Elections and the next startup challenge

In the two months leading up to the election, Israelis will witness countless, well-scripted campaign events that will vie to dominate the news cycle. But these will not be the only activities taking place in Israel. During this period, some 100 conferences and events dedicated to Israeli startups are also scheduled. It may seem these two types of activity have little to do with one another, yet the outcome of the coming election will have a profound affect on the direction of the Israeli high tech industry and the prospects of its startups.

At stake: the future of Israeli innovation. (illustrative photo credit: Moshe Shai/Flash90)

By the time we reach election day, more than 3,000 people in Israel’s high tech industry are expected to lose their jobs. Companies such as ECI, Orbetech, Onlive and Actelis Networks have already started downscaling, with many others expected to follow suit. The next government’s top priority should be to secure the future of the industry.

To do this, it will need to address a number of pressing issues directly affecting the industry including two of the most pressing; the availability of finance and the capacity to employ and retain exceptional people.

In Israel, a commonly cited problem is a starving venture capital industry. Over the past five years the majority of venture capital firms have failed to raise new funds. Traditionally, this capital was the main source of successful early stage companies. According to the Israel Venture Capital Research Center, in 2012 venture capital funds are expected to account for less than a quarter of all monies raised by Israeli companies. Unable to attract new investors, venture capital firms are hesitant to deploy resources to new companies while others are forced to pull out of the country altogether.

A second source of funds that has become sparse is that of Israel’s office of the Chief Scientist. Traditionally, this arm of the Ministry of Industry, Trade and Labor supports the early development of cutting-edge technologies and products through grants and low interest loans. There are many large Israeli companies that owe their success to the support they received from this office during their early development stages. These include NICE, Gilat, Teva, Amdocs and Check Point to name a few. Over the past four years, the Chief Scientist’s budget has steadily eroded by some 600 million shekels, reaching its lowest point in more than two decades.

Building a business requires more than just money and enthusiasm. Companies need people to further develop technology and build lasting enterprises. The main threat for Israel’s ability to continue to lead the world in innovation is its ability to produce first-class scientists and engineers.

Israel owes a lot of its fast pace growth to the million plus immigrants who arrived after the collapse of the Soviet Union. Over 20% of the immigrants who came in the 1990s had engineering background that more than doubled the availability of talent in the high tech industry. This demographic advantage is slowly fading.

The two fastest growing population groups in Israel are those who are least likely to integrate in the high tech industry: Israeli Arabs and ultra-orthodox Jews. Both groups lag educationally, especially in subjects such as Math, Science and English. In 1960 these groups accounted for less than 15% of school children. This past September, Arabs and ultra-orthodox children accounted for 50% of first graders.

The Israeli high tech industry has been experiencing a long period of sluggish growth partly due to the global economic crisis and partly to Israel’s internal woes. To secure its future, the next government should start by refinancing the office of the Chief scientist, bringing its budget back to year-2000 levels. It should then commit to tackling the growing educational problem. Israel is not going to get another million Russian immigrants to fuel its high tech industry; as such it must provide first-rate education to children of all sectors.

There has never been a time that the sector’s long term survival has been more at risk than today, how to fix it should be a main theme of this coming election.

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Management expert Uri Goldberg is the author of the book, “What’s Next for the Start Up Nation?” recently excerpted in The Times of Israel, about the future of Israeli high-tech.