In the tech sector there is much talk about transparency. Transparency regarding managers and employees, transparency about teamwork, transparency towards the customer. Yet in many places in the sector there are more questions than answers. So it's no surprise that where the important data is not available and information is thin on the ground, serious mistakes are made such as IPOs of dozens of companies not yet mature enough for the stock exchange. Compared with most other sectors of the economy, except the defense industry, the tech industry stands out for its especially low transparency.
The lack of transparency begins at the top. The main investors in the tech sector - venture capital funds - are for the most part privately held and incorporated in the British Virgin Islands or the Cayman Islands. They tend not to provide any important data such as their list of investors, which is likely to include Israeli and US pension funds, but also oligarchs or companies owned by the Chinese government. They also do not report their annual yields.
Israel's growth companies, including the startups worth more than $1 billion, tend not to provide any details about their situation. They provide information mainly about the number of employees they are hiring and the branding strategy that they are deploying. But there is no reliable data about their revenue, their losses and their valuation. Research companies and government ministries publish many reports about the numbers of unicorns, and the large financing rounds they complete but there is no information about the ratio of multiples to their revenue, profitability, or debt, which might give an indication of their financial stability.
The large development centers - not only of Microsoft, Apple, Google, Amazon and Meta - are branches of a public company but there is nothing public about them. The exception is Intel which as part of a company that receives Israeli government grants, publishes a social responsibility report that tells the Israeli public how many employees it has hired, how much money has been spent with subcontractors and how much it has contributed to Israeli exports. But all the other development centers keep their information deeply concealed.
Startups operate secretly in order to create an advantage and protect themselves from the large companies. But when they become large companies, raising hundreds of millions of dollars from well-established and institutional investors including pension funds on whom many workers are dependent, perhaps at the very least some minimal reporting is required.
The tech sector's share of the Israeli economy, according to the Central Bureau of Statistics, grew last year to 11.1% of salaried employees, or 385,000 workers. The sector is responsible for paying 25% of income tax and 43% of exports in 2020. Taking into account the contribution of the tech industry to the Israeli economy, one would expect government research departments to gather information about the sector. Yet the various public research departments including the Israel Innovation Authority, the Knesset Research Department, the Central Bureau of Statistics and the Bank of Israel take most of their data from two private research organizations: IVC owned by the Holtzman family and which is connected to the Giza venture capital fund, and Start-Up Nation Central, which is a philanthropic organization of the Elliot hedge fund founder Paul Singer.
IVC, the longer established of the two organizations, surveys the world from the point of view of a research company serving customers interested in investing in startups. Start-Up Nation Central's activities are similar and have the aim of encouraging investment in Israel by making information available to foreign investors.
The research companies help decision makers understand where the money is flowing and to which sectors and companies and to better follow which companies have held IPOs or been sold. But that is only part of the picture. An organization that has a more intimate acquaintance with the tech sector is the Israel Tax Authority, which sees the big deals, the tax payments of the companies and the income tax paid by their employees. But sometimes small deals even evade their notice and the Tax Authority also plays its cards close to its chest. It is easy to imagine what the public debate on high-tech would look like if we knew how much corporate tax the major development centers pay, or what tax rate is paid by the wealthier companies and individuals.
In order to manage the right policies for Israel's tech sector, there has to be a more proactive effort to gather a flow of reliable information. Reforms for transparency are needed that would require companies from a certain size or revenue level to present more data. Even if this is not a general financial report, one organization like the Israel Innovation Authority or Ministry of Science and Technology should be made responsible for managing public policy for the tech sector and for reports that would assist better understanding of what is happening.
In order to start talking about high-tech policy, the Ministry of Science and Technology decided to ask what exactly Israeli high-tech is and where it begins and ends. One of the subcommittees of the Committee for Developing Human Resources headed by Dedi Perlmutter deals with the basic definitions of terms in the sector, such as should R&D at a bank be included in the sector? Who is a junior in high-tech? Also sitting on the subcommittee are representatives of the Ministry of Economy, Central Bureau of Statistics, Israel Innovation Authority and private research companies. After their results are published there will at least be a standardization of basic definitions in the sector and that will help form a basis for policy formation.
In order to prevent what happened last year when enthusiastic investors and entrepreneurs courting risk pushed companies that were not yet mature enough into IPOs, there is a need to focus on gathering information that will reveal the weak points. Instead of asking how much money a company has raised, we should understand their level of leverage, profitability and the revenue multiples contained in their valuation.
Instead of talking about a shortage of engineers, we should try and understand in which specific disciplines and segments they are lacking and at what rate the educational institutions can provide them as employees for the economy. Instead of basking in the big exits like Mobileye, we should be tracking the acquisition of companies and asking if they are benefitting the economy. Does an acquired company pay higher tax, keep its IP in Israel and employ more people here?
Instead of glorifying in the range of development centers in Israel of the international tech giants, we should be measuring their effect on the extreme rise in salaries in the economy and their genuine contribution to the payment of taxes including VAT, and connect this up to the fall in the number of new companies being founded in Israel.
Published by Globes, Israel business news - en.globes.co.il - on February 3, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.