Don't Mind the Unicorns: The Man Charged With Saving Israeli High-tech

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"I don't sleep well at night because the unicorns and all the successes don't calm me. I am very happy about it, but it’s the result of investments we made two, five and ten years ago - and I look 10-20 years ahead," says Ami Applebaum, chairman of the Innovation Authority, in an interview with Haaretz.

The high-tech industry's challenges are well known to insiders, but they have been barely audible in recent months, given the fact that the industry is enjoying one of its most prosperous periods yet. In recent months, start-ups raised more capital than the amount raised last year, which was itself a record year; 10 to 20 new companies will be listed on Wall Street this year. Moreover, over the past year, the number of high-tech workers has increased, despite the coronavirus and other issues.

"The world has gone through a decade’s worth of digitalization in one year. This has created huge opportunities and plays to our strengths, for example data and artificial intelligence capacity. We are competing with the major players now," Applebaum says. 

‘I don't sleep well at night because of the unicorns. We are on a slippery slope,’ says Ami Applebaum, chairman of Israel's Innovation AuthorityCredit: Tomer Appelbaum

"However, it has exacerbated the industry's challenges - manpower shortages, declining number of startups, the lack of budgetary certainty over the past two years, Israel's declining innovation indices, low productivity and the need to invest in future technologies. All of these are putting us on a slippery slope - and need to be quickly addressed.”

The conversation with Applebaum follows the publication of the authority's annual report, which includes a comprehensive overview of the state of the industry, its employees, the volume of investments, differences between foreign and Israeli companies, the state of innovation in the public sector and more. Vice President of the Israel Innovation Authority's Growth and Strategy Division Sagi Dagan, and Assaf Kovu, the authority's chief economist, were also present. Dror Bin, the new CEO who was only appointed last month did not participate in the conversation.

The timing of the publication of the report was ideal for the authority - it came out only three days after the formation of the new government. Whether intentionally or not, it seems to directly address the fresh decision makers - Prime Minster Naftali Bennett (a former high-tech entrepreneur), the Finance Ministry, the Science Ministry which recently incorporated the Innovation Authority, and others. It addresses the need to increase Israel's R&D budgets, reform regulation, increase innovation in government bodies, and so on.

The report and subsequent conversation raise three main questions.

1. Is the infrastructure to develop high-tech giants in place?

Recent years have brought change to the industry - more and companies have grown massive and Check Point is no longer alone. Alongside it is Wix and SolarEdge and with them are quite a few more companies that could eventually grow to have thousands of employees and a market value of billions of dollars. The Authority notes that the current wave of IPO's and company growth may require regulatory and business sector reform. According to the authority, if these companies become large multinational corporations, which are required to ensure business longevity, questions may arise regarding Israeli labor laws and their suitability for global public companies.

Israeli cyber firm SentinelOne went public at $11 billion, but the chair of Israel's Innovation Authority is still worried for the future of Israeli techCredit: NYSE

As an example, they point out the issue of visas for foreign experts, which has progressed in recent years. Another example of the required regulatory changes is the need to reform tax regulations on foreign loans to high-tech companies, to enable high-tech companies to increase the variety of financing options available to them.

"We can’t enforce different laws in New York, Tokyo and London. The business world will not accept it, it is unforgiving that way," Dagan explains. 

"I think a great many regulators understand that something needs to change in the way we conduct regulation in the technological, digital and global world," Dagan adds. Kovu gives another example of the role of regulators - encouraging new sectors as has happened with the automatic vehicles and drone sectors. According to him, if regulation anticipates the market and the moves of other countries, it strengthens the local sectors and forms the basis for the establishment of new companies.

2. Is the government's goal feasible?

The incoming government has set a goal - 15 percent of employment share will belong to the high-tech industry by 2026. Today the figure stands at 10 percent and in the last 20 years it has ranged between 8 percent to 10 percent and has not risen above that. 

According to the authority, this is feasible, but industry challenges can't be ignored - it is dominated by non-ultra-Orthodox Jewish men (about two-thirds of workers, and 72 percent in core professions), with the incorporation of women stalling over the last two years. Although the number of female students in STEM subjects has increased in recent years, they still make up only a third of all students - so there is no expectation of an improvement in this figure in the coming years. There is also a significant challenge in incorporating the Arab and ultra-Orthodox populations.

The desire to increase the number of high-tech workers stems from the industry's high productivity, which leads to higher wages as well as higher tax revenue. Thus, in 2018, high-tech workers paid about 25 percent of income tax payments in Israel, three times their share. The margin was even greater in multinational companies, which mainly employ developers. These companies employ 1.5 percent of total workers and they paid 8.3 percent of total income tax payments. In recent years, there has been continuous growth in the number of foreign development centers in Israel, but last year only four were opened. The authority believes this is because the potential of new companies to operate here has reached its limit. 

According to data presented by the authority, the number of employees has increased by 6 percent annually in recent years (slightly less during the coronavirus pandemic). Continued growth at this rate will reach 12 percent within five years, but not the desired 15 percent. The authority understands the complexity of the challenge, but to their mind the solution lies in the aforementioned issue - the capacity to develop large local companies.

As an example, they mention the difficulties of accessing technical support in Israel, which is making life difficult for companies due to the lack of industry approval to employ workers on Saturday, the Jewish day of rest. According to the authority, the solution lies in employing non-Jewish workers or importing foreign workers - but it is not certain that these solutions will satisfy the companies themselves.

Another challenge is junior recruitment. One in four students today is in technological studies, but they have difficulty finding work due to lack of work experience. According to the authority, they were probably also the main victims of coronavirus. 

"Large companies need to know how to absorb juniors, not out of lofty goals, but for their own good. We shouldn't be hearing about companies worth more than a billion dollars that doesn't recruit juniors, it's like saying it doesn't borrow money or maintain good governance", Dagan says.

3. Maybe not high-tech?

The high-tech industry is at the forefront of decision-makers' minds, who share the understanding that it is a growth engine for Israel. The Innovation Authority, responsible for research and development, also focuses on the sector. This is why its human capital report emphasizes the number of job vacancies in the industry - and in any case the 15 percent target applies to all high-tech workers, not just developers, but not to IT workers in banks or traditional industrial companies, for example.

The Innovation Authority notes that for several years now they have been expanding into non-high-tech occupations, for example in promoting innovation in manufacturing plants or in the public sector. The non-academic training Authority promotes provided training for IT workers for the entire economy. Nonetheless, the data shown reflects the focus of that policy. However, over the past year, the authority seems to understand that the policy needs to expand beyond the high-tech sector.

"It is our responsibility to gather the information and raise a flag, and to ask the government to increase the academic budget and incentivize the industry. Also, in the context of employment - the government itself is a large employer that can take more risks because unlike the private market - nothing is lost if they invest a little more in training a worker that eventually decides to quit" Dagan says.

"Today, the entire Israeli economy is moving towards digitalization, with blockchain and large logistics center management, for example. The entire economy is moving forward in terms of innovation and whoever doesn't follow suit - will die," says Dagan. "However, we should encourage the public sector. If the whole world jumped ten years forward, it only jumped three. It's a very good start but it's time to hustle, to get the new government to allocate funds and operational capacities.

With the formation of the new government, the Innovation Authority was incorporated into the Science Ministry, having previously operated under the Finance Ministry.

Asked if this move is justified, Applebaum says: "As a civil servant, I am not in a position to judge political decisions." 

Applebaum is in fact the only government employee in the authority - the Innovation Authority is a statutory body and therefore enjoys independence. 

"We worked with the Science Ministry a lot before we joined them, and also with other government ministries - and we will continue to do so. We are a statutory body, and it is important to us that the minister in charge speaks with the right voice in government, that they have the drive to leverage innovation in a comprehensive and non-politicized way and that they have the ear of the prime minister and the Finance Ministry," Applebaum says. 

"We will continue to work intensively with the minister and for the benefit of the country."

According to Applebaum, the connection with the Science Ministry can help coordinate their various activities - for example, the responsibility for applied academic research and the Space Authority - with the activities of the Innovation Authority. 

"I estimate that the incoming minister, who is experienced and knows what a statutory body is, will also be able to leverage the capabilities she receives from the Innovation Authority to greater innovation in the broader Israeli economy, in both the private and public sectors."

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