Israel plans to start providing government guarantees for bank loans to startups that it hopes will help the companies remain in Israel.
The loans will enable cash-strapped startups to raise funds without having to resort to foreign venture capital funds or investors, who often pressure these firms to relocate their activities abroad, the nation’s innovation chief told The Times of Israel. The idea behind the initiative is to help keep Israeli companies in Israel.
Aharon Aharon, the head of the Israel Innovation Authority, which is in charge of setting out the nation’s innovation policies, said that the idea is for startups to obtain bank loans from Israeli and foreign financial institutions, which would be backed by guarantees provided by the Authority. If the firms cannot repay the loans, the guarantees would be triggered and the Authority would step up and repay the sum.
“The rationale is to keep the companies in Israel,” Aharon, who took office in February 2017 after having served as CEO of Apple Israel, said in an interview at his offices in Airport City, on the outskirts of Tel Aviv, earlier this month. “This will enable them to avoid dilution and stay in Israel.”
As a startup grows, it evolves from a small group of employees doing primarily research and development into a firm that needs to produce, market and sell its new product, tapping new customers in new places. This growth stage takes skill, time and a lot of money, and is also the phase that creates the most value for the company’s founders and shareholders — and the country it operates in, in the form of tax revenues.
For biotechnology companies developing a drug or a medical device, the task is even harder and costlier. To get through their Phase III testing — the last phase before international marketing approvals — the firms need to raise huge amounts of money to enroll patients and conduct studies.
Thus founders are faced with a difficult choice: If they don’t want to close down for lack of funds, they can either sell up and let a deeper-pocketed new owner take the next step of manufacturing the product or developing the drug, or they can find investors but see their stake in the firm diluted as new shares are issued for those investors. Moreover, these investors — often US or Chinese VC firms — often require the startups to relocate activities to their own home markets.
“So, what we see in the two cases is the value chain is not created in Israel,” Aharon said, calling the founders’ quandary “the startup’s death valley,” in which they either fail to raise the funds they need to grow or stand to lose primary ownership of their company.
In all of these cases, “Israel lost,” he said. “Even if the company was created here and the intellectual property came from here, and the local entrepreneurs were from here and the development happened here — in the end the value (creation) is in another place.”
An extreme example of this was the case of Kite Pharma, he said, a US firm that was bought last year by US bio-pharmaceutical company Gilead Sciences, Inc for a whopping $12 billion in an all-cash deal. The drug developed by Kite was based on intellectual property developed at Israel’s Weizmann Institute of Science.
“The $12 billion did not help the Israel industry,” he said, with Israel getting “zero” tax revenues from the deal even though the intellectual property came from Israel.
“The company was set up on the basis of what was developed in Israel but was set up from the beginning in the US, because the ability to raise money in Israel at an early stage was very small.”
Cases like that of Kite have prompted Israel to attempt to keep the value chain local by offering government-backed loan guarantees.
“I offer the entrepreneurs the option to get money without dilution,” he said. “This is very attractive. So, from their point of view, for them it is better to take my money.”
The European Investment Bank has already been issuing guarantees for bank loans to small and medium enterprises, including to Israeli banks that lend to Israeli firms. Now, in parallel, the Innovation Authority wants to set up a new program aimed at high-risk, high-growth tech firms, and is looking to enroll Israeli banks for the project.
The authority will shortly issue tenders for banks to bid for the loan guarantees program, Aharon said. “The banks are engaged.”
The skilled worker squeeze
In the interview, Aharon also talked about the challenges facing the Israeli tech industry, with the main one being that of finding enough skilled workers to fuel the tech boom. This is creating competition between Israeli startups and foreign tech giants that operate in Israel for the best workers, and is causing salaries to spiral.
The average salary in the high-tech sector is some NIS 21,000 a month, compared to an average salary in the economy of NIS 9,800 , he said. But a university graduate with a year of experience can get as much as NIS 23,000 to NIS 28,000 with a bonus worth two months’ worth of salaries, he said.
“We have become one of the most expensive countries to employ programmers and engineers; this wasn’t always the case, this is a dramatic change,” said Aharon. “We are almost 25 percent more expensive than Germany, and 20% more expensive than the UK. The only market we are equal to is certain areas in the US. Silicon Valley is still more expensive.”
Between 2005 and 2015, the average wage in high-tech rose by 38 percent, the Innovation Authority said in its 2017 annual report.
The Authority has set out policies that it hopes will double the number of employees working in technology-oriented firms in the next decade, increasing the number employees in the high-tech sector from 270,00 to 500,000 in 10 years.
Short-term solutions are already being put in place, Aharon said. These include coding boot camps to teach programming skills and a program to draw technologically skilled immigrants to Israel, he said. The nation should also further tap populations, like Arabs, the ultra-Orthodox and women, which have been largely left on the sidelines of the high-tech boom. Retraining older, skilled workers aged 45-plus is another way to increase the pool of workers, Aharon said.
Arabs could account for 20% of tech workforce
One key untapped resource is the Arab population, he said, which is highly educated but underrepresented in the tech job circuit, making up just some 1.5-2% of R&D jobs but some 21% of the population.
Since 2012, the government has set up a number of programs to help Arab Israelis integrate into the labor market and the high-tech industry, in an effort to boost economic growth and reduce income inequality. Just 5.7% of Arab Israelis are employed in the high-tech industry and only 2% of those are employed in R&D, according to Israel’s Innovation Authority 2016 report.
Things are gradually changing for the better, however. The share of employees from the Arab community working in R&D grew fourfold between 2008 and 2015, according to data provided by the Innovation Authority.
“It is easier” for Arab Israelis to find jobs in the tech field these days, said Aharon, because there is more employer willingness to hire them — perhaps because of the acute shortage felt — and more role models to inspire them. Nonprofit organizations and programs set up to help bridge the gap are having an impact, he said.
“I think the potential is incredible,” Aharon said. Arab Israelis could account for 20 percent of tech jobs in Israel, he said. “I believe so. It will not happen in a year, but I think so, there is a lot of potential.”