The findings of the Israel Innovation Authority's "State of the High-Tech Industry in Israel 2023" report published yesterday points to the continuation of several worrying trends including the fall in overall investments, the reliance of the domestic market on foreign investment, and the political situation which has aggravated the damage caused by the global economic crisis. With Wall Street now back on the rise, the Israel Innovation Authority warns that if Israeli tech does not see the reversal of negative trends during the summer then the domestic tech industry will have a problem.
According to the report, Israel's tech industry has undergone changes in recent years. After a period of growth and prosperity, 2022 saw a decline in funds raised by the Israeli tech sector and in the number of businesses - a worrying trend that raises questions about the future of the industry and the potential manner of its recovery.
The direct impact of global economic instability and international political changes is evident in the Israeli tech industry. The decline in funds raised, together with the many layoffs by tech companies, reflect the cooling of the market. But now, it seems that there is a trend of recovery in the global industry, especially in the technology industry in the US, which raises the question of whether the domestic industry will also follow these positive trends.
Most R&D is funded by the private sector
The story of the growth of Israeli unicorns (privately-held tech startups worth over $1 billion) is an important part of understanding the process of growth and development of Israel's tech industry, which has prospered over the past decade. Many Israeli companies were sold at a relatively early stage to multinational companies, and became part of R&D centers that helped cement Israel's central position on the global tech map. However, according to the report, in the recent times some of these centers in Israel have been shut down, while closures of Israeli companies also occurred after their acquisition.
On the establishment of these R&D centers, the report found, "Over the years 2016-2018, the rate increased to an average of 24 new development centers per year, while in 2019-2022, the rate dropped to a low and an average of eight new development centers being opened per year. In recent times, due to the global economic crisis, a trend of closing development centers that operated in Israel began including Dropbox, EA and other companies. Due to the importance of the multinational companies' development centers to the stability of the tech industry, it is important to follow the development of this trend."
The report stresses that the centrality of the tech industry to the Israeli economy stands out on an international scale. In Israel, most investments in R&D are financed by the private sector, at a rate that is among the highest of OECD countries. This figure indicates the high dependence on the private sector in Israel and also the ability of this sector to finance and carry out innovative projects. However, during periods of economic crisis or a decline in investments in the private market, tech companies in Israel may be more exposed to shocks, since they have fewer alternative financing channels.
The report also found that compared with other OECD countries, Israel is the only country where more than half of the investments in R&D are made by foreign investors, "While the domestic private sector is responsible for financing 40% of R&D - the lowest rate among OECD countries." According to the report, "This is a unique characteristic of Israeli high-tech. In other OECD countries, the main funding source of R&D is local private investors in the local market, and in some countries, especially in Europe, there is also a great deal of government funding."
Israel Innovation Authority also reports that $15.9 billion was raised by Israeli tech startups last year, down 45% from $28 billion in 2022. The report also states, "Due to global economic instability, which includes interest rate hikes and a significant slowdown in the scale and pace of capital raising, and against the background of continued political uncertainty in Israel, the forecast is that the downward trend in investments is expected to continue this year."
The downward trend in investments will continue
Israel Innovation Authority chief economist Assaf Kovo said, "The coming months will be critical for Israeli high-tech. Past experience shows that usually, two quarters after a recovery begins in the capital market on Wall Street, which is reflected in the rise of the Nasdaq index, there is also an increase in raising capital and employees in Israeli high-tech. Due to the rise in the Nasdaq since the beginning of the year, in a normal state of affairs, one could expect an increase in capital raising and employment in Israel already during the summer months of 2023. According to the indications presented so far, reinforced by April and May data, there is a real concern that Israeli tech is separating from global trends."
In the data presented so far about capital raising by Israeli startups in 2023, it seems that in the first and second quarter of the year the downward trend in investments continued (the data is still expected to be updated). If there is no significant reversal of the trend, it seems that the decrease in investments in the domestic industry will continue, in sharp contrast to the growth and prosperity that characterized it in recent years. "This is a warning light for Israeli high-tech that requires preparing for appropriately."
Published by Globes, Israel business news - en.globes.co.il - on June 28, 2023.
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