Statistics reported last week that job openings for software engineers fell 7 percent in April-June from the previous two months. The declines come as vacancies across Israel’s economy have fallen slightly after hitting record highs, with technology vacancies leading the decline.
“If we compare it to 2021, the decision [to hire] was taken more slowly. Companies are more cautious, they are moving slower than in the past – but they are recruiting and they are fighting for talent,” Solomon said.
Due to a combination of persistent labor shortages and rising inflation, wages in the tech sector will probably rise, he predicts.
“The year 2022 will end with an increase of about 5 to 8 percent in terms of salaries for software engineers. I can say that about 3 or 4 percentage points it will be due to inflation, not the market,” he said. “Engineers still hold the best cards in salary negotiations. They see prices going up, and of course they will ask for higher salaries.”
