Israeli startups and growth tech firms are employing some 80,000 engineers and programmers abroad to make up for the shortage of skilled personnel in the so-called Startup Nation, the country’s innovation chief said in a wide-ranging interview with The Times of Israel.
The shortage of qualified workers “continues to grow,” said Aharon Aharon, the head of Israel’s Innovation Authority, which sets out the nation’s tech policies. “We are missing some 15,000 qualified engineers and Israeli companies employ some 80,000 workers outside Israel.”
The shortfall of manpower could hamper the growth of a sector that has powered Israel’s economy for more than a decade, industry heads, analysts and government officials have warned.
There were about 700 new startups set up in Israel in 2017, with workers often opting for the challenge of starting their own company rather than joining an existing one, and successful entrepreneurs returning to the market with new ventures.
In addition, Google, Apple, Deutsche Telecom, Bosch and the rest of the 368 foreign multinational corporations active in Israel operate numerous R&D centers that offer steep salaries for the best brains.
So Israeli startups and growth companies — defined as those with initial sales of some $1 million — who are faced with ballooning salaries due to competition for talent, now employ workers in the Palestinian Authority and Ukraine, and to a lesser extent in Greece, India, China and even Burma to develop high-end software.
This trend is simultaneously a necessity for the firms and a threat to the nation’s tech ecosystem, Aharon said, as it leads to the danger of brain drain and the transfer of intellectual property outside Israel.
“The danger is we will have competition that will be hard to cope with,” he said.
Summing up the year that has passed, Aharon, the former CEO of Apple in Israel, who was appointed to the post of innovation chief in December 2016, said that all indicators point to 2018 having been another “good year” for Israeli high-tech.
At 4.3% of gross domestic product, the investment in civilian R&D is still “at a very high level” and VC investment in Israeli tech companies is likely to surpass the record level of $5.24 billion reached in 2017, he said. In the first three quarters of 2018, VC investment in Israeli tech was already $4.5 billion, according to data compiled by IVC Research Center, which tracks Israel’s tech industry.
“Many deals are being signed now,” he said, which makes it difficult to pinpoint a final figure for 2018. “But we see that the pace is the same as last year and even more.”
The local industry is also showing signs of maturity, he said.
The number of startups being set up in Israel decreased from 2014 to 2017, and an increasing number of startups were shuttered yearly in the same time period, according to a report by Startup Nation Central, a nonprofit that tracks the industry.
Data released by SNC in August shows that in 2017 some 700 new startups were set up and 408 closed down — a net growth of 292. This compares to 1,001 startups set up in 2014, when SNC started collecting the data, and 221 firms that closed down that year — a net growth of 780 new firms.
This slowdown in new startups is due to a global trend in which investors “prefer to bet on a winning horse and invest a lot of money in it,” and also due to a maturity in the industry, Aharon said. There are “significantly bigger funding rounds over a smaller number of companies,” and for companies at larger valuations, he said.
In addition, startups are living longer. “It takes companies longer to fail,” Aharon said. Whereas startups used to fold after a year or two, now “we see a tendency toward more than two years.”
A boom in artificial intelligence
This year, 2018, was also characterized by a “massive” burst in activity in the use of artificial intelligence technologies, he said, adding that almost all projects the authority sees use AI.
Indeed, according to data published by IVC Research Center, AI exits in the first half of 2018 were higher than for all of 2017.
Since 2010, more than 1,200 AI companies have been set up in Israel, of which 79% are still active, 6% have been acquired, and 15% have stopped operations.
Aharon said that 2018 also saw a continued growing interest from investors from the East, mainly China, but also Korea and Japan, he said.
“On one hand it diversifies sources so we are much less exposed to geographical crises, but on the other hand the investments from China are relatively new and we need to learn how to deal with them,” he said.
According to IVC data, foreign investors made up 77 percent of investments in Israeli tech firms in the past two years, with US investors the still most dominant players, capturing 35% of the capital raised by these firms. Chinese, British, Japanese and German investors accounted for around 3% of investments each, the data showed.
The role of multinational corporations operating in Israel is “very significant,” he said, even if the government does not need to provide them with grants anymore to set up shop in Israel, as it did for example 10 years ago for General Motors, to encourage it to set up an R&D center in Israel and jump-start the local autotech industry, or as it did for Barclays Plc and Citi, encouraging them with grants to set up tech incubators to boost the local fintech industry.
“Multinational corporations (MNCs) are coming here anyhow. In the past two years 60 MNcs came to us, from the East, US and Europe, without us helping them,” he said. “So, there is no need for us to help them.”
These multinationals should get government assistance only in specific areas the government wants to promote — like fintech and the automotive industries in the past — and now life sciences.
Indeed, the authority recently launched a grant track, called Track 35, to encourage life sciences corporations to come and boost the industry in Israel.
MNCs do 50% of Israel’s nation’s civilian R&D, and they largely deal with the most cutting-edge technologies, he said. They train employees to high standards, and they also have a “spillover effect” on the industry as employees who have trained with them go on to set up their own firms.
What the government must do now is to make sure these companies increase their activities in Israel — by setting up production facilities, registering their intellectual property locally so as to pay taxes locally, and expanding their research and development operations to Israel’s geographical periphery, so as to widen the circle of people who benefit from the tech boom, he said.
The impact of US President Donald Trump’s tax reform, in which corporate taxes were cut, is not being felt yet in Israel, he said, but has generated some uncertainty as to the tax structures of these firms. Meanwhile, he said, there seems to be no risk in them leaving Israel because of the US reform.
“At the moment it doesn’t look like they are leaving,” he said. These companies, including Apple, Facebook, and Amazon, are all growing in Israel and continuing to employ people, he said.
Aharon sees the industry continuing to grow in 2019, though there are challenges he says must be tackled head-on.
Those traits that have been drawing foreign multinational corporations will continue to be part of Israel’s tech ecosystem, he said, mainly “talent, multidisciplinary abilities, and the entrepreneurial spirit,” he said. “These three characteristics, that often enough are in the same person, are very important characteristics in which we have a very big relative advantage.”
In addition, there in an advantage in Israel being such a tiny country, “as everyone knows each other.”
However, competition from other nations is looming large. “They are all catching up,” he warned, citing increased competition from China, Japan, Singapore, Canada, Europe and many countries in Eastern Europe, all of which have increased their civilian R&D budgets and are getting government support for their tech sectors.