Israel innovation chief says work-from-home could challenge tech ecosystem

The recent shift toward working from home could challenge Israel’s tech ecosystem, the head of the agency in charge of fostering that ecosystem has warned.

“It could make entrepreneurs employ workers abroad,” Aharon Aharon, the CEO of the Israel Innovation Authority, said in an interview.

“One of the disadvantages that are a result of this crisis is that the location of the workplace… is unclear,” he said. “In the global world, and this is something that worries me, the fact that people work remotely can divert activity from Israel to overseas,” he said. This is a “risk.”

Once employers get used to working with workers remotely, there are no limits on where they could be, Aharon said. On the flip side, Israeli workers may prefer working in Israel for an international company with higher salaries and better conditions than those offered by a fledgling local startup.

This could further exacerbate the shortage of skilled workers that is hampering the growth of Israel’s tech economy, he said.

The coronavirus pandemic, which has made employee location less relevant as social distancing has inclined people to work from home, is starting a trend in Israel that is seeing startups increasing their reliance on outsourcing, tapping into a flexible, global pool of talent, a survey published last week showed.

Aharon, 66, who took the helm of the body in charge of setting Israel’s tech policies in 2017, is set to leave his post at the end of the year. In a wide-ranging interview with The Times of Israel held earlier this month, he discusses the potential of Israel’s newly forged ties with the United Arab Emirates (he sees great potential) and plans for a program to increase funding for early stage startups that have been suffering from a lack of investment — even more now, thanks to the pandemic.

He also describes how the tech ecosystem in Israel is maturing, and what tech fields will continue to boom — artificial intelligence and the convergence of biology with other sciences for medical purposes, in which Israel has an edge over global competitors.

Even so, he warns, Israeli tech firms must not rest; they should always be in “panic mode” because of the fast shifting technological map globally.

Aharon declined to reveal where he is going from here, although his plans are already made and he will be doing something he hasn’t done before, he said.

He holds two degrees from the Technion-Israel Institute of Technology, in computer and electrical engineering. He began his career at IBM, and then moved on to work in a number of private sector posts, including at Zoran Corporation and Seabridge. Aharon was also involved in setting up two startups that were later sold in exit deals. He was instrumental in the establishment of Israel’s Apple activities.

UAE, gateway to the Arab world and the East

The newly struck relationship with the UAE, Bahrain — and possibly other Gulf countries — will open the door to Arab markets, he said. While Turkey was once a gateway to the East, relations with this Western Asia country have been fraught in recent years, as its leader Recep Tayyip Erdogan has demonstrated hostility to Israel.

“Now, via the UAE, things will be much simpler and more convenient. With just a three-hour flight, we will gain entry to the East,” he said.

The UAE is a “huge economic powerhouse” and very advanced in some areas, including financial technologies. Now, the Emirates are looking to gain an edge in a variety of other fields, including cybersecurity and food and agriculture technologies.

“We can enjoy joint ventures with them,” Aharon said.

Israel and the UAE normalized relations in September, as did Israel and Bahrain, paving the way for open business and trade ties in which technology will play a key role.

Asked if the UAE’s no-corporate-tax policy could endanger Israel’s startup sector by drawing companies to set up operations there instead of locally, Aharon said he doesn’t see that happening.

“Tel Aviv is one of the most liberal cities in the world, with a thriving tech ecosystem,” he noted. The tax regime in Israel for startups is “very friendly”; they pay taxes only after they start making a profit, which “takes a long time,” he said. “Our startups get the support they need here.”

UAE funds should be channeled into much-needed infrastructure projects in Israel, he said. “A massive amount of money is needed. And if we manage to strike a right balance, there won’t be any tension with security considerations.”

Israeli tech coming of age

Israel’s tech ecosystem is undergoing a process of maturation that is seeing companies grow larger and employ more people – in sales and marketing for example, and sometimes in manufacturing, other than just in research and development.

“We have over 30 unicorns in Israel,” he said, referring to privately held tech companies that have a valuation of over $1 billion.

At the end of 2019, and before the coronavirus struck, Israel had 4,500 high-tech growth companies with revenue from sales, compared to 2,400 in 2011, according to data compiled by the Israel Innovation Authority.

“The industry is coming of age,” he said, “and that is good for the economy.”

Many of these tech firms have fared very well in the pandemic, he said, which has helped spur the world faster toward a digital sphere, as lockdowns and social distancing required almost everything to move online.

At the end of 2019, and before the pandemic struck, high-tech exports reached an all-time record of $45.8 billion, accounting for 46% of all Israeli exports. Most of the growth in high-tech export stems from software and R&D exports, the annual Innovation Authority report for 2019 showed.

Even so, he said, in a tech world that changes very fast, all the time, “we should always be in panic mode,” he said. “The world is global, and the only way to stay ahead is to run faster.”

Israel must also close the gap between its tech economy – which accounts for just some 9% of the nation’s total workforce but is considered the economy’s main growth engine — and the more traditional economy, made up of low-tech industries that employ low-skilled workers with low productivity levels, which struggle to keep up with competition from a world that is both more globalized and digitalized.

“We meet the second economy every day, in our daily lives,” he said, explaining that the technological innovations developed in Israel are unfortunately often not implemented locally, and thus their impact does not trickle down.

For example, Israel has hundreds of companies in the smart transportation field, and all major Tier-1 car manufacturers have been flocking to Israel to be part of these new innovations. At the same time, the country’s transportation infrastructure and public transportation system are outdated, without adequate synchronization between trains and buses, he said.

Productivity in these sectors, the traditional industry and government services, is 30% lower than in other OECD countries. “We must connect the two economies, and raise productivity,” he said.

The Innovation Authority has set up programs to address this gap, he said, “but it is still a drop in the ocean.”

Artificial intelligence is one field in which Israel will continue to excel going forward, Aharon said. According to data compiled by the Authority, AI has the most companies working in it of any high-tech sector, and the ability of entrepreneurs to identify the potential in this field at an early stage and enter it quickly has made Israel a world leader in AI.

Bioconvergence — the intersection of biology with other sciences for medical purposes — is also a field with a lot of potential that Israel can excel in, he said. The authority in July set up a NIS 13.5 million ($3.9 million) program to boost the nation’s edge in the field.

“The field can be a growth engine for Israel’s high tech,” Aharon said, adding that the coronavirus has given this sector a “big push.”

Robotics, drones, life sciences and food technologies are all fields Israel has potential to excel in.

More money for early stage startups on way?

The Innovation Authority is planning to launch a program soon to provide funding for early stage startups, which even before the start of the pandemic were suffering from a shortage of investment as VC funds and private equity and institutional investors, globally, have switched to investing in less-risky, later stage firms that have a proven record of sales.

“There is almost no risk in these later stage firms, with a promise of a lot of return,” Aharon said.

Investments in Israeli startups valued at up to five million dollars has decreased both absolutely (to $509 million in 2019 from $853 million in 2018) and as a percentage of total investments in Israeli startups (to 6% from 11%).

In addition, large tech firms have starting setting up their own, in-house startup hubs, which won’t become part of Israel’s startup ecosystem.

The lower number of seed-stage companies is also an intrinsic part of the maturing of the ecosystem, with serial entrepreneurs avoiding setting up low quality firms, thus leading to a reduction in the total number of startups in the ecosystem.

Analysis conducted by the Israel Innovation Authority indicates that recent years have shown a decline in the number of startups added to the Israeli innovation ecosystem.

From 2012 to 2017, 1,000 new startups were established per year, with a net of 500 companies added per year (the number of new startups after deducting those that closed). However, since 2015, there has been a decline in the number of new startups, with 800 registered in Israel in 2019, a net addition of just 360 companies — the lowest number seen in a decade.

The decline in the number of new companies also means a decline in the diversity of technologies and new fields of innovation developed by Israeli high-tech. This drop could hinder Israeli high-tech’s dynamism and flexibility, as well as its ability to continue to maintain its position as a world leader in up-and-coming technology trends, the Authority said in its 2019 annual report.

The total investment in seed-stage companies has remained constant in recent years, with a decline in 2019.

The Innovation Authority already operates projects aimed at supporting early stage startups, such as the Tnufa program, which helps entrepreneurs refine their ideas and bring them to proof of concept stage, as well as startup incubator programs, which work to advance early stage startups. Startups that are fostered in an incubator program have shown to have three times the success rate of others, Aharon said.

The concept and the budget of the new funding program are still being formulated, Aharon said.