Startups should do their utmost to hold on to their workers in order to get through the economic crisis caused by the coronavirus, Israel’s tech chief said, warning that the loss of manpower could spell the end of the nation’s thriving startup ecosystem.
Startups should “preserve their workers and not let them go,” Ami Appelbaum, the nation’s chief scientist and chairman of the Israel Innovation Authority, said in a phone interview.
“It is globally hard to find good people,” he said.
The Innovation Authority is in charge of setting out Israel’s policies for the tech industry.
The coronavirus, which has killed thousands globally and rocked economies, may deal startups a harsh blow, he warned.
“I expect there will be many closures,” Appelbaum said, as firms struggle with fixed costs — like rent and salaries — while they are unable to market or sell their products to clients worldwide because of lockdowns and canceled flights. Investors and VC funds are also likely to clamp down on spending due to the uncertain times.
Five percent of Israeli tech companies have already fired workers, and 64% have frozen new hires, an unofficial survey by Israel’s Viola investment group has shown. The venture capital firm queried 135 chief financial officers and human resources staffers at tech companies to study the effects of the virus on the Israeli tech industry.
Companies “cannot go out and continue to sell their products because there are no flights,” Applebaum said in the interview. Marketing managers cannot demonstrate new products because “everyone is working from home.” All of this will affect revenue stream, both for companies that are already selling their products and those that are just starting to sell, he said.
Alongside this, injections of capital into the Israeli tech ecosystem have partially stopped and will continue to dry up, he said. The uncertainty of when the crisis will end is the biggest source of worry, he noted.
Global startup financing is already taking a hit, according to New York-based data firm CB Insights. Funding to private companies in the first quarter of this year is down nearly 12% compared to the same period a year earlier, on pace to reach $77 billion. This figure represents a 16% drop on fourth quarter 2019 funding, the data shows. The projected decline in the first quarter of 2020 “will be the second steepest quarterly decline in the past ten years,” second only to a 36% drop in the third quarter of 2012, the report said.
The most vulnerable tech firms are the smaller ones, Appelbaum said, especially those that are developing a physical product, such as a medical device, as opposed to developers of software and apps. The latter don’t need to physically send or demonstrate their product for it to be used.
Another risk factor for companies that make physical products is dependence on imports for parts. In the tech sector these chips and precision parts are often delivered by air freight rather than shipped, and many flights have stopped their services.
The firms and the Israeli government will have to make a special effort to ensure that the supply chain of these parts won’t be halted, he urged.
Appelbaum has more than 36 years’ experience in research, development and senior level management in the field of semiconductors. Before becoming the nation’s chief scientist and chairman of the Innovation Authority in September 2017, he served for 22 years at the California-based firm KLA Tencor, a $18 billion equipment maker for the semiconductor industry.
The coronavirus has caught Israel at a vulnerable time. The nation is experiencing a political stalemate with three elections within a year, and budgets have been put on hold. Indeed, the Innovation Authority in January said it would be halting the grants it provides startups for research and development projects due to the lack of approved funding.
Appelbaum said he hoped to soon be able to finance the grants that have already been approved.
“From the moment they approve the budget, we will be immediately able to start spending the money,” he said.
Seeking for coronavirus solutions
In light of the coronavirus, the Authority has also led an initiative to provide, together with a number of other bodies, NIS 50 million ($14 million) in grants to Israeli tech companies developing tools to combat the coronavirus pandemic.
The proposal seeks to finance solutions for diagnosing the illness, reducing its spread, expanding remote health care, developing antiviral products, aiding patients in quarantine, digitally monitoring the virus and assisting respiratory intensive care units, among other suggestions.
The Innovation Authority, the Economy Ministry and Manufacturers’ Association also called on manufacturing plants to submit plans for accelerating the production of equipment for fighting the virus.
The NIS 50 million will be new funds injected into the startup ecosystem, Appelbaum explained, adding that the money will likely lead to new products that would have probably never been developed without the outbreak of the virus.
He also believes that the tech industry and the advanced manufacturing sectors will get a chunk of the NIS 5 billion Finance Minister Moshe Kahlon promised to inject into the economy to aid those affected by the crisis.
How much these sectors will get is still to be determined, Appelbaum said, but it is clear they will be getting part of the funds, seen that the tech sector is the “growth engine of Israel.”
What is the scenario you see when we come out of this crisis? What can we expect, where will we be?
The crisis will undoubtedly hit the tech industry globally, he said, but it will also help create a plethora of products that otherwise would not have been developed, such as new ways to detect illnesses, diagnostic systems for viruses that don’t yet exist, and new medical imaging technologies.
“I already see them coming,” he said.
The use of artificial intelligence technologies for medical purposes — to analyze genomes and populations and clinical data — will also see a boost, he said.
“With good management — and I don’t have reason to believe that there won’t be good management — Israeli high-tech will continue to lead and be the growth engine of Israel and will continue to forge partnerships in the world.”