After reading quite a few end-of-year summaries about the state of the “Startup Nation” in 2015, a few conclusions stood out for me: Firstly, we’re at an all-time high in terms of the number of companies formed, the number of exits, the amount of money raised by VCs, the presence of multinationals etc. Secondly, despite these impressive achievements we also faced some challenges, and thirdly, the major risk in 2016 will probably be a global “financial crisis” which is out of our control, but which we may be able to prepare for by addressing some of these challenges as soon as possible.
I must admit that I am not a big fan of “patting oneself on the shoulder” for a job well done. Sure, many great things have happened here in the past few years, but as an industry we should also look not only at the highs but also at our weak spots, because solving structural inefficiencies in an industry takes a lot longer than regular “adjustments” for macro cycles.
So the real question we should be asking ourselves is not “how we are going to be successful in 2016” but rather “how are we going to be successful in 2025?”
I believe that alongside the great achievements of the past year, 2015 also highlighted some of the challenges that the Israeli hi-tech industry is facing, and it’s time for all of us to work as an industry – and not only as a group of individual companies and funds – in order to create a sustainable infrastructure for the future.
Here are some of the issues that I believe have gotten worse in 2015, and that we need to start addressing:
1. Dilution of talent
It is estimated that some 1,400 new companies were created in 2015. This is about 10% higher than 2014 and double the number of newly formed companies in 2007. However, with the supply of R&D and product people plateauing and not growing at the same rate, this trend is not sustainable. We are seeing more and more companies with incomplete founding teams, very long cycles to hire team leaders, directors and executives, and rising turnover.
With the addition of new demographics into the cycle, we are simply going to run out of people. Some very positive government initiative around math education have been introduced but without an active involvement from the industry, this may be “too little, too late”.
We need to work relentlessly to increase the talent pool by sourcing people from new demographies and investing heavily in technological education.
2. Rising costs
The dilution of talent is creating a huge demand for good people, resulting in increased costs, mainly of R&D executives and “special experts” (high performance engineers, DBAs etc.). This is fueled by increased competition from multinationals who are offering “out of market” salaries and relocation packages that are amounting to significant costs. With the increased focus on expenses and profitability this would cause some companies to be spread too thin, hurt their product quality and move further away from profitability.
Inevitably, if the market will not be able to solve the supply of R&D, companies will have to rely more on offshore operations in order to curb their R&D costs.
3. Uncertainties in tax regime
This is a topic which widely discussed within company corridors and meeting rooms but doesn’t get the necessary attention. Recent court rulings on issues related to founder taxes is leading to changes in regulations both in the US and Israel. In addition, constraints on stock mergers and long approval cycles with tax authorities are already creating uncertainties regarding potential tax exposure in complex corporate structures and M&A scenarios.
The industry needs to start working hand-in-hand with government bodies and tax authorities to create a long term competitive tax environment.
4. Productivity, compliance and Cyber Security
While the Israeli tech industry is one of the leading providers of Enterprise Software, Cyber Security and compliance solutions in the world, Israel is actually very slow in adopting those solutions for its own needs. While the average mid-stage US-based startup is using Slack, deploys 8-10 different security products and makes sure that it employs governance policies around the organization, the situation in Israel is very different, probably due to reluctance to pay for IT productivity apps and governance tools.
Israeli CEOs who understand that their organization’s infrastructure needs to go hand-in-hand with the growth of their business – and take steps to improve productivity, compliance and security – are the ones who will thrive.
In conclusion, we will undoubtedly look back on 2015 as a terrific year for the Startup Nation, but that doesn’t mean that we can be complacent. We need to acknowledge the challenges as well and start working towards finding solutions for them as soon as possible so that we can maintain the startup nation’s “streak of success” in spite of uncontrollable hurdles that are most likely already on their way.