Israel's tech sector is amazing - and also endangered
The country has a shortage of engineers connected to a major structural problem
(with Jonathan “Yoni” Frenkel; a version appeared in TechCrunch)
On the surface, it’s impressive that Israel has nearly as many unicorns as the European Union with a population almost 50 times smaller. It may seem odd to suggest that the gap can grow still larger. And yet, it is so.
The tech ecosystem is like a flywheel. When founders sell or go public, money floods into the ecosystem in three ways. The first, obviously, is the injection of liquidity from investors.
The second effect is the creation of new investors. There is truth to the idea that the newly wealthy founders (and employees) first buy a house — and then start investing in startups themselves. And third, venture capital flows to those who have shown successful innovation in the past — a halo effect that is as evident in Israel as it is in San Francisco.
These things happened with early employees of companies like Google, Uber and Twitter, who became investors or founders. And a version of it is happening in Israel, where it is not uncommon for employees to manifest total conviction that they can do better than the founders who brought them riches.
Being employee No. 10 at an Israeli success story like Monday.com or SentinelOne is somewhat akin to being employee No. 15 at Uber or Instagram: The companies may offer somewhat less of a halo — but not that much less. These employees-turned-founders have skills and backgrounds sought by investors. And Israeli chutzpah can sometimes do the rest.
That’s why Israel is pushing 100 unicorns — privately held companies (essentially all in tech) valued at a billion dollars or more. Compare that with Europe, which has a much larger population and just 125 unicorns. It is a success so profound that it begs for explanation.
For starters, Europe’s business culture is far more risk-averse than Israel’s, for reasons grounded in its past success. There are easier ways to make a good living in much of the EU, while in Israel, with its less established legacy economy, tech entrepreneurship was long a more appealing path.
That paradigm was right for a scrappy society that has never known true peace and is composed mostly of immigrants or their children. It’s an origin story that begets a spirit of adventure — and also its cousins, innovation and entrepreneurship. Add to that the technology driven by the security industry and military, which are a result of the wars, and throw in mass emigration from the post-arms-race Soviet Union, and you have a story.
In a new wrinkle, add to that the COVID factor. Israel was able to come out of the pandemic somehow stronger due to an early bet on vaccines and the fact that its outside tech sector (accounting for perhaps a tenth of the workforce) was well suited for remote work. Furthermore, Israel pulled in significant VC funds during the period.
This is happening at the right time. Israeli companies, already punching above their weight in areas like cyber, fintech and SaaS, are showing tremendous promise in verticals like food tech, agritech, space tech and, of course, vaccines.
But this is where the picture grows gloomier: A major roadblock may prevent Israel from realizing this potential.
On the surface, it would appear that Israel is well equipped for supplying workers to its industry. Indeed, this data shows Israel with 135 scientists and engineers for every 10,000 citizens, “more than any other developed country.” But it is not enough for the demands created by the burgeoning tech sector.
The 2020 High-Tech Human Capital Report from the Israel Innovation Authority and Start-Up Nation Central found that 60% of tech firms were having trouble finding workers and that there were currently 13,000 unfilled tech job openings in the country. Various recent studies found chronic shortages of engineers; September reportedly saw 14,000 engineer vacancies.
This shortfall in supply is pushing up the cost of labor, making Israeli engineers much more expensive than their counterparts in most countries. In an era of remote work, this drives employers to outsource work to countries like Ukraine and Romania, a trend that does not bode well for continuing to bottle the special sauce of “Startup Nation.”
Other things are moving in the wrong direction. Israeli students’ international test scores in math, science and reading are plummeting compared to those of other countries, largely because of massive political dysfunction: Successive governments have allowed the unimpeded growth of ultra-religious schools that often do not teach math at all.
This relates to the wider issue of the amazing expansion of the ultra-Orthodox sector, where half the men study religion full time (and most of the other half toil in a vast religious services bureaucracy) and women are dedicated to raising more than seven children each on average. Another sector that does not participate proportionately in the tech economy is the Israeli Arab one, a historically underprivileged and underfunded community that lives with high crime rates.
One obvious approach would be to encourage ultra-Orthodox Jews and Israeli Arabs to integrate into wider Israel and be given every tool. Underfunding of the Israeli Arab towns and schools must end (a process that is beginning with baby steps this year, with an Arab party joining the new coalition), and the government must order the police to crack down on rampant criminality in the sector. Funding should be denied to any schools that do not teach math or science (one of many steps needed to integrate the ultra-Orthodox).
The Israeli government should seize the initiative through public-private partnerships — the very approach that in the past helped incubate and fund promising startups — that would target ways to improve the education system. The goals are the same: accelerating the economy. Israel needs to tackle education with the same gusto it directed at the Iron Dome or dealing with its adversaries.
Possibilities include improving STEM education (science, technology, engineering and math), particularly in the periphery; improving teachers’ pay; limiting how aggressively parents can intervene; incentivizing outside programs like Fullstack Academy and other coding academies to open schools in Israel; and working with tech giants like Wix to further develop Silicon Valley-style campuses nurturing local talent.
Starting students earlier by teaching coding and programming could help units of the military focused on R&D and cognitive areas, broadening recruitment to new population groups and, in turn, creating new employees for the tech sector.
Another problem is the insanely strong shekel, which in a way makes Israel’s tech sector a victim of its own success: The shekel is at 25-year highs because of the tremendous value-added tech export sector, which its low price elasticity. This makes Israeli labor less competitive. The country needs to get the shekel — now at 3.1 to the dollar, driving Israeli per capita GDP above almost all countries in Europe — back to reasonable levels.
None of this will be easy, but the cost of complacency is high. To do nothing and hope for the best is worse than nothing. It would fritter away a monumental gift that the inscrutable fates have somehow bestowed upon the Jewish state.