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Pandemic presents opportunities and pitfalls for Israeli tech sector, report says

Written by NoCamels Published on 

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The country’s tech startups are extremely innovative, but is bogged down by a lack of homegrown talent and investors.

The COVID-19 pandemic poses new opportunities for the Israeli tech sector to become a key driver in a truly global, digital age, but there are a number of important potential pitfalls that must be watched, according to a new report by Start-Up Nation Central (SNC), an Israeli NGO that tracks the local innovation ecosystem.

As the world adapts physically and mentally to remote living, working, socializing, and learning, we are nearing “a new digital equilibrium” in a new normal that has highlighted a “need for digital resiliency in our homes, businesses, classrooms, and public facilities, SNC says in a position paper that accompanied the report.

Israel is already a leading player in the software, data, and smart sensors industries that place it at an “excellent starting point” for a post-pandemic era that will redefine work, healthcare, manufacturing, education, and just about every sector, the report reads. SNC notes several major industries where strong tech capabilities will also see an increase in demand, namely cybersecurity, digital health, fintech, industry 4.0, and agrifood tech.

Each of these industries is expected to see growth in various sub-sectors as operations move online and become more remote, including cloud and infrastructure security, remote medical monitoring and telemedicine, industrial robotics, supply chains, as well as automated yield and harvest platforms.

In addition, Israel has a highly adaptive ecosystem that is “evident in both the generation of hundreds of innovative new tech startups each year, and the rapid pivoting of existing companies, all with an eye toward new market challenges,” writes SNC.

The ecosystem’s deep tech orientation has resulted in a significant B2B focus that is “much more than comparable ecosystems in other countries.” In turn, Israeli tech companies have extensive experience with remote work and collaborations with large corporations, which are “crucial features in times when the traditional ways of doing businesses are disrupted worldwide,” SNC explained in its report.

The Israeli tech sector’s main goal should be “to maximize [its] long-term value” including spillovers to the rest of the economy, helping more companies grow, and maintaining companies’ core operations in Israel, according to the report. Policies must be put in place to balance human capital and financial capital alongside “constructive conditions for conducting proofs of concepts locally.”

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Read this: Israel Innovation Authority adds USD 115 million to support startups during COVID-19 crisis

Tech’s stumbling blocks

This is where the pitfalls lie as well. Israel is notoriously short on tech talent, with some 18,500 open tech positions as of last year. One of the main contributing factors to this shortage has been the tech sector’s reliance largely on non-Orthodox Jewish Israeli men, a limited resource that has been nearly exhausted.

Meanwhile, Arab employees made up just 2% of the overall number of high-tech employees in 2018, according to a joint report on the state of the tech sector released earlier this year by SNC and the Israel Innovation Authority. In the ultra-Orthodox community, representation in the tech industry remains low and stands at approximately 3% (primarily ultra-Orthodox women.) The rate of women employed in the sector, meanwhile, is at a standstill at about 30%, with just 22% for technology positions and 18% for tech management roles.

“The high-tech industry is the country’s most productive sector, and without the inclusion of many thousands of new workers from diverse populations and geographies, this industry will continue to disengage from the Israeli economy—an outcome with potential damage to the Israeli socioeconomic fabric that cannot be underestimated—to the point where the high-tech industry would be a foreign element in Israel,” wrote Eugene Kandel, a prominent Israeli economist and the CEO of Start-Up Nation Central.

While there have been efforts by the government and the tech sector itself to integrate these populations in recent years, progress has been too modest. SNC notes that the “proliferation of remote work in the new digital age has created a unique opportunity to change the status quo and include more underrepresented populations in the tech sector.”

Already, the high demand for engineers has led to rising salaries and widening inequality, culminating in growing resentment towards the sector in some circles, SNC said in its latest study. This is a dangerous path, it warns, as the tech sector “has gradually become detached from the mainstream Israeli economy,” with many firms opting to relocate their headquarters to other countries to be closer to target markets and investors.

“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 sector’s gradual disconnect from the overall economy may leave it vulnerable to populist legislation that sees in it a ‘foreign colony’ intent on 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,” SNC’s position paper reads.

Read this: Jerusalem a rising powerhouse for Israel’s tech scene, report says

Another potential stumbling block is the local tech sector’s dependence on foreign investments, which is a growing concern. Currently, most equity investments originate from non-Israeli VCs, and the vast majority of limited partners in Israeli VC firms are foreign as well, SNC reports.

While this is a vote of confidence in Israel’s tech sector, the authors says, “In times of crisis it creates a vulnerability as investors tend to increase their home bias. Travel restrictions make this home bias much stronger than in the 2008 crisis.”

The global health crisis presents an opportunity to reduce dependence on foreign capital and rebalance between local and foreign sources of investment capital, while simultaneously attracting local institutional investors and encouraging Israeli savings to be invested in Israel’s economic engine—its tech sector, the report reads.

The COVID-19 pandemic presents an opportunity to “reimagine the relationship between Israeli high-tech and the rest of the economy,” the SNC position paper states, winding down on a more hopeful note.

“In the dawn of the post-pandemic new digital age, pairing the pressing needs of Israeli society with the strength of its tech engine can result in unparalleled achievements” where Israel can transcend its status as a startup nation and become “the leading nation in providing its citizens—and ultimately the world—with cutting-edge digital solutions in health, education, and welfare.”

This article first appeared in NoCamels, which covers innovations from Israel for a global audience.

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