The year 2020 was full of promise for the Israeli high-tech industry. In 2018-19, 55 Israeli venture capital firms raised a combined $4.7 billion. In 2019, some 3,700 Israeli tech startups raised a record $8.3 billion in 522 deals - but then came coronavirus.
According to the Financial Times, in China, the epicenter of the global outbreak, the number of venture capital deals dropped 64% in January and February compared to the same period in 2019. The amount of capital raised by businesses fell by two-thirds.
In Israel, a major concern at the beginning of the pandemic was a potential decline in overall sales, along with anticipated difficulties for startups to generate investment capital (similar to the previous two industry crises in 2001 and 2009).
Weeks later, the fears have morphed into reality.
According to Yisrael Gross, co-founder of L7 Defense, “the average financial loss for all Israeli startups is estimated at $2 million, in addition to $500,000 in lost income due to deferred transactions.
“Startups,” he told The Media Line, “were left with no choice but to downsize and as a result, 20% of all their employees were either laid off or put on unpaid leave. The remaining workers had their salaries slashed.”
The Israeli government is currently paying unemployment benefits roughly equal to 70% of the salaries of those placed on unpaid leave. The Finance Ministry also announced a $200 million support package for tech companies.
However, the economic blow sustained by the local industry could have been softened had the funds allocated to unemployment benefits – estimated at $1.65 billion per month – been transferred directly to corporations in order to allow them to keep their workers.
In the United Kingdom, for example, the government said it would pay up to 80% of the salaries of employees retained by businesses.
The high-tech industry, like other sectors, is an inter-related and dynamic ecosystem. Every producer, supplier and distributor is a cog in an intricate machine that grinds to a halt when one part fails. Therefore, when one company shuts down or experiences a downturn, this is liable to create a chain reaction impacting on entities that depend on it for services or components.
In this respect, the policy adopted by the UK could have a dual effect: that is, keep people working while preventing the psychological ramifications of mass joblessness. Employed workers are optimistic, more confident about their futures and, hence, more likely to spend money.
This could, in turn, have helped other sectors impacted by the partial lockdown such as restaurants, which had hoped for a significant increase in takeaway business to offset losses sustained due to Health Ministry restrictions preventing people from dining out.
According to L7 Defense’s Gross and other experts, 2020 will be a lost year for the high-tech industry.
“It takes 6 to 12 months to raise funding. Startups that haven’t raised funds until now are unlikely to do so this year,” he predicted.
Itay Katzav, CEO of TreatVA, a startup for the virtual adoption of pets, expressed concern over the ability to raise capital during the crisis.
“We are in discussions with a few investors. One of them said he will postpone investments at the moment because he doesn’t know how much worse things are going to get,” he told The Media Line.
A decrease in consumer spending, combined with uncertainty about the future – not only locally but also globally – makes it very difficult to raise funds.
Prior to investing, entrepreneurs generally acquaint themselves with business founders by meeting them face to face. But the pandemic makes fundraising more difficult as Israelis have essentially been barred from leaving the country. Meetings need to be almost exclusively conducted online.
Nevertheless, startups that manage to survive the crisis could come out on the other end even better positioned. In Gross’ estimation, they can possibly weather the storm by cutting costs and streamlining operations.
While some high-tech companies have reported significant losses, others have benefited immensely from the change in lifestyle brought about by the pandemic.
Video streaming sites and apps such as Netflix and social media platforms like Nextdoor have seen dramatic increases (about 80%) in traffic since the beginning of the outbreak.
“The corona era has changed the working habits of Israeli high-tech companies,” Dr. Lior Solomovich, an expert on information and communications technology at Kaye College, explained to The Media Line.
“Hi-tech companies are being creative to adapt themselves to the huge challenge facing them. One way they are doing it is by enabling their workers to work from home via video communication platforms,” he added.
Indeed, tools such as Zoom – a videoconferencing service – have become ubiquitous, as companies and schools have turned to such platforms to enable their employees to operate from home. Corporations providing cloud-based phone, video and messaging services, and those offering virtual-desktop technology are more popular than ever.
With millions of employees around the world working remotely, corporate technology infrastructures have been strained. Therefore, more and more people have turned to Amazon, Microsoft and Google for cloud computing.
Some Israeli startups are seeing a spike in customer adoption.
TalkSpace, a platform that enables patients and therapists to communicate via text, audio, or video messaging, has seen a dramatic uptick in usage.
The opposite is true for ride-hailing firms like Uber and Lyft, and property-rental sites like Airbnb. In certain cities, Uber has seen a 70% drop in the number of riders. Airbnb has sustained major losses as bookings have decreased by double digits.
L7 Defense’s Gross thus believes that “the post-coronavirus era is likely to be characterized by a wave of mergers and acquisitions, as investors will take advantage of opportunities to buy underpriced startups.”