David's Harp / Start-up nation at risk of shut-down
An oversized head and a shriveled body, Israeli high tech needs to build bigger companies for the long run and create jobs for non-engineers.
Another Israeli start-up bit the dust last week.
Of course, that's not how it was portrayed by the company or by the media. Long pursued by Facebook for its technology, Face.com was finally acquired by the social-networking behemoth for a price variously estimated at between $50 million and $100 million.
The price was probably closer to the lower end of the range, but even that would be a good return on the time (three years of work by fewer than 20 people ) and money ($5.3 million of capital ) put in by the company's founders, investors and employees.
Face.com was in the business of developing cutting-edge technology that can recognize faces from photos uploaded to the Internet. What could its purchase by Facebook be, other than further evidence of Israeli genius, the bounty that start-up nation Israel has bestowed on the economy and an inspiration for young people?
Deals like this smack of the Klondike gold rush, or wildcatting for oil in Texas. You come up with an idea, raise some capital, hire some programmers to put it to work and hope that after a couple of years someone will recognize the results - which these days in inevitably some kind of mobile application - as a big enough thing to warrant buying you out for tens of millions of dollars, or more.
In Face.com's case it was the fortune of Facebook's relentless pursuit of new come-ons for its social networking site, its move into mobile and its strategic decision to pursue the area of photos and images.
The downside, of course, is that you could be beaten to the punch or find yourself going after an idea that has no traction, and end up with the digital equivalent of a dry well. But as a business it isn't bad. Venture capital basically works on this proposition - invest in a portfolio of start-ups and count on a couple of big hits to make up for the misses.
That's not 'progress'
It wasn't supposed to be like this. When "start-up nation" was born here, some 20 years ago, the assumption was that at least a few of the tiny companies that were sprouting up would turn into industry leaders. There has certainly been plenty of time for that to happen. In 1992 there was no Google, no Facebook, no Amazon. In 1992 Apple was a struggling maker of personal computers. But two decades later, Israel basically remains a nation of start-ups.
Digital wildcatting is profitable for those engaged in it. But does the Israeli economy - that is, the rest of us - get anything from it? Not really, when you look at what goes into making a start-up and what comes out of it.
Let's start with the capital, most of which comes from abroad. Last year Israeli venture funds accounted for just a quarter of all new investment in high tech: a 10-year low, but during that period foreign VC funds have accounted for most venture investment in Israel. Even Israeli VC funds raise most of their money overseas, not from the locals.
The Israeli economy benefits from the infusion of capital, but when the start-up is acquired the profits go back from whence they came.
What about employment? Start-ups typically have a work force small enough to squeeze into a single frame without benefit a wide-angle lens. They pay their employees well and create a huge amount of wealth, but there is a limit to the benefits that accrue to the rest of the economy from providing office supplies and late-night pizza deliveries. Because these companies get sold very quickly they never need to take on the kind of personnel bigger enterprises typically do, which would mean more jobs and more demands for goods and services.
Delusions of grandeur
If you look at the job break-down for the technology sector you will find that it employs nearly 53,000 software and hardware engineers, compared to less than 4,200 people in sales and 3,700 in marketing.
The industry employs more physicists (4,400 ) than finance professionals (3,700 ); more experts in algorithms (nearly 3,300 ) than in business development (2,400 ).
In other words, Israel's high-tech industry has an oversized head, full of new ideas, and a shriveled body that does little to develop them commercially in order to build sustainable businesses and to create employment.
Not everyone can or should be a brilliant software developer. Technology is our flagship industry, but it must create jobs in a wider range of skills in order to spread the wealth.
Indeed, we may have little choice in this matter; there are signs that the start-up assembly line is slowing. The supply of engineers, which ballooned with the massive immigration from the former Soviet Union in the early 1990s, is aging and isn't being replaced, a worrying phenomenon that is the fault of a lousy educational system and the fact that a growing portion of the population has never wanted (the ultra-Orthodox ) or been invited (Israeli Arabs ) to dine at the technology table. In many ways Israel is now a nation of a few well-paid engineers and many more struggling shwarma slicers (the local equivalent of burger flippers ). If we're not careful, that pyramid could become even steeper.