Analysis

Three Myths About Israeli Startups Busted - and One Confirmed

The hype around Israel’s high-tech sector is real, but the true story is often in the details

An illustrative photo shows Solarin, a mobile device with unprecedented levels of technology and security by British-Israeli start-up, Sirin Labs AG, at their offices in Tel Aviv, May 16, 2016.
Amir Cohen, Reuters

The hype around Israel’s high-tech sector is real, but the true story is often in the details. That’s what the Central Bureau of Statistics report on the industry for the years 2011-16 that was released Monday showed.

The record levels of startup fundraising and exits in recent years might give budding entrepreneurs the impression that it’s easier than ever to succeed in high-tech. Israeli tech companies raised a record $5.24 billion in 620 deals last year, an increase of 9% over 2016, according to IVC Research Center. The number of exits, swelled by Intel’s $15 billion acquisition of the auto-tech company Mobileye, reached a stunning $23 billion

The reality, however, is less glamorous. Here are three myths about the industry that the government’s statisticians dispel and one piece of conventional wisdom that holds up against the evidence.

1. The startup sector just keeps growing

The great majority of startups fail and don’t earn a return for their investors, as the report showed: Of the of 4,029 companies that were surveyed in the 2011-16 period, 37% had folded by the end of 2016.

Another discouraging statistic was the number of startups that were formed in the final year of that period — just 625 in 2016, the lowest in five years and 17% less than the record 750 the year before. It was also the first time in the six years that the number fell.

The number of startups that shut down rose, not only in percentage terms but also in absolute terms. In 2016, 396 startups closed down, compared to 307 in 2015 and 263 in 2014. That happened even though 2016 was a record year at the time for fundraising by Israeli startups.

The CBS data do not include the majority of startups that are in their earliest stages and haven’t raised any outside capital because they are not registered with the tax authorities or with the National Insurance Institute. But worldwide, early-stage tech companies are raising significantly less money and the same is likely to be true in Israel.

2. All startup jobs pay very well

In 2016, Israeli startups generated approximately 27,500 salaried jobs, a 7% increase over 2015. How does that square with a drop in the number of startups that opened for business and the increase in the number that closed?

One of the most prominent trends of 2016, which continues to this day, is the increase in the number of big fundraising rounds. Israeli tech companies are creating more added value and doing more business, and need more capital at higher valuations to continue growing. That is, more money for marketing and sales and to acquire other companies.

The result is that there is a growing number of companies that aren’t putting themselves up for sale at a very early stage, as had been the case in the past. The combined revenues of Israeli startups increased 2% in 2016 to 6 billion shekels ($1.7 billion at current exchange rates).

The average monthly salary at a startup, according to the CBS, was 13,800 shekels in 2016, a 5% increase over the previous year and 1.5 times more than the average salary nationwide of 9,200 shekels.

This surprisingly low figure is due to the large number of tiny startups that pull the average down. At companies that employ less than 10 people, the average is 12,300 a month while among those that employs 20 to 50 that average jumps to 20,500. A t startups that employ more than 50 people, the average is 21,300, or 2.3 time the nationwide average wage.

3. All of Israel is Startup Nation

Israel is known around the world as Startup Nation, but the CBS data show that is would be more accurate to say Tel Aviv is Startup City. Some 72% of all startups are in Tel Aviv or its suburbs and an even greater number of all jobs at startupe — 78% — are located there.

In 2016, Tel Aviv was home to 270 startups formed that year and the center of the country to 470. Nowhere else in Israel did the number of new tech companies exceed the double digits: In Haifa, the number was just 56, in the north 33, in Jerusalem 50 and in the south 37.

The concentration of startups in the Tel Aviv area give workers are lot more bargaining power, which shows up in an average monthly salary of 14,600 shekels. By comparison, in Jerusalem the average was 11,700 and in the south just 11,200.

4. Cybersecurity is the king of Israeli tech

That much is true, thanks to the knowledge and experience future entrepreneurs obtain in the army. Prof. Isaac Ben-Israel of Tel Aviv University estimates that little Israel accounts for 10% of all turnover in the global cybersecurity industry. The CBS data found there were more than 260 startups in the sector and that the employ 2,550 people, or 9% of Israel’s entire startup payroll.

Cybersecurity is also the best-paying tech sector, with average salaries of 18,500 shekels a month in 2016. Next in line among 16 sectors the CBS surveyed was telecommunications tech at 16,500 followed by medicine and semiconductors with an average of 15,900. Startups developing apps were at the bottom, with an average of 11,500 a month.

The question remains whether the demand for cybersecurity products and services justifies all the capital that has been put into the sector and can sustain all those startups. In other words, even cybersecurity could turn out to be a myth, too.