Cash tightens for Israeli start-ups, ushering in new era of job cuts

Fundraising slumps in second quarter as global economy slows. Israeli tech industry watchers say situation not so grim as dot-com bust 20 years ago

Ilan Shacham/Getty Images

Business towers filled with Israeli start-ups frame the night landscape in south Tel Aviv

Israeli tech workers are polishing their LinkedIn profiles. The trend is clear with fundraising for Israeli companies in the second quarter of 2022 down 31% from the same period last year, according to a survey by Greenberg Partners. And as the money dries up, so go the jobs. 

Just this week comes the news that cybersecurity outfit Snyk plans to lay off 30 employees after a September 2021 investment round that raised $530 million. StreamElements, which helps users draw revenue from streaming video, cut 20% of its staff last week, less than a year after Softbank led a $100 million investment round for the company. Alibaba, the Chinese e-commerce juggernaut, told employees it plans to shut its Tel Aviv R&D center, leaving at least 40 people looking for work.

Not a day seems to go by without another almost-boilerplate headline that goes like Mad Libs: “(Insert company name) is laying off  (insert two- or three-digit figure) employees after raising (insert eye-popping dollar figure) less than a year ago.”  

The frequency and intensity of the news stories could have you wondering if the Start-Up Nation is facing a new version of the dot-com bust of 20 years ago?

Not so fast, industry insiders say.

Israel is not alone in suffering from the economic woes roiling the globe. As annual inflation has risen to 4.1 percent, the shekel, which traded for 3.10 against the dollar a year ago, weakened to 3.52 last week. While unemployment is at a two-year low of 3.6% – about half the level in European Union countries – layoffs are very real and likely to climb as Israeli firms expect to further slow their hiring, according to the OurCrowd High-Tech Jobs Index.

Hiring Freeze

In the most recent survey by OurCrowd, a Jerusalem-based venture capital funding platform, some 48% of the businesses polled reported “cautious hiring plans” for the balance of 2022, higher than earlier this year. More said they planned to freeze bringing on new employees. At the same time, many of those affected by layoffs at Israeli companies are, in fact, employed overseas or they don’t hold coveted roles in development and engineering. 

When they have those jobs, employees being laid off are still likely to find other companies seeking their talent, according to venture capital firms. There are still far more open positions today than available employees, especially in technical talent areas like engineering and data science, where Israel is considered strong, analysts say. The shrinking market may also reduce wage inflation, which could lead more companies to hire locally rather than offshore to Europe or India.

“Israel’s high-tech salary inflation and high valuations have made our start-ups less attractive M&A (merger & acquisition) and investment targets for strategic companies on a global scale in recent years,” said Doron Zauer, managing partner at Initium Group, which advises multinational corporations on Israeli business opportunities. “Start-ups going bankrupt and shedding jobs is a tragedy for those affected, no doubt, but the lowering demand might reduce the sky-high salaries that we have seen over the past several years,” he told The Circuit.

To be sure, many Israeli companies are still seen as promising investments. Cyolo, which uses “zero trust” technology to regulate network access, announced last week that it raised $60 million in a funding round led by National Grid Partners.

More Rational Deals

Though painful for employees, reducing staff often improves the fundamental economics of a start-up – especially in the early stages. Investments go further and allow a much longer runway of activity before the company needs to pursue the next financing round. It also can provide more rational valuations for companies in both early-stage transactions and exits.

In PwC Israel’s Hi Tech Exit Report 2021, Yaron Weizenbluth wrote that last year’s record-shattering five-fold growth – which featured 171 deals and a total value of $82 billion – could not be sustained. 

“Uncertainty about inflation, combined with capital markets that are not as accommodating for the experimentation in 2021, will ultimately lead to a more selective market in terms of what companies go public and what valuations they will get,” wrote Weizenbluth, head of PwC Israel’s technology group.
Initium’s Zauer doesn’t see the shakeout  as necessarily damaging.

“This would be good news to many, and will also give birth to a new wave of startups founded by repeat entrepreneurs,” he said.

Robert Lakin is editor of the Substack newsletter, TLV Strategist, and former markets editor for Bloomberg News in Tel Aviv.