Small startups hurt most by wartime challenges – report

Survey finds startups as well as older tech firms need funding assistance amid call-up of reserves for Gaza war and difficulties in nabbing foreign investment and clients

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

For illustration: Workers in a startup (Vadim_Key; iStock by Getty Images)
For illustration: Workers in a startup (Vadim_Key; iStock by Getty Images)

The massive call-up of reserves for the war with the Hamas terror group that has been raging for more than two months is taking a heavy toll on both small startups and more mature tech firms, according to a survey by the Start-Up Nation Policy Institute (SNPI) released on Wednesday.

The Israeli Defense Forces mobilized more than 350,000 reserve soldiers, in the aftermath of Hamas’s devastating October 7 attacks on southern Israel, in which terrorists killed some 1,200 people, most of them civilians, and took about 240 hostage.

Among the reserves are employees working in the tech sector, the growth engine of the Israeli economy. As a result, many startups are faced with the need to do business during the war period in the absence of key personnel, including founders, CEOs, and heads of R&D and sales, which has been affecting their day-to-day operations as well as their ability to raise critical funding.

To counter the war’s impact on startups and tech firms, the Israel Innovation Authority, in charge of directing the nation’s tech policies, has launched a special funding program for startups with a short runway. Additionally, several private emergency funds have emerged, with the goal of investing in war-affected startups.

To assess the war’s impact, SNPI conducted a survey among 600 startups and tech firms that have applied for emergency funding initiatives. The data from the survey showed that small startups of up to 10 employees that had raised less than $5 million prior to the outbreak of the war make up the bulk of the applicants and are hit hardest by funding difficulties and the absence of workers.

Meanwhile, a breakdown of the startups that submitted applications through the first week of December also found that one-fifth were startups founded before 2017.

Uri Gabai, CEO of the Start-Up Nation Policy Institute (SNPI) Policy Institute. (Micha Loubaton)

“While Israel is fighting on the security front, the economic front must not be neglected,” said SNPI CEO Uri Gabai. “Small startups that are essential for Israel’s future are in real danger, while the older and larger ones are also having difficulty getting through the current period.”

Out of the surveyed startups, more than 20% said that their operations are being impacted by having employees called up for reserve duty. Among those companies, 39% have 1 to 5 employees, and 31% have 6 to 10 employees.

“Regardless of the percentage of employees who were called up, the absence of a CEO, head of R&D or head of sales has a big impact on a company’s operational capacity,” said Danny Biran, the author of the report. “For example, the CEO typically plays a central role in fundraising, and their absence significantly hampers this activity, on top of all the other fundraising challenges.”

Almost 40% of the startups said they are experiencing challenges in fundraising for various reasons, including investors retracting agreements following the outbreak of the war, delays in meetings with potential investors, or difficulties in scheduling meetings. Many of the companies reported that investment processes were halted by both foreign and Israeli investors.

Difficulties in fundraising is highest among tech firms created before 2017 who secured more than $20 million in funds before the war, as about 50% said they were struggling to raise fresh capital.

“These companies need to raise more money than younger companies, and are therefore more impacted by investors’ general ‘lack of appetite,'” said Biran. “Older companies that haven’t raised enough money in the past to weather the current storm are less attractive to investors.”

Israeli reserve soldiers seen during military training in the Golan Heights, northern Israel, October 30, 2023. (David Cohen/Flash90)

Enterprise software and digital health are the sectors where the highest percentage of startups reported a negative impact of the war on activities in Israel, including a decline in sales to local customers, termination of trials or pilots, and delays in payments by local customers. During the war period, trials and collaborations with Israeli hospitals were halted, which is negatively impacting product development of digital health startups, while traditional manufacturing and defense industries have stopped any purchasing orders, according to the survey.

Many startups dependent on the global market reported difficulties in inking agreements with international customers, partners, or developing other sales channels. That’s also due to the suspension of most international flights to Israel, constraining the ability to meet customers and partners or participate in trade shows.

“International customers and partners hardly visit Israel, hurting business activities of many companies,” said Biran.

Biran lamented that the funding programs and emergency initiatives the Israel Innovation Authority can offer during the war period are limited to providing support for industrial R&D. However, many companies are in need of monetary assistance for business activities, such as marketing, sales and customer support, and not necessarily for R&D, he added.

“Israeli high-tech, which is experiencing an ongoing crisis in 2023, is a player in a global competitive market – the world is not waiting for us,” said Gabai. “The Israeli government must act immediately to save the high-tech industry and ensure that the day after [the war], Israel’s economy remains as strong as possible.”

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