Coronavirus crisis: 65% of Israeli start-ups face ruin within 6 months

When asked how long their company operations could be maintained should current conditions continue, 3.4% of the companies surveyed estimated that they would fold within the month.

JUNE 1, 2020 17:07

Gil Perry, CEO of startup company D-ID, stands on stage during a presentation to the CyberTech 2018 conference in Tel Aviv, Israel January 31, 2018. (photo credit: NIR ELIAS / REUTERS) — Gil Perry, CEO of startup company D-ID, stands on stage during a presentation to the CyberTech 2018 conference in Tel Aviv, Israel January 31, 2018.

(photo credit: NIR ELIAS / REUTERS)

Israel's tech sector has called for government assistance to help companies ride out the economic slowdown caused by the coronavirus lockdown, as a survey has shown that two-thirds (65%) of small start-ups are unlikely to continue beyond the next six months without support.

The survey, conducted by the Israel Innovation Authority and Israel Advanced Technologies Industries (IATI), Israel's umbrella organization for the hi-tech and life science industries, found that half of the 414 hi-tech companies surveyed had been "significantly impacted" by the slowdown, with the remaining half either experiencing limited impact or no impact.

A quarter of the companies had to let go of staff while half have cut wages, and of the companies already generating sales, 63% were having to cope with a 25% drop in sales.

Less than half (45%) of companies reported a runway of less than six months, which is defined as the amount of time until a company goes out of business assuming current income and expenses stay constant, although this is an improvement from the 27% reported in the Central Bureau of Statistics (CBS) survey published in May.

“The results of the survey show that many young technology companies are facing bankruptcy," according to Karin Meir Rubenstein, CEO and president of IATI.

"The innovation industry is the main growth engine of the economy, and has been carrying the Israeli economy on its back towards unprecedented growth and prosperity, almost without any government support," Rubenstein said. "No doubt the government must provide a comprehensive and immediate response to the problems already afflicting the industry due to the crisis, as well as the problems expected in its aftermath, in order to allow the industry to stabilize itself in the face of the expected recession."

When asked how long their company operations could be maintained should current conditions continue, 3.4% of the companies surveyed estimated that they would fold within the month, with 21.3% facing closure within the next three months. Nearly a third (29.6%) were hopeful that they could manage for 4-6 months under current conditions, and a quarter (25.4%) estimated they could hold on for 7-12 months, while one in five were more optimistic about their outlook, expecting to be able to continue operations for over a year under current conditions.

However, the most optimistic companies were also predominantly the largest, with nearly 40% of large companies of 50+ employees expecting to continue for a year or more, against just about 15% of companies with ten employees or fewer reporting the same outlook.

IN THE TECH sector, as in many others, financial constraints were inevitably having a knock-on effect on employment. Some 10% of companies had already had to let up to 10% of their staff go, while a further 14% had been forced to enact wide-scale layoffs of over 15% of their staffing levels. Some 35% of companies meanwhile had not yet made redundancies but were considering it, while the remaining 41% were not considering it.

However, if current conditions continue, fully two-thirds of companies would need to let a significant number (defined as more than 15%) of staff go, with the majority having to do so within the next six months.

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The downturn means that many companies are looking for funding to carry them through the economic slowdown, but the survey showed that just 10% of companies had requested and received additional funds from current investors in light of the crisis. Some 18% had made the request and been turned down, while a further 23% had requested funds and were awaiting an answer.

Consequently, the majority are looking to the government for assistance. 60% of the companies surveyed had applied for grants via the Israel Innovation Authority, of which just over half had done so through the accelerated coronavirus channel set up to help companies weather the financial storm caused by the lockdown.

A further third of companies, however, were in need of assistance but had not submitted a request for a range of reasons, such as failure to meet the threshold conditions, lacking the innovative technological requirement, difficulty raising complementary funding, previous rejection, or because they were raising funds through an alternative channel.

The difficulties that these companies are having in raising funds from the government has led for calls for wider-scale help for the tech industry, given that the sector has largely been responsible for the growth in Israel's economy in recent years.

"The additional support approved for hi-tech companies, valued at NIS 1.2 billion, is not sufficient and is not based on a thoughtful and methodical response," Rubenstein said.

IATI is working with the Innovation Authority to formulate a way forward, but the government also needed to step up, she said.

"Among other steps, together with the Innovation Authority we have established a forum consisting of representatives of industry and government ministries, along with other organizations we are including, with the purpose of addressing companies’ sustainability. In light of the figures we have, government must provide a response to the immediate needs that came up in the survey, and provide financial solutions that will allow industry a continued effective existence. Otherwise, we are gravely concerned for a potential collapse of the hi-tech industry as we know it, which would lead to an undermining of the entire economy.”

Aaron Aharon, CEO of the Innovation Authority said: “The picture painted by this comprehensive survey shows that hi-tech companies, with an emphasis on smaller startups, are facing significant challenges.

"The Innovation Authority continues to monitor conditions in the hi-tech industry, and is committed to providing tools to assist its recovery and the growth of the entire Israeli economy,” he said.