Much like the plagues of old, the modern landscape of Israel's high-tech industry faces its own set of trials, each presenting a unique test of resilience. This Passover, its narrative of transformation and renewal reflects on the challenges and triumphs within the ecosystem.
The Jerusalem Post asked high-tech industry experts and stakeholders to share their insights on 10 of these modern "plagues," uncovering the underlying issues and exploring potential solutions.
The Plague of Cost-Driven R&D Decisions
A growing trend among companies is the tendency to set up their operations and expand their workforce in destinations known for their cost-efficiency, such as Bulgaria or India. This shift is largely driven by the attraction of accessing a workforce that is less costly compared to more established tech hubs, like Israel. Nonetheless, in Israel, the equation remains steadfast: high cost comes with very high value.
"Here in Israel, we see a distinctive blend of a strong no-matter-what development ethos, unparalleled innovation spirit, impeccable execution, and swift delivery, placing Israeli high-tech as leaders on the global map," shares Eliel Schurman, head of Engineering at the SAP Development Center in Israel. "It is imperative that companies do not overlook the invaluable Israeli workforce and its unique contribution, integral in propelling both their enterprises and products to new heights. Embracing the unique qualities of the Israeli workforce is essential for sustaining the innovative edge and success synonymous with Israeli hi-tech culture."
The Entrepreneurial Stagnation Plague
From 2007 to 2015, Israel experienced a surge in startup creation, but since then, there's been a dramatic decline of over 50% in new ventures annually. This trend signals a reluctance among entrepreneurs to launch startups, despite ample opportunities in fields like cyber and AI. This stagnation threatens the tech sector's vitality and local economy. While support programs are crucial, fostering a culture of entrepreneurship is equally important.
Ziv Elul, co-founder and CEO of Pery, a digital health company: "Areas like mental health have seen increased demand, highlighting opportunities for innovative solutions like AI-based ADHD interventions. However, startup incubators are dwindling, and collaborations with foreign entities are stalling. Rejuvenating Israel's innovation prowess demands concerted efforts to reignite entrepreneurial spirit and drive collaborative initiatives forward. Together, we can uphold our position as a global innovation leader."
The Valuation-Bubble Plague
In recent years, there has been a proliferation of Israeli high-tech companies focusing predominantly on valuations and fundraising rather than the core essence of business - generating revenue and cultivating a sustainable product. Many such ventures boast lofty valuations on paper but lack tangible products or a customer base, creating a speculative bubble that threatens their long-term viability.
Avri Itach, CCO of Flyfish, a technological financial services company, claims that "for startups, the primary objective should be establishing a robust business model that generates revenue and fosters profitability, instead of pursuing exits. This approach not only instills a sense of stability within the company but also alleviates the pressure to deliver intangible promises to investors. By emphasizing profitability, startups can organically attract investment and ensure their longevity in the market."
The Plague of Capital Raising During Crises
Israel's vibrant high-tech sector faces challenges in capital raising, particularly during crises. Economic, political, and social instability can drastically reduce investor confidence. Recent examples include Israel's judicial reform raising concerns among foreign investors, and the war in Gaza undermining stability.
Gal Ringel, CEO and founder of data privacy company Mine, advises: "Despite these challenges, high-tech companies can succeed in raising capital by focusing on a strong, experienced team, a unique product with innovative solutions and market value, a solid business plan including market analysis and growth strategy, and cultivating strong investor relationships."
The Proof of Concep (PoC) Plague
In the dynamic landscape of technological innovation, the traditional "Proof of Concept" (PoC) approach often becomes a bottleneck, delaying the realization of a startup's full potential. This methodology, while prevalent in corporate settings, can stifle progress by focusing on small-scale validations rather than embracing the broader vision of scale-up and phased roll-outs. "For startups, particularly in the Israeli ecosystem where solutions are crafted for swift global adoption, this can be a significant hurdle," says Michael Marx, head of UST Spark, UST's innovation entity aiming to forge growth partnerships with Israeli start-ups. "The key to success lies in bypassing the PoC stage and demonstrating readiness for immediate integration and scalability. This requires a product that is not just conceptually sound but also market-ready, supported by a team that is fluent in the language of global business and aligned with the fast-paced demands of international markets. In essence, the transition from a PoC-centric mindset to one that prioritizes rapid scalability and phased deployment is crucial for startups aiming to navigate the corporate maze effectively and secure a foothold in the global arena."
The GEN AI Pivot Plague
The rapid rise of generative AI presents both a challenge and an opportunity for startups, and those clinging to traditional methods risk falling behind. "Generative AI opens the door to brand new customers, competitors and therefore pivot opportunities for companies that were sure of their product market fit," shares Nogah Hendler, vice president of product at high-tech company Commit, which provides, among other services, consulting services to a variety of companies in the process of implementing generative AI technologies. "Imagine a marketing startup struggling to create compelling content when their rival leverages AI to churn out targeted ads and personalized customer journeys. Survival hinges on adaptation; startups must explore how generative AI can enhance their existing offerings or even pivot their core technology. This could involve using AI to streamline internal processes, develop more user-friendly interfaces, or even generate innovative product ideas. Ignoring generative AI might not be a death sentence, but it certainly puts a strain on a startup's ability to compete in a rapidly evolving landscape.
"Embracing this technology is no longer a luxury, it's a necessity for survival and future success. Remember, that past success in tech fields is not a guarantee for the future, since we’re facing a true and massive revolution that’s shifting all paradigms.”
The Down Round Plague
The last year or so has seen a return of fundraisings at lower valuations, the so-called “down round."
"For many founders and investors raising funds in a down-round is perceived as a last resort and is something they will try to avoid," says adv. Simon Marks, partner and head of High-Tech and Venture Capital practice at Epstein Rosenblum Maoz (ERM) law firm. "This is due to the 'double whammy' of the dilutive effect of the down-round itself, as well as the additional dilution from any anti-dilution protections given to previous investors. While it is advisable for companies to explore other alternatives before raising funds in a down round (e.g. cutting the burn-rate or raising funds via alternative instruments such as a SAFE), the down-round doesn't necessarily need to be the death knell of the company. Done smartly, a down-round can be used as an opportunity to clean up the cap table, strengthen the relationship with investors, and create new incentives for core management and employees, thus positioning the company for future success."
The Plague of Junior and Entry-Level Positions
The Israeli high-tech industry is thriving, but a large shadow is threatening its future: the dilemma of Junior positions. Academia is falling short by failing to adapt its study programs to the evolving needs of the industry.
"Overemphasis on theory and outdated curriculum means many graduates lack the skills required in the job market," says Chaim Geron, co-CEO of Infinity Labs R&D. "Thus, a vicious cycle ensues; juniors struggle to get a job without experience, and companies are hesitant to hire them without it. Academia must undergo a transformation, transitioning from a primarily research-focused entity to one that produces employees capable of immediately adding value to the workplace. Syllabi should prioritize practical, relevant skills, in collaboration with high-tech companies and by recruiting industry experts for teaching roles."
The Diversity Deficit Plague
Despite ample evidence showcasing the benefits of diversity within companies and organizations, Israeli high-tech still has considerable room for improvement in this regard, especially following a decline in the representation of minorities in the sector last year.
"Research consistently demonstrates that diverse teams enhance overall company performance, leading to increased revenues and profits," explains Yinnon Dolev, CEO of Sompo Digital Lab Tel Aviv. "Embracing human diversity brings forth exceptional talent that propels companies forward, fosters quicker problem-solving, and becomes a pivotal factor for employees when selecting their workplace. It's important for managers to actively integrate individuals from all segments of Israeli society into their companies, a strategic move that not only enhances workplace dynamics but also contributes to the broader economic landscape's improvement."
The Geographical Concentration Plague
Remaining in the realm of diversity, Shai Meinrath, vice president of the Employment, Desertech and Climate Innovation Center, points to another glaring issue within Israel's high-tech industry: a lack of diversity and a geographical concentration primarily in the Tel Aviv area.
"This concentration not only limits opportunities for talent from diverse backgrounds but also poses risks to the resilience of the industry itself," she explains. "As Israel navigates through turbulent times, the importance of diversifying and decentralizing the high-tech sector cannot be overstated. However, amidst these challenges lies an opportunity for transformation. The Negev region stands as a potential game-changer, offering fertile ground for social and economic development. Embracing the potential of the Negev could not only mitigate the industry's vulnerabilities but also contribute significantly to the broader societal and economic well-being of the nation.”