The COVID startup crunch

Israeli flag with stock tickers

In a recent study conducted by think tank Startup Genome, Tel Aviv and Jerusalem tied for 6th place in their Global Startup Ecosystem Ranking. The study, which uses deep dives into a variety of data to track startup health in over 150 cities, is particularly important as we enter into a uniquely disquieting time for startups worldwide. Another report released by Startup Genome claims that more than 40% of startups may face financial insolvency if they cannot raise additional funds within 3 months, leaving the space in a position that is particularly vulnerable to economic disruption such as that caused by COVID-19.

For the 2020 report, Tel-Aviv-Jaffa was singled out for its specializations in AI, big data, and cloud technology. Given that many think tanks expect exceptional growth rates in cloud computing, Israel's talent pool is definitely an exceptional one. However, such specialization cannot protect Israeli startups if they find it difficult to raise money. The mystique of the Israeli startup has for many years captured the imagination of foreign investors at both the corporate and consumer level, but with the current economic downturn, that may not be enough for many new companies strapped for cash.

Emphasizing this point, Israeli tech exits hit their lowest levels in six years, dropping to $5.82 billion. Whether this reflects investor trepidation or Israeli companies waiting until after the downturn for a better deal remains unclear. With a struggling worldwide economy, many companies may simply be delaying IPOs or waiting for a better buyout when conditions improve as they are expected to in 2021. Furthermore, Israeli companies raised a record $2.74 billion in the first quarter of 2020 despite the depressed exit figures, a number largely carried by growth stage companies.

With startups worldwide feeling the money crunch, much is uncertain, but Israel does appear to be in a fairly good position overall. A seemingly unshakable foreign confidence in the Israeli entrepreneur, along with, lets face it, a strong ability to sell, gives Israeli companies a strong starting point to deal with the crisis. Add to this the fact that most Israeli businesses, being technological in nature, are less likely to be affected by quarantines and restrictions meant to stem the spread of the virus, and is it possible to envision a future here where the startup market is largely untouched.

Some even see the current crisis as a new opportunity.

Irit Kahan (managing director of Deutsche Telekom Capital Partners), said in an interview on startups with Calcalist that “The trend today is more money going into fewer companies, and it is going to continue as the crisis goes on. This will mean there will be fewer companies but it is also an opportunity for companies developing technologies fit for the new world created by Covid-19 to shine.”

Given Israeli scientists work on COVID-19's myriad of problems, it is this exact line of thinking that has some expecting multiple Israeli sectors to buck economic trends and continue to grow.