Coronavirus crisis still difficult for Israeli high-tech companies: survey

Coronavirus crisis still difficult for Israeli high-tech companies: survey

Coronavirus crisis still difficult for Israeli high-tech companies: survey

Despite some improvements, the data shows that most of the companies are required to make painful adjustments to adapt to new conditions


JULY 23, 2020 17:56

THE GAV-YAM Hi-Tech Park of Beersheba is a joint initiative of the city’s municipality and Ben-Gurion University of the Negev. (photo credit: screenshot)

THE GAV-YAM Hi-Tech Park of Beersheba is a joint initiative of the city’s municipality and Ben-Gurion University of the Negev.

(photo credit: screenshot)

 A follow-up survey conducted in early July 2020 among 825 high-tech companies in Israel and recently published data from other sources paints a complex picture of the industry as a whole, the Israel Innovation Authority (IIA) said Wednesday.

According to the survey conducted by the IIA and the Israel Advanced Technology Industries (IATI), despite certain slight improvements, most of the companies surveyed have suffered significant consequences as a result of the coronavirus crisis, and a higher percentage of these companies have had to lay off employees than in the previous survey.

Aharon Aharon, director general of the IIA, said “Two months ago, many assumed that by now the health crisis would be behind us; however, the reality of an ongoing crisis has required companies to adopt severe policies regarding hiring and layoffs, investment in R&D, and new projects – and further moves can be expected in the aftermath of Q2.  Nevertheless, many investors who raised funds prior to the crisis are taking advantage of the current lower valuations of companies to invest at prices that will prove to be attractive.”

“The Israel Innovation Authority will continue its various support programs to continue the flow of ‘oxygen’ to companies and to allow as much regulatory relief as possible, based on the understanding that the high-tech industry is a significant factor in the Israeli economy’s ability to emerge from this crisis,” he said. 

Karin Meir Rubenstein, CEO and President of IATI, said: “The current survey, based on an extensive sample of high-tech companies in Israel, indicates highly problematic trends in the Israeli high-tech sector, which should serve as a warning sign for decisionmakers. The situation it depicts is grim and more problematic than we previously envisioned at this stage of the crisis.

“We stand side by side with the Israel Innovation Authority and support the steps it has taken to benefit Israeli industry. Without the Authority’s activities, the situation would have been far worse. This is the right time for decisionmakers to fully comprehend the complex situation we are facing and take decisive actions,” Rubenstein said, adding “The State of Israel expects Israeli industry to solve these most complex challenges – mainly health and economic challenges. However, we will not be able to do so without the necessary assistance.”

Recent data published by the Central Bureau of Statistics shows a 40% spike in layoffs in high-tech companies, from 5% laid off in May to 7.1% in June. Similarly, the current survey shows that the percentage of high-tech companies that have laid off employees increased from 25% in the May survey to 29% in the current one. The increase in layoffs is believed to show that the previously optimistic sentiment regarding the length of the crisis has been replaced by an understanding that the uncertainty will continue into the future, in light of which many are taking difficult measures to adapt to the new reality and avoid bankruptcy.

Along with the increase in layoffs, there is a decrease in the number of employees on furlough (both in data from the Central Bureau of Statistics and from the current survey).  This decrease is believed not to be an indication of improvement in the situation, but rather mirroring the increase in layoffs – furloughs being replaced by permanent redundancies.

However, the survey also shows some slight improvements: a decrease in companies that have halted their hiring processes (from 71% in the May survey to 55% in the current one), a slight decrease in companies that have implemented pay cuts (from 48% in the May survey to 45% in the current one), an increase in companies reporting that they are not considering layoffs (from 33% in the May survey to 39% in the current one), and increase in companies that are not considering pay cuts (from 26% in the May survey to 33% in the current one). This positive trend results apparently from additional funding for Israeli high-tech companies. As noted, it is believed that despite these improvements, the data still shows that most Israeli high-tech companies are facing significant challenges and are required to make painful adjustments to adapt to new conditions. 

Data recently published by IVC shows that after the decrease in size and number of investment rounds in Israeli start-up companies at the outset of this crisis, in recent months there has been an upsurge and a return to a number of funding rounds similar to the pre-crisis level. This upsurge is believed to be driven by a similar trend in global capital markets (primarily in the US equity market), which over the past 6 weeks have posted strong recoveries and growth due, inter alia, to government assistance programs that have streamed significant capital into the markets.

Another reason for this upsurge is the challenge that many start-ups face due to the coronavirus crisis – impelling them to compromise on investment terms, and to seek smaller funding rounds from existing investors, and in parallel encouraging investment bodies to extend funding to struggling portfolio companies and to seek out investment opportunities at a lower cost. This is evidenced by the decrease in median investment size, from $5.7 million in the first quarter to $5 million in the second quarter, in contrast to the growth in funding round sizes in recent years.

Data from the current survey points to a variety of challenges faced by start-up companies – for example, in response to the question: “How long can you maintain company operations should the current conditions persist?” 45% of start-ups reported timeframes shorter than six months. However, this data shows improvement in comparison to answers to the same question in the May survey, where 55% reported such timeframes. It is believed that this improvement is due to the bounce back in investments, as well as government assistance having kicked in in recent months (including the “Fast Grant” from Israel Innovation Authority), and the fact that in recent months, many companies have made painful adjustments to reduce their ongoing costs, including pay cuts, layoffs and suspension of R&D processes – 69% of companies surveyed reported that their R&D processes have slowed down or stopped completely.

Despite the recovery in global capital markets, most countries have experienced a significant slowdown in economic growth and activity. For some Israeli high-tech companies already in the sales stage, this means reduced sales, impacting company revenues and posing a significant challenge to further growth and to penetrating new markets. Accordingly, the survey shows that 60% of companies in the sales stage report significant impact (over 25%) to sales volume (an improvement from the May survey, where this stood at 63%). However, it is interesting to note that 20% of Israeli high-tech companies saw no impact on their sales, with 10% even increasing sales during the crisis – online retailers, digital health, gaming, and more.    

The survey sent out in early July covered 825 companies compared to 414 in the May survey. Out of all the respondents, 46% are in the software sector, 38% are in healthcare and 16% are in hardware and communications; 59% are small companies with 1-10 employees; and 50% are in pre-seed and seed stages, similar to May (51%).

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