Is the party over for Israel's tech sector?

Lemonade IPO Credit: NYSE

A fall in vacancies for software developers is another indication that Israeli tech companies and startups are tightening their belts.

The latest figures from Israel's Central Bureau of Statistics show that the number of job vacancies for software developers has declined for the first time since the outbreak of the Covid pandemic two years ago. For the previous two years, the number of vacancies had been steeply and consistently rising, as Covid created new opportunities for the tech sector.

In the first quarter of 2022, the Central Bureau of Statistics reported that demand for software developers fell 3%, although during the same period there was a 6% rise in demand for sales agents and salespeople for shopping malls, and a 5% rise for waiters and bartenders.

But there was a sharp decline in demand for electronics engineers, down from peak demand for the profession in April 2021. According to the Central Bureau of Statistics, demand for electronics engineers has fallen 31% since October 2021 and by 3.6% since January 2022. But not all engineers are seeing falling demand in job vacancies. The number of job vacancies for mechanical engineers rose 9% in the first quarter of 2022, while there are job vacancies for 1,300 technical engineers, an all-time high for recent years.

A change of direction or temporary decline?

The rise in demand for programmers over the past year was the highest and fastest ever. The number of job vacancies doubled from 7,000 to 14,000, between January 2021 and January 2022. Before Covid it took four years for the number of job vacancies for programmers to double. Will the number of vacancies continue falling, or is it just a temporary decline that will soon halt?

Tech recruitment company Ethosia CEO Eyal Solomon told "Globes" that tech companies are undergoing cautious changes. "A large number of companies are planning to shut down and some are freezing recruitment.

"Although the fall in demand is ostensibly due to the holidays, in our talks with companies that are hiring, major concerns were raised about what is on the way, following the declines on stock markets worldwide, the war in Europe and rising inflation in the US. Some of the companies decided to freeze hiring and sit on the fence to see where the markets are going.

"The level of anxiety created by financial results, combined with global instability, is causing difficulties for new startups in raising capital and many tech companies are making cautious changes in their rate of new hiring."

Sectors that were neglected are now undergoing a correction

Israel High-Tech Association chairman Marian Cohen describes the latest Central Bureau of Statistics data as a 'correction.' He said, "Since it was more attractive to train software engineers, other sectors have suffered from neglect for 20 years including mechanical engineers and for sure areas like engineering and technicians.

"Until today the biggest shortage of tech people is not in startups but manufacturing plants - whether it is a high-tech factory or low-tech factory making use of making use of higher level mechanization. When the government talks about increasing the number of tech employees from 370,000 today to 550,000 in five years, the main increase won't come from startups, whose numbers are actually diminishing, but from large factories."

Bessemer Ventures partner Amit Karp talks about a change in atmosphere taking place right across the market. "Almost on every board of directors that I am involved with there has been talk about the new reality and CEOs are being asked whether they can identify the need to amend the annual budget in line with the situation.

"Some of the companies are managed efficiently but companies are preferring not to raise capital in the short term in order to not lose out on valuation, or were not managed efficiently from the outset and are re-assessing their budget."

Karp explains that the correction on the stock markets can be seen clearly. "It is sufficiently sharp, painful and protracted so that it cannot be seen as a short episode. Therefore, it is clear where the situation is also leading to in the private market. Because only one quarter has passed since the correction on the stock market, you still don't see it everywhere but we are starting to see a cooling off in raising venture capital; there is a slight fall in the number of financing rounds, mainly from more mature companies.

"Although festivities are still in full throttle in the cryptocurrency sector but when you see companies in the product sector for end users taking a hit, you understand that it will surely reach the private market sooner or later. Companies needing to raise capital are waiting a little out of concern on losing value but there is a limit on how long you can stay under water. So everyone is waiting at the moment and it may be that we will see the main fall in another one, two, or three quarters."

A wave of layoffs in startups worldwide

The correction in demand for tech employees is another expression of the tipping point that the industry has reached after a year of exceptional growth in every possible parameter.

So for example in 2021, Israeli startups raised a record $25.6 billion, more than 2.5 times its previous record in 2020 and 25% of the amount that flowed into all of Europe. Even in the first quarter of 2022, Israeli startups raised $5.6 billion, higher than almost every quarter prior to 2021.

Many of the financing rounds announced in the past quarter were closed several months previously, when the industry was still influenced by euphoria. In recent months and especially since the Russian invasion of Ukraine began and talk of US rate hikes and the sharp falls on stock markets, the atmosphere surrounding tech companies has changed dramatically.

A "Globes" examination found this week that all 22 Israeli tech companies which listed on Wall Street last year through either an IPO or SPAC merger have lost a combined $34 billion in valuation for their investors, compared to their IPO or SPAC merger valuation. Not one of them is trading above its debut valuation.

In the US and worldwide, the reality is even more depressing. Although it is still too early to talk about a crisis, there is certainly a correction with more than 2,000 layoffs by high profile startups alone over the past month in the US, India and Brazil.

More opportunities to buy at attractive prices

Although the fall in market cap of tech companies on the stock market is spread over all sectors, on the private market it is concentrated mainly on companies that are forced to raise hundreds of millions of dollars every year or 18 months in order to capture market share. On the other hand, these companies spend major amounts on infrastructures and hiring employees and are very far from profitability. These are mainly companies in the ecommerce sector and that sell products to consumers rather than commercial companies.

Checking out the growth of companies through LinkedIn provides a similar picture. The growth curve in the number of employees in ecommerce at companies like Yango, Yotpo and even successful ecommerce platform Global-e, show a slowing of growth. Even Lemonade, which directly markets online insurance to customers, has slowed its rate growth as has Bizaboo, which helps produce virtual conferences. A different picture is provided by cybersecurity companies like Wiz, SentinelOne and Orca Security, which continue to show strong growth.

Even companies that have endured strong falls in value on the stock exchange but are in growth sectors such as Kaltura, Taboola and ironSource, are demonstrating strong growth according to LinkedIn.

The fall in valuation, the cooling of the privately held market and gloomy forecasts have persuaded many companies to think about acquisitions and being acquired. Although the past quarter saw a reduced number of exits, web data company Bright Data CEO Or Lenchner sees more and more opportunities on the Israeli market. He told "Globes," "Our VP business development who deals, among other things, with acquisitions is busier than ever."

Lenchner talks about the opportunities that the tech situation has afforded his company. "Money has become less cheap and companies that are not profitable already don't see the capital raising market as attractive and are looking to be acquired. We certainly see today as a company more enquiries from companies and investment bankers. For us as a medium sized profitable company, there are many more opportunities and the price has become more attractive."

Published by Globes, Israel business news - en.globes.co.il - on April 27, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Lemonade IPO Credit: NYSE
Lemonade IPO Credit: NYSE
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018