Strong shekel exposes tech industry's falling competitiveness

Zohar Zisapel  / Photo: Jonathan Bloom , Globes
Zohar Zisapel / Photo: Jonathan Bloom , Globes

Sources in Israel's technology industry say that its long-term problem is rising salaries.

The low shekel-dollar exchange rate has put many in Israel's technology industry under pressure. As in previous crises, this time too there have been calls for government aid to the sector. How in fact is the exchange rate affecting it, and what does it want?

Technology entrepreneur and investor Zohar Zisapel explains that the crisis does not apply to the whole industry. "There are different kinds of technology companies," he says. "Early-stage companies that are financing themselves solely from funding rounds are hardly affected, and at present it's very easy to raise more money. Companies in hot areas that as yet have low sales and high losses are also not very much affected by the dollar exchange rate, because they can easily raise large amounts on the public or private market."

The companies that are suffering, Zisapel says, are "profitable companies that pay their way from their revenue, so that a substantial fall in profits or, God forbid, a switch to a loss, is critical for them."

Aaron Mankovski, managing partner at venture capital firm Pitango, says, "High-tech as such does not need aid. All of Israeli industry, including high-tech, needs an export-oriented currency policy. High-tech has been very much affected by the volatility, and its competitiveness is in decline. At such a low shekel-dollar rate, manpower costs in Israel become clearly uncompetitive, and that is liable to make companies look for other places in which to employ people instead of in Israel."

OurCrowd founder and CEO Jon Medved believes that dollar purchase by the government are the right policy at this time. "The dollar crisis has a substantial impact on companies in the field. You don't need a doctorate in mathematics to do a simple sum - if I take in money in dollar investments - after all, 90% of the money for high-tech comes from overseas - and my expenses are in shekels, then as soon as the shekel strengthens against the dollar by 5%, my ability to pay employees or maintain a company here reduces by 5%," he says. "Instead of drawing up big plans, all that needs to be done is to continue buying dollars. The guys at the Ministry of Finance should be working overtime to print money and buy foreign currency. I don't think we need grandiose rescue programs, just ensure a normal exchange rate, and that it will be possible to do business in this country."

A senior source in the industry who asked not to be identified said, "You have to separate the short-term considerations, where you need a Band-Aid to solve the immediate crisis, and the long-term considerations, where the solution is to seek to induce a reduction in salaries in high-tech." According to the source, pay in Israel has reached levels close to those in Silicon Valley, even though the cost of living there is higher, and even surpasses pay levels in other US locations. "The long-term solution," he says, "is therefore to increase the number of programmers or to reduce salaries. The problem is that managers in the technology industry don’t care, because for the time being everyone is happy with these salary levels."

State of Mind Ventures general partner Nir Adler says, "On the tactical level, the decline in the shekel-dollar rate in the past few weeks is painful but not dramatic. Most companies have already adapted their business plans to a low exchange rate, and most of them are hedged for the short to medium-term of 60-360 days.

"The bad news, however, is that the multi-year trend of a strengthening shekel comes together with inflationary trends in salaries and real estate, and in combination these trends are materially eroding the advantage of an Israeli startup. In other words, in purchasing power parity terms, the cost of setting up and developing a company from the seed stage to an advanced stage is rising substantially. There are also offsetting trends, such as the accessibility of cloud infrastructure and greater efficiency in the sales process, but these are mostly trends that benefit overseas companies to the same extent."

Published by Globes, Israel business news - - on January 18, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Zohar Zisapel  / Photo: Jonathan Bloom , Globes
Zohar Zisapel / Photo: Jonathan Bloom , Globes
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