After the super year 2021, the investment volume fell in Israel’s classic high-tech industry. There is no doubt that this should not be taken lightly, but there is also no reason to panic, as some headlines in so-called business newspapers – especially in Europe – suggest. The main challenge is the so-called ‘homefront’ (political institutions, infrastructure, and bureaucracy)
The market is in a global recession due to the warmongering of dictators such as Russia, Iran, or China and Covid has of course left its mark. In addition, market adjustments are currently taking place in the “traditional” high-tech sector and the focus is shifting to the innovative fields of medicine, food production, sustainable energy production, and space industry as well as quantum computers.
In other words, Israel’s startup landscape and ecosystems are in the process of being reshaped and restructured. The global market is simply saturated with cybersecurity startups and the like.
Finally, one must also name homegrown factors. First and foremost, the political institutions, inadequate infrastructure, and bureaucracy. They are explicitly mentioned as negative factors for Israel in the last WIPO innovation ranking. Israel is losing rankings for the fourth year in a row and is no longer in the top 10 as on VonNaftali reported.
Homefront
The Israel Innovation Authority (IIA) names another homemade factor in its report on the status quo of high tech in Israel in 2022: the cobbler is walking barefoot.
The IIA writes in its report: ” (…) Today, there is a gap between the groundbreaking innovation, which is developed by Israeli high-tech workers in Israeli and global companies, compared to the level of digital and innovative services accessible to the Israeli public. In other words “the cobbler goes barefoot”. In this sense, the Israeli public does not benefit from Israeli innovation in its daily life.
The challenges related to this issue include, among others, the release of regulatory barriers that will allow the testing and implementation of groundbreaking technologies in Israel, funding R&D and innovation infrastructure in companies that are not part of the high-tech industry and in the public sector, encouraging innovation-based management in non-technology companies, implementing advanced technology in the economy and training employees for the skills involved in engaging in innovation.” Further, IIA is speaking of “The untapped potential of Israeli technology companies: the industry-academia collaboration“
It is always surprising to see that while Israel flies to the moon and around 23% of all Nobel Prizes have some sort of Jewish background or connection to Israel. Israel is considered the powerhouse of innovation, but a look at the streets and everyday life in Israel, quickly leaves one in doubt. Where is this great advance that Israel is giving to the world?
A lot of homework has to be done to make the homefront clear. It is high time that Israel is not only a beacon of light for the world, but also and especially in Israel itself. The cobbler can no longer walk barefoot at high living costs.
Declining Investments
Now the frame is set to better understand the findings of Start-Up Nation Central, together with the SNPI think tank, concerning the annual summary for the year 2022 of the Israeli high tech industry which is based on analysis of data from the Start-Up Nation Finder innovation business knowledge platform.
The main insights are:
– Funding brought forward compared to previous years
– Time between seed and A round investments cut in half
– Israel’s cyber sector suffers a serious decline in investment
The report of Start-Up Nation Central states: “The total volume of investment in 2022 plummeted by almost one-half – from an unprecedented USD 27 billion in 2021 to some USD 15.5 billion in the past year. This phenomenon is not unique to Israel; for the sake of comparison, investments in Silicon Valley high tech companies declined by 40%. The overall number of funding rounds in 2022 also declined to 826 compared to 1,103 rounds in the previous year.
However, looking at data for the year as a whole does not tell the full story. By looking more closely, we can see the initial signs of a global slowdown. In light of 2022’s financial market downturn, the decline in total investments for most types of funding rounds is not surprising; what is surprising is the seed investments recorded an increase in 2022.
Seed investment in Israeli startups in 2022 increased by 22% compared to 2021, or from USD 1.3 to 1.6 billion. These figures are especially surprising when we take into account the decrease in the number of startups (which we reported in previous reports) that would presumably have led to a decline in the total value of seed round investment.”
Start-Up Nation Central’s CEO, Avi Hasson: “A multi-year perspective shows that 2021 and not 2022 was the exceptional year in the Israeli high tech industry. The unrealistic quantum leap in investments, market cap, and transaction multiples in 2021 corrected itself in 2022, and alongside global macroeconomic trends, there was a markedly significant decline in investments, particularly in the second half-year of 2022. Nevertheless, the investments, exits, and high levels of demand continue, but in a more prudent and measured manner.” True.
Digital Infrastructure
Additionally, the ‘homefront’ of innovation should not be overlooked. Again a quote from the IIA report on high tech in Israel 2022 describes just another field where Israel is lagging behind – Digital infrastructure. The report states: “However, the surfing speed available in Israel still lags behind the leading countries in the world: Israel is ranked 32nd in the world as of February 2022 with a median broadband surfing speed of 90.42 megabytes per second, according to a 22 Ookla test.
It is not surprising, then, that the business sector and the public sector in Israel lag behind the comparison countries, against which Israel measures itself, when it comes to digitization and technological innovation. The OECD data also show that the business sector in Israel lags behind the OECD in the assimilation and use of a variety of technologies, for example the use of social networks, cloud computing, CRM systems and big data and artificial intelligence technologies.
In all these indicators, with the exception of the use of cloud computing, the business sector in Israel is below the average use in the OECD countries. The public sector in Israel also suffers from this gap: according to the UN ranking, Israel is placed 66th in participation in digital processes of the public sector.” The same holds true for the streets, schools and other public buildings.
In conclusion: Israel is still a powerhouse of innovation and start-ups and a beacon of light for the world. However, there are challenges and rough seas, but they can be addressed, especially the homemade factors of decline – reform of political institutions, upgrading infrastructure, and cutting down on bureaucracy.