Israel was referred by Eric Benhamou (Angel investor and chairman of 3Com) as a “60 year old startup” in an interview last week. Judging by the ROI on Israel, any VC would be happy with the nominal results: Economically, the country was able to grow the average annual gross domestic product from $3,500 in 1950 to $22,500 last year. Financially, the exchange rate of the Israeli Shekel is one of the fastest growing against the Dollar and when it comes to the team – Israel has one of the largest pools of engineers and startups per capita.
That said, not all is rose: the political leadership in the country is rotten and involved in various criminal investigations which puts a strain on international investors looking for stability. Israeli firms are experiencing multiple difficulties:
1) High costs of labor – an Israeli engineer costs $68,000 on average which is almost equivalent to the price of a US engineer ($76,000 on average), but 4 times the price of an Indian or Russian engineers which stands on approximately $18,000 a year. A continuous spike in labor costs might drive away investors to China, India and Eastern Europe.
2) Israeli companies are facing layoffs and a slow down in hiring due to the dollar crisis. Less orders and more costs make it hard to stay in the black. Just in the past few weeks:
– Tower fired 170 employees to save $14 million
– Agent VI fired 20% of its work force
– Metacafe laid off 70% of staff
– Intel closed its development center in Yokneam, lost $100 million investment
3) Lastly, the closed IPO window and the slowdown in M&A activity makes it hard for investors to cash out on their Israeli portfolio.
Yet investments in Israeli technology firms are announced almost on a dialy basis. So, can Israeli startups prevail? Numbers indicate a yes, but analysts predict that the worst may still be around the curve. In the next series of posts, I will detail the VC founding rounds announced in the last 30 days.