The future of Israeli tech: Total Quality Management and disciplined investments
To paraphrase that famous biblical text, you can be reassured that the recent collapse of the Silicon Valley Bank (SVB) in the US isn’t going to send Israeli start-ups and tech businesses into the valley of the shadow of death.
There have been conflicting reports in the international media that investors and venture capitalists (VCs) with skin in the Israeli game are becoming twitchy because a large proportion of Israeli tech firms are in deep hock to SVB. Further, that the added uncertainty of political turmoil currently gripping Israel is augmenting that uneasiness. The stability of corporate law is potentially at risk if current judiciary reform goes ahead as intended. This may or may not, in itself, spell trouble for the Israeli tech sector; but the uncertainty around this whole debacle might be enough to deter foreign investment.
And let’s not forget that Israel’s economy was rated 4th-best among OECD countries in 2022. The tech industry accounts for about a quarter of total government income from taxes, around half of the country’s exports, and circa 15% of commercial output.
But while it’s true to say that there have been more stable times, this isn’t going to be anything like the international crash of 2008 nor the bursting of the DotCom Bubble. Why not? Let’s look at the reasons for the SVB collapse, the causes of that historic DotCom disaster, and what start-up leaders can and will do differently this time. A lot of current stability and strength is down to tech firms using Total Quality Management, which removes such things as risky practices and unplanned strategies.
Not least, Israel has a high proportion of ‘Unicorns’ – because we are one of the few countries in the world that instills a high level of discipline into its citizens through our proud adherence to our military service. Such conduct and attention to high standards in the intelligence forces and other military branches tend to stay with young entrepreneurs for the rest of their lives.
Why did SVB flounder and sink?
In short, because it had too much money! This might sound bizarre, but the financial complexities around how SVB invested its investors’ funds is key to understanding the bank’s failure.
SVB became the ‘go-to’ bank in the US and internationally for Deep-Tech start-ups; because everyone knew that SVB specialized in that sector. They understood SaaS and AI business models, those long runways before start-ups take off, so SVB became a natural home for burgeoning tech funds.
Whenever a VC came to a promising tech firm and injected capital, the recipient would invariably invest it with SVB. 2021 was a very lucrative year for techies seeking VC money; in fact, around $612bn worldwide was invested by VCs, nearly double the amounts raised in 2020. Consequently, SVB found itself with a nice problem to have – more money sloshing around than it could ever lend out. As a result, it invested around $91bn into ‘long dated securities’, which included 10-year Treasury Bonds.
The problem was that international interest rates were at historically low levels when these securities were purchased. Treasury Bonds are effectively a ‘fixed rate’ product, so as soon as interest rates and inflation started to rise, the bonds’ values proportionally decreased. Accordingly, SVB now had assets realizing very little interest. It decided to mitigate its failure and sold around $21bn of those assets at a loss of $1.8bn. To add fortification, or so it thought, SVB then sold $2.25bn in freshly issued shares.
Unfortunately, the losses and seemingly desperate actions of selling shares only spooked investors, who smelled fear. Human psychology causes runs on banks. They only happen when the collective consciousness of all investors turns from smug satisfaction to fear of failure. Often overnight. As a result, on March 9th, 2023, SVB customers attempted to withdraw nearly $42bn in a 24-hour period. No bank could withstand such a hit. The rest is history.
What can start-ups do to stay afloat this time?
It’s not unreasonable to make comparisons between the infamous Dot Com collapse of late 2002 and the failure of SVB. Although they happened for completely different reasons, and our tech sector is in an entirely different status, the net result is similar; the money stops flowing.
Fortunately, the failures of the Dot Com era have been largely eradicated by a more sensible and mature type of entrepreneur nowadays. Contemporary start-ups have learned from the past. The ‘fake it until you make it’s attitude of careless investment and wild company over-valuations has been replaced with disciplined due diligence and investment into products that can truly achieve what they claim.
This is evidenced by the fact that several Israeli unicorns are weathering the fiscal storm of rising inflation and increasing interest rates quite well. Take, for example, companies with products and services that offer solid utility: A12, Dealhub, WalkMe, Protai, and Buildots. These are platforms that offer tangible money-saving and efficiency augmentation for their clients. When your product does what it says on the tin, you don’t need to fear the moonlight flit of investors.
Instead of the USA and UK barrow-boys of the Dot Com era, Israel is building a strong foundation of companies that hold Total Quality Management at their core. Organizations like Walnut.io and Gong are providing measurable and significant sales increases for their clients with their disciplined and quality approach to doing business.
There is a diaspora of Israeli talent that once dispersed like dust with the four winds of the globe, but Israel is establishing itself now as a world center for excellence in tech and innovation. These talented people will be returning home, especially after the current political dust has settled, which it always does.
Fair stands the wind for success.
The optimistic news is twofold. The world’s companies need to digitize to stay ahead, especially in light of the post-Covid ‘Work From Home’ (WFH) patterns currently expected by many white-collar employees. The ‘Great Resignation’ showed us that if you don’t allow employees to have a work-life balance and a remote-working proportion of their time, they’ll vote with their feet and go work for someone who will cater to their needs. Only effective tech and AI can allow appropriately successful WFH patterns across a geographically scattered workforce while increasing profitability through enhanced business intelligence and data management.
So now is the right time to hire fresh talent or bring employees back to companies; these returning workers are known as ‘boomerangs.’ They might currently be in the US, UK, Portugal, Cyprus, or other international tech hubs. But the fact remains that enterprises are trying to save money, and the only way is to digitize their systems and adopt AI. Luckily, this is where Israeli start-ups dominate.
In summary, while SVB was an important funding source for Israeli tech firms, the good news is that attitudes have changed within start-ups and SaaS businesses. Tech firms are now more sensible than even two years ago, thus keeping longer-term investor relationships alive.
What could have been a perfect storm will likely turn out to be a pleasant climate for the Israeli tech sector. And long may it continue.