Coronavirus could decimate Israeli startups - survey

High-tech office / Photo: Shutterstock, Shutterstock.com

65% of tech startups with ten or fewer employees say they won't last six months without additional finance.

The effects of the coronavirus pandemic have not bypassed Israel's high-tech industry. Since the crisis began, companies have closed down, while others have cut salaries and laid employees off, and there are signs of an investment freeze. A new survey examines the effect of the pandemic on startup companies in Israel, from the start of the crisis until mid-May.

The survey finds that Israeli startups are suffering from a shortage of finance and from a substantial decline in sales, and are being forced to cut manpower and pay. Many are dealing with the danger of closing altogether. The survey also finds that most of the companies are examining alternative finance tracks, but that these are not meeting the demand.

The survey was carried out by the Israel Innovation Authority together with Israel Advanced Technology Industries (IATI), the umbrella organization of the technology and life-sciences industries in Israel. It covers more than 400 Israeli startups of various sizes and in various fields: software, healthcare, and hardware. The results are broken down by company size; 65% of the participating companies are small companies with ten or fewer employees. The effect of the pandemic on companies of this size is particularly marked, and if the current situation persists, 65% of the small startups in Israel will have to shut down within six months because of a shortage of cash.

According to the survey, since the coronavirus crisis started, a quarter of the companies have already laid off employees. 10% have laid off up to 10% of their workforce, and 14% have laid off more than 15%. The breakdown by field shows that software and hardware companies are most likely to have laid off employees: one third of them have done so. Among pharmaceuticals and biotech companies, only 6% report that they have shed workers.

One third of the companies report that if the situation continues they will have to dismiss at least 15% of their employees within three months, and a further quarter of the companies say this will happen with six months. The greatest wave of layoffs is expected to be among companies at the A round financing stage. More than two thirds of these companies report that they expect to be downsizing within six months.

The survey also shows that 71% of the startup companies covered have halted recruitment of new employees; 14% have slowed the recruitment process; and only 15% are continuing with recruitment as usual. More than 40% of the responding companies have put workers on unpaid leave, and almost 25% have done so to more than half their workforce. 22% of the small companies, with up to ten employees, have put most of the employees on unpaid leave, as have 14% of the companies with 11-30 employees. Among the larger companies, none reported unpaid leave on a similar scale.

Revenue and investment

The problem starts, of course, with cash flow, which is made up of fund raising and sales revenue. On sales, 17% of the companies report no hit to sales arising from the coronavirus pandemic, and 6% actually report sales rising. 45% of the companies report that their sales have declined by over 50%, while 37% report a smaller decline. Companies employing 50 people or more that responded to the survey tended to report the smallest declines.

As far as fund raising is concerned, 40% of the responding companies report a halt in their fund raising processes, and a further 50% report delays. According to the survey, only 10% of fund raising rounds are currently continuing as planned. Startup companies depend upon venture capital investment and other forms of investment in order develop a product that, if it succeeds, is meant to pay back the development cost and eventually reach substantial sales and ultimately enable the investors to make an exit.

In recent years, the market has been awash with money. Companies raised money fairly easily, and tended to be spendthrift with it, recruiting intensively at high salaries, and spending on rapid expansion to markets around the world, and on the costs of fashionable offices in expensive locations. Now, the difficulty in raising funds is making companies cut back in various ways, with the aim of lengthening the amount of time they will be able to survive without raising more finance.

50% of the companies in the survey say that they will not be able to continue in business for more than six months without additional finance. The proportion is especially high among the small companies, which account for most of the respondents to the survey, and so this figure is not representative of the situation among the larger companies. 65% of the companies with up to ten employees said that they would not be able to continue in business for more than six months without additional finance. Only 12% of the companies with 31-50 employees said they were in this position, while among companies with over 50 employees the proportion was 25%.

Alternative sources of finance

In order to survive, the survey found, many companies have turned to alternative sources of finance. The funding tracks that have been explored are approaches to existing investors for an internal funding round; approaches to financial bodies for loans; and approaches to the Innovation Authority for grants. 51% of the companies said they had approached their existing investors. Of these, 35% received negative responses, while 19% received additional financing. The rest are still awaiting responses.

Companies with up to ten employees received a higher rate of negative responses. 47% of the companies in this category who approached their investors were refused, and only 16% received additional funding. By contrast, of the companies with 31-50 employees who approached their investors, 60% received more funding, making this the category with the highest rate of success in the breakdown by company size.

60% of the companies surveyed said that they intended to apply for grants from the Innovation Authority. Half of them plan to apply on the fast track, and the rest on the regular track. The fast track is intended for companies that need finance quickly because their existing finance is not enough for them to continue in business for any length of time. Companies ineligible for this track, because their financial position is a little more stable, can apply on the regular track.

Despite the financial difficulties during this period, nearly 60% of the companies surveyed said they had not sought a loan and were not considering doing so. 22% of the companies said that they were considering the possibility of applying to a financial body for loan finance, and only 20% reported that they had approached a bank or other financial institution for a loan. Of those who had made such an approach, only 20% received loans, amounting to just 4% of all the companies in the survey. Half the companies that applied for loans were turned down, and the rest had yet to receive a response.

Published by Globes, Israel business news - en.globes.co.il - on May 31, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

High-tech office / Photo: Shutterstock, Shutterstock.com
High-tech office / Photo: Shutterstock, Shutterstock.com
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