About 50% of early-stage startups have cash horizon of less than six months – survey

With Israel’s war with the Hamas terror group ongoing for more than two months, about 50 percent of early-stage startups say they are struggling with a survival horizon of less than six months, according to a survey by the Israel Innovation Authority.

The survey conducted among a sample of 500 early-stage startups over the past month – between November 14 and December 11 – showed that attracting and obtaining critical financing is the biggest challenge during the current war period, in addition to the recruitment of customers, and grappling with the local uncertainty of the war period.

Thousands of tech workers and startup founders have been drafted to the army as Israel called up more than 350,000 reservists amid the war that broke out after some 3,000 Hamas terrorists burst into southern Israel on October 7 from the Gaza Strip and killed 1,200 people, most of them civilians, and abducted at least 240.

The massive callup presents challenges in particular for early-stage startups, both in terms of attaining critical funding, as they are perceived as high risk, and in terms of their daily operations. Moreover, the uncertainty around the duration of the war and its magnitude has kept foreign investors away. That’s as about 80% of venture capital investments in local high-tech startups were generated from foreign funds in the years 2021 and 2022.

The findings of the survey by the Israel Innovation Authority, in charge of directing the nation’s tech policies, showed that the majority of early-stage startups have a financial runway of up to six months, while 28% indicated they have up to three months before they run out of cash reserves and need to raise fresh capital.

Even more worrying, 56% of the surveyed founders and managers of early-stage startups fear that there is a high probability that they will not succeed in raising another round of financing, according to the survey.

“The high-tech industry is one of the important fronts of the economy and of the country’s national resilience,” said Israel Innovation Authority CEO Dror Bin at the Globes business conference in Tel Aviv. “From the conversations and meetings, we have had in recent weeks, with all the players in the industry, investors, entrepreneurs and companies alike, we understand the difficulties of financing and the challenge of raising funds that early-stage startups are facing to secure their continued development.”

“Many younger startups that have cash for less than three months will have to raise money in the coming year: how do you raise funds when investors are sitting on the fence or when you are recruited into reserve duty?” Bin questioned.

The Israeli economy’s dependence on the tech sector has significantly grown in the past decade, and it now contributes 18% of GDP, versus less than 10% in the US, and about 6% in the EU. About 14% of all employees work in the tech sector and in tech jobs in other sectors. The Israeli economy relies on high-tech products and exports, which make up about 50% of total exports, as well as taxes from the sector.

Even before the outbreak of the war, Israeli tech companies were suffering from a severe plunge in investments of as much as 70%, exacerbated by a global economic slowdown and the contentious judicial overhaul advanced by the government earlier this year.

“One of the challenges, even before the war, is the dependence on foreign investments,” said Bin. “Even more in times of crisis, it is a challenge when foreign money runs away, so we need Israeli money to continue support.”

The worrying trends that have intensified since the start of the war prompted the Israel Innovation Authority to launch emergency funding plans and investment incentives in recent weeks with the potential of streaming about NIS 1 billion to cash-strapped startups, providing them with a lifeline, Bin said.

“Our goal is to extend the survival of these companies and help them get through the war, and then they will be able to raise funds in a calm manner,” said Bin.

Bin noted that one of the main challenges of the high-tech industry is the gradual decline in the number of startups being formed in Israel over more than a decade, a negative trend that has intensified against the backdrop of the coronavirus crisis, the contentious judicial overhaul and now the Hamas war. From a record of 1,400 startups established in 2014, the number has plunged to about 600 startups in 2022, according to Bin.

“This is happening all over the world,” said Bin. “If this continues, it will not be healthy for Israeli high-tech, after all, startups are the growth engine of the entire sector.”

“This is the main asset of Startup Nation that we need to protect, if we want to see growth in the next decade,” he remarked.