Opinion

The True Danger Israel Faces as the Startup Nation Is Imploding

Technology is what has made Israel a major world power but the industry that makes it all possible is no longer growing

Spinal surgery with the help of Mazor surgery robot
ללא קרדיט

It’s Sukkot holiday week and if Israelis aren’t actually dwelling in their sukkahs, they are lazing on the beach, or even more probably, stuck in traffic in the hopes of lazing on the beach. If they are paying attention to the news, they are worrying about Moscow’s rage over Israel’s role in the downed Russian plane in Syria.

What they are least likely to have paid attention to is what Startup Nation was up to over the holidays.

Ostensibly, there was a lot of action. Last week, the medical tech company Mazor Robotics was sold to Medtronic of Ireland for $1.6 billion. On Tuesday, Tapingo, a platform for ordering meals on college campuses, was sold to Grubhub of the U.S. for $150 million and the Indian online retailer Flipkart acquired the analytics startup Upstream Commerce for a reported $50 million.

On the surface, that all seems like good news. Israel is Startup Nation, and what we do is start up companies with cool technology and eventually makes millions selling them. It’s a win-win – the investors earn a profit, the people almost always get to keep their jobs, now as employees of a multinational. And the entrepreneurs start up another company and the cycle repeats itself.

Which is all well and good, but first of all, that win-win is confined to Israel's technology industry and doesn't filter through to everyone else; and secondly, Israel's Startup Nation phenomenon itself has stopped growing.

Still a kid at heart

The fact is there’s a limit to how many startups even Israel can create. Entrepreneurs and good ideas don’t grow on trees.

Already there aren’t enough engineers, and Israeli companies have to complete for their skills with the 300 or so multinational research and development centers operating in Israel.

The result is that is that the growth in the number of Israeli startups has stalled over the last few years, according to figures from Startup Nation Central.

In 2014, more than 1,000 startups were formed and 221 closed. Three years later, the numbers were 700 and 408, respectively.

Israel's tech industry was supposed to overcome the problem of stagnating start numbers by becoming more “mature,” that is, companies would no longer sell themselves after being in business a few years. Instead of reaping immediate profits from an exit, they would do it the old fashioned way by making and selling products and services. In the process they would have to hire people to handle such things as finance, marketing, manufacturing and human resources.

The three exits we’ve witnessed over the last few days evince none of that. They attest that Startup Nation is still an impatient child with its eye on the exit.

Those who say the industry is growing up argue that showing the number of exits has been shrinking. It’s true – there were 132 exits in 2014, dropping to 127 last year and 58 in the first half of this year, according to Israel Venture Capital Research. But not all exits are the same.

A startup that lists on the stock market plans to stay independent and become a real business, if it isn’t already. After all, since the dot.com boom fizzled 18 years ago, you can no longer sell investors on the flimflam that that you’re in a lengthy “growth stage” (that is, unless you’re Jeff Bezos) and profits will come later.

But the number of Israeli startups that head for the stock market was tiny to begin with and is dropping. There were just eight initial public offerings in 2017, and there have been three in the first half of this year.

The kind of exit that tells you startups and their backers are really exiting, in the sense of disposing the business, is merger and acquisition deals, that is, when the company is sold lock, stock and barrel to another company. Here, the IVC data show that M&A activity has been remarkably stable in the last few years, with a dip in 2017 that looks like it is being reversed this year.

None of this is surprising. The shareholders of a startup company are typically venture capital funds, sometimes big corporations, the firm’s entrepreneurs and employees, and private investors. Like any investor, they want to earn a return and in the case of a small, non-public company that means selling it either to another company or to other investors via the stock market. Between those two options, they still prefer the stock market by a long shot.

Even for people who when they hear the word “Java” think of a cup of coffee or an Indonesian island, rather than of a computer-programming language, the fate of Startup Nation is critical. Israel is regarded as a much bigger economic, political and military power (No. 8, according to a U.S. News & World report survey) than its tiny size would ordinarily merit, and the reason for that is our technology prowess.

Innovative abilities are the reason why Israel has become an integral part of the global tech industry. It’s the reason why China and India pay us so much attention. Our cyber-warfare and intelligence capabilities command the respect of our allies and fear of our foes. It’s the only important industry where Israel is globally competitive and if we lose it or let it stagnate, we’re toast. But, alas, there’s the smell of something burning.