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Israel ‘well positioned’ to benefit as coronavirus fast-forwards tech revolution

Paper by Start-Up Nation Central says Israel should help drive the pandemic-induced ‘new normal’; warns of tech sector ‘disconnect’ from rest of the economy

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Illustrative image of innovation, AI, machine learning and robots (ipopba; iStock by Getty Images)
Illustrative image of innovation, AI, machine learning and robots (ipopba; iStock by Getty Images)

As the coronavirus pandemic fast-forwards the adoption of technologies from online shopping and banking to education and healthcare, Israel is “well positioned” to make the most of this digital revolution to emerge “stronger and more resilient” from the crisis, a new position paper by Start-Up Nation Central (SNC) says.

“COVID-19 could be the pivotal moment heralding the true beginning of the digital age,” the nonprofit, which aims to connect Israeli startup firms to corporations, governments and organizations around the world, said in a statement. “Rather than standing back and watching as this ‘new normal’ unveils, forward-looking nations, industries, companies and individuals should leverage the digital opportunities generated by the crisis in order to emerge stronger and more resilient.”

“Israel’s society and economy in general — and its tech sector in particular — should view the COVID-19 pandemic as an opportunity,” the statement said. “Israel’s tech ecosystem is well positioned to help establish the ‘new normal’ and drive its evolution.”

Yet Israel should be wary of the “disconnect” that is occurring between its tech sector and the rest of the economy, something that is already leading to resentment in some circles, and could lead to populist legislation that seeks to keep talent and innovation local, while curbing the flow of foreign investment into the country.

Self-employed Israelis and small business owners participate in a rally calling for financial support outside the Knesset in Jerusalem, on April 19, 2020 (Yonatan Sindel/Flash90

The nation has the highest ratio of startups per capita of any country in the world and an average of almost 1,000 new startups every year in the past five years, SNC’s position paper, “The New Digital Age,” said. With this plethora of startups and culture of entrepreneurship, Israel has the ability to “quickly adapt” and pivot activities to new market challenges.

“The nation’s longstanding expertise in software, data, sensors and cybersecurity provides an excellent starting point for entering the new digital age,” the statement said. Israel also has a unique combination of both a startup culture and “technological depth,” rooted in its strong academia and military intelligence units.

To be able to meet the opportunity, however, Israel must make sure to maximize the long-term value it gets from its tech sector, and make sure it spills over to the rest of the economy and society. At the end of 2019, just some 9.2% of the nation’s workforce was employed in the tech sector, according to the Israel Innovation Authority’s 2019 Annual report.

This goal of squeezing more value out of the tech sector could be achieved by helping more companies grow and maintain their core operations in Israel, SNC’s policy paper said.

Illustrative image of a startup company concept (relif; iStock by Getty Images)

To do this, policy makers should focus on creating “a sufficient and balanced supply of human capital” for the industry. At the start of the pandemic many tech firms downsized or stopped recruiting. However, with the new digital age on steroids ushered by the pandemic, “demand for skilled tech professionals is expected to surpass that of recent years,” the position paper said.

The widescale adoption of remote work has created a “unique opportunity” for the tech sector, which has been starved for talent over the last decade, to tap into a greater variety of populations, who are currently under-represented in the sector.

“Doing so would result in gains for the tech sector, as well as generate a spillover effect for population groups affected, dramatically changing the lives of tens of thousands of people. The efforts required to integrate these underrepresented populations will be significant, but the social and economic benefits will extend far beyond the tech sector. Seizing this opportunity requires a creative and coordinated policy across many government agencies, along with strong industry collaboration,” the statement said.

To make sure more value is extracted from the tech sector, policymakers must also make sure firms have the financial capital they need to grow and set up conditions for the startups to be able to test out their technologies and conduct proof of concept locally. This becomes even more relevant as foreign travel has been curbed, due to the coronavirus restrictions, which will make Israeli tech firms more likely to turn first to local potential clients rather than foreign markets, as has been the case traditionally.

Illustrative image of investments amid coronavirus pandemic (Julia_Sudnitskaya; iStock by Getty Images)

Despite several months of lockdown and travel restrictions, investments in Israel’s tech sector continued to be strong in the first half of the year, which may indicate that investors “are anticipating the new digital age, and are increasing their investments in tech accordingly,” the paper said.

Equity investments in tech firms totaled $4.59 billion in the first half of the year, compared to $3.45 billion in the first half of 2019, SNC data shows, and of $7.64 billion for the full year 2019.

This would be “consistent with the K-shaped economic recovery, in which the tech sector worldwide recovers strongly, while the rest of the global economy struggles for a much longer period.”

High uncertainty, disconnect is a worry

Even so, uncertainty regarding future investments remains high, the report said. And because Israel’s tech sector is highly dependent on foreign investors, mainly from the US, in times of crisis Israel is vulnerable because “investors tend to increase their home bias.” Travel restrictions imposed by the coronavirus make decision making from afar harder.

Israel should thus use this current crisis as an opportunity to reduce its dependence on foreign capital, by trying to attract local institutional investors “and encouraging Israeli savings to be invested in Israel’s economic engine – its tech sector,” SNC said. Because of the high risks associated with investing in startups, Israeli institutional investors that are in charge of investing the pension and savings funds of Israelis have traditionally largely steered clear of the tech sector.

The authors of the report also warn of a “disconnect” between the nation’s booming tech sector and the rest of the economy, which can lead to growing resentment toward the sector in some circles.

Eugene Kandel, CEO of Start-Up Nation Central (Emmanuel DUNAND / AFP)

“We began to see the telltale signs during the early stages of the pandemic, when support programs for high-tech companies were met with hostility by the general public,” the authors said. This could lead to “populist legislation” that could seek to curb foreigners from what could be perceived as “grabbing up all of the talent without sharing the profits.”

“This scenario is a serious threat to the sector’s sustainability and to the Israeli economy that depends heavily on the sector,” the authors said.

“The Israeli innovation ecosystem once thrived on a fruitful public-private partnership. But as the high-tech industry grew, it became more global and less Israeli, and that partnership has eroded,” they said.

In the new digital age, post-pandemic, a new partnership should be formed by making sure savings of the local population are invested in the tech sector, by strengthening the tech companies’ efforts to hire underrepresented populations and by connecting traditional Israeli businesses to advanced tech solutions, to bring everyone on board.

“All of these solutions can result in a new equilibrium that is mutually beneficial for Israeli high-tech and the rest of society,” the authors said.

The authors of the report show that over the past decade Israel has been a pioneer in adapting new technologies, faster than other tech ecosystems and has applied them across a wide variety of industries. These include artificial intelligence (AI), augmented reality (AR), autonomous technologies, big data and internet of things (IoT), which give it a global edge, the statement said.

The nation is also a leader in a variety of technologies that will become even more important in the post pandemic era – including cybersecurity, digital health, fintech, industry 4.0, and agri-food-tech.

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