About 70% of tech firms face operating difficulties amid reservists’ call-up

Survey of the sector since the Israel-Hamas war broke out shows more than 70% of startups postponing or canceling orders and projects, others grappling with lack of financing

Sharon Wrobel is a tech reporter for The Times of Israel.

Reserve soldiers seen at a staging area near the Israeli border with Lebanon, northern Israel, October 23, 2023 (Ayal Margolin/Flash90)
Reserve soldiers seen at a staging area near the Israeli border with Lebanon, northern Israel, October 23, 2023 (Ayal Margolin/Flash90)

With Israel’s war with the Hamas terror group in its third week, about 70 percent of Israeli tech firms and startups are facing disruptions in their operations as a chunk of their employees have reported for reserve duty, according to a survey by the Israel Innovation Authority and Start-Up Nation Policy Institute (SNPI).

Israel has already called up more than 300,000 reservists, many of whom are working in local tech companies. Israel declared war on Hamas after some 2,500 terrorists broke through the fortified Gaza border on October 7 and killed, tortured and mutilated some 1,400 people, most of them civilians, including babies, children and the elderly. Many were murdered in their homes and some 260 were massacred at an outdoor music festival.

With an estimated 15% to 20% of tech sector employees mobilized, the survey conducted among a sample of 500 tech firms showed that over a quarter have been hit by both a shortage of key personnel and difficulties in raising crucial financing. Many firms also cited a decline in employee performance either due to a lack of childcare arrangements, with many schools and kindergartens shut, or because of mental stress.

The survey was carried out to identify the needs of Israeli tech companies and determine how they are dealing with the difficulties posed by the war, said the Israel Innovation Authority, in charge of directing the nation’s tech policies.

Over 70% of the respondent startups in the survey said they had to postpone or cancel orders and projects. They cited the inability to conduct pilots and clinical trials or advance important R&D projects, alongside difficulties in exporting and importing. About two-thirds of the companies said they had technical and operative problems connected to the war.

In addition, about 40% of the tech firms in the survey lamented that their efforts to raise financing, including investment agreements, got canceled or were put on hold. Out of the startups in danger of immediate closure, 60% reported funding difficulties. Only 10% are managing to have meetings with investors.

An illustrative photo of the Tel Aviv financial business district skyline. (Elijah Lovkoff via iStock by Getty Images)

“The slowdown in fundraising cycles and the mobilization of reserve soldiers to the war pose a challenge for a significant number of high-tech companies,” said Israel Innovation Authority CEO Dror Bin. “This preliminary survey and the many in-depth conversations we have had indicate that there is a significant number of high-tech companies with a short runway for whom the war has delayed or stopped their capital raising round.”

“This means that there are companies that are at risk of being closed in the coming months,” Bin warned.

These worrying trends prompted the Israel Innovation Authority last week to launch an emergency funding plan that will allocate NIS 100 million ($25 million) in aid grants to provide about 100 cash-strapped startups with a lifeline.

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.

Among early-stage startups, difficulties in raising capital and a revenue plunge are the main problems, while later-stage tech firms are grappling mostly with a decline in employee performance and shortage of human capital to keep operations running smoothly, according to the survey.

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.

Illustrative: A high-tech development center in Herzliya, Oct 30, 2020. (Gili Yaari/Flash90)

“High-tech is the leading sector of the Israeli economy, and returning to growth as quickly as possible is not only vital – it’s absolutely necessary,” said Ori Gabai, CEO at the research and policy institute SNPI.

“Over the years, one of Israeli high-tech’s strong points has been that it is based on the entrepreneurial culture, with hundreds of new startups established every year – but in a period of security-related and economic instability, startups are also the most vulnerable.”

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