In the international arena, Israeli startup companies are considered a leading brand for creativity, quality and innovation.
Indeed, until 2021, the Israeli startup companies raised relatively much more investments compared to startups in Europe and the USA.
At the end of 2021, following a global crisis in the economy, decreases in investment fundraising in startups all over the world began. Since the increase in fundraising in Israeli startups was sharper compared to Europe and the USA until By the end of 2021, the decline was also more painful.
This is a very natural phenomenon that manifests itself in almost every field of the world of economics and business, so it should not be directly associated with the startup industry in Israel.
However, to this global crisis, two additional local crises were added: political instability during 2023 and the war that began in October 2023. As a result of the global crisis and the local crises, many investors did not rush to enter investments or preferred to invest in relatively safer places.
Indeed, the total investment in Israeli startups decreased in 2023 to $7.3 billion, a decrease of about 60% compared to 2022.
It sounds like a drastic drop, but when you look at the last period from a strategic point of view over a 5-year period, you can see that despite the global and local crises, we returned to the total number of recruitments that were in 2018. Therefore, the most important message is to maintain optimism.
In addition to the difficulty in raising investments, about 70% of Israeli high-tech companies experience significant difficulties in maintaining continuous functioning as a result of recruiting workers for reserves.
It is important to emphasize that this is a short-term difficulty and does not have the same long-term significance as the difficulty in raising investments.
Already these days, thousands of reservists are being released and the economy is gradually returning to normal functioning.
How do you deal with the challenges?
In such situations and as in any situation where there is a fundamental change in the economy, every company must understand and analyze the current situation, learn what is to come as much as possible, and make adjustments as necessary.
At this stage, strategic changes must be made that will accompany the company in the next year or two, and then a reassessment must be made according to the changing situation.
Every company, especially startups at the beginning of their journey, must make changes and adjustments on the fly in order to survive.
There are several ways and, of course, each startup's approach is different depending on the nature of the company's activity, but there are several main lines in order to survive the coming period and even emerge stronger from it:
Conservation of existing resources
Dr. Amit Sarosi./Courtesy of those photographed
Any project that is not planned to bring profits to the company in the next 1-2 years must be stopped until the situation is re-evaluated.
Current resources should be preserved as much as possible and any activity that does not contribute to the company's income in the short term should be frozen.
This also means development projects which are not supposed to mature soon, entry into new markets, acquisitions, promotions, bonuses, company events, etc.
Everything stops and all current resources are directed to the main channels intended for income generation.
If you are a startup at the beginning of its journey and without current sources of income, it is important to maintain the existing resources and work in a limited way until the economy recovers and new recruits come in.
If you are a more advanced startup with existing products/services, this is the time to show capabilities that exist even without external funding (investors appreciate this).
Maintaining relationships with current investors
It is very important to understand that the present investors have an interest in the company surviving the crisis, therefore one of the relatively easy channels for quick fundraising such as "Bridge round" (until the company is ready to raise round A or B), is through existing investors.
Correct handling of recruitments of this type can preserve the state of the company until the end of the crisis, after which the picture of the economy will change and new opportunities will open up.
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Risk management and preliminary planning
Every company must have an operational plan that will define how the company conducts itself in emergency situations from every possible aspect - financial, operational, administrative, etc.
This plan should include organized procedures for every emergency scenario and provide answers to questions such as: What do you do when employees are called to the reserves?
What do you do when you can't work from the company offices?
Is it possible to create a complete remote work environment?
What qualifications are required, etc.
In addition, especially in startup companies, financial risk management is one of the most important things.
Unfortunately, most of the starting startups do not have the resources to manage financial risks, so in situations where the economy is damaged, there will be direct damage and existential danger to the startup.
It is very important to prepare in advance, analyze financial risks and plan accordingly.
Some of the questions that have to be answered are what happens in a situation where there is difficulty in raising investments?
What is the company's existential horizon at any given moment?
Is and how should resources be allocated for emergency situations, etc.
These are very important questions that every company must examine in order to get through the next crisis.
In conclusion,
The State of Israel has known many wars and unfortunately every few years there is a security incident that affects the local economy.
As a result, the financial market reacts negatively, which is natural.
Fortunately, in most cases the negative market reaction corrects itself within a few months and even shows increases.
For example, in the Second Lebanon War, cell 125's index dropped by about 8% but recovered within about a month, while in Operation Protective Edge it was not abnormally affected.
In both cases the index showed increases again after about a year.
It is important to emphasize that after Operation Tzuk Eitan in 2014, the high-tech industry was not harmed and even developed.
As evidence, the total investments in Israeli companies almost doubled between 2014 and 2016, and the number of employees in high-tech increased from 249 thousand to 271 thousand.
The number of exits also increased significantly, from 99 in 2014 to 135 in 2016.
The conclusion is that this is a challenging period that will pass in the next year or two and if we make the right decisions, we will also come out of it strengthened.
Author: Dr. Amit Sarosi, strategic consultant for companies and angel investor
The data in the article was based on studies done by the SNPI Institute which were published in January 2024 and October 2023.
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