A Look Inside The Booming Startup Nation: Is Everyone Getting A Piece Of The Pie?
For Israel’s startup scene, 2014 was in many ways the year of the golden egg, with exits and IPOs totaling $15 billion, a new record for the Startup Nation. And it looks like 2015 is shaping up pretty well too, with Israeli startups raising $994 million from VCs in the first quarter of this year only. Experts expect heightened investment activity during the remainder of the year as well, with 2015 potentially surpassing the booming 2014.
But with all the money pouring into Israeli startups by VCs, investments funds, large tech corporations and private investors, the question many Israelis ask themselves is: Who really benefits from the thriving high tech scene? NoCamels spoke to experts and analyzed workforce, salary and tax data, which reveal that while high tech accounted for a third of Israel’s economic growth in 2014, the tech revolution has skipped the majority of Israelis.
Eight percent of the Israeli workforce is in high tech
While Israel rightly enjoys the aura of the Startup Nation – with more startups per capita than anywhere in the world, only 8.2 percent of its workforce is actually employed by technology companies, including such giants as Microsoft, Apple, Facebook and Google, which have offices and R&D centers in the Holy Land.
According to Israel’s Central Bureau of Statistics (CBS), 283,000 Israelis currently work in the high tech sector, with the nation’s workforce totaling roughly 3.45 million people. On average, high tech workers – who are typically highly skilled and educated in the field of computer science – earn nearly twice as much as the rest of the country’s workforce. While the average Israeli worker earns $2,400 a month, according to the CBS, high tech employees make $4,700 a month on average.
Women and minorities are underrepresented
So, who makes up the exclusive 8 percent? Mostly young men, official numbers reveal. Women comprise only 35 percent of Israel’s workforce in high tech, with men holding 65 percent of the tech jobs, CBS says.
And it’s not all men who rule high in the high-tech scene, but mostly younger men; older men (and women) have a hard time maintaining a lifelong career in this industry. It’s no secret that startups look for young engineers and developers who are willing to work the long hours and often under extreme pressure. While ageism is illegal discrimination just as much as discrimination against women is, many employees in their 50s (men and women) have told the Israeli media it is difficult to maintain a career in high tech.
Manpower shortage pushes recruiters to think outside the box
Minorities are also severely underrepresented in the industry: while their portion in the general population is nearly 21 percent, non-Jews comprise only 2 percent of the tech workforce, according to Tsofen, an organization promoting the integration of Israel’s Arab citizens into its high tech industry.
Ziv Mandel, CEO of the John Bryce Hi-Tech Training and Assimilation Division at Matrix, a leading IT company, explains that the high tech industry has traditionally recruited Israeli Defense Forces veterans who served in technological units such as the famous 8200 unit. Since the state of Israel doesn’t typically enlist Arab citizens in the army, the high tech scene “has become an exclusive club for Israelis who served in the military,” he tells NoCamels.
But openness towards minorities seems to slowly be growing in some parts of the industry. Indeed, over the past couple of years, recruiters have started turning to minorities (some more than others), including ultra-Orthodox Jews (who don’t typically serve in the military) because of a shortage in high tech talent. In addition, “minorities have become more aware of the benefits of working in the high tech industry, and many more enroll into college in order to study computer science and related fields,” Mandel says. “They’re gradually entering the high tech workforce and the trend is expected to continue.”
Silicon Wadi beats Silicon Valley
Still, Israel’s portion of high tech workers is higher than that of European countries and even Silicon Valley in the US. According to the Public Policy Institute of California, less than 5 percent of California’s workforce is employed in high tech; the rate is even lower when looking at US national numbers.
However, it’s important to remember that much of the European economy and California’s economy have not traditionally relied on high tech as much as Israel; rather, it has focused on the automotive, agriculture, aerospace, defense, chemicals, biotechnology and food industries.
Tax from ‘exits’ is mostly paid abroad
Another beef many Israelis have with the high tech world is that the millions of dollars in investments that have been poured into the Startup Nation over the years – most recently spent on Israeli startups by Amazon and Dropbox – aren’t reaching the wider Israeli population.
Firstly, all foreign investors – as large as Amazon and as small as angel investors – typically pay taxes in their home countries, even if they invest through an Israeli VC, says accountant Ofer Sela, Technology Partner at KPMG, an accounting firm. Israeli founders of startup companies hold up to one-third of the shares (the rest is held by VCs and foreign investors), and so when they sell their company the portion of the tax due in Israel is relatively small.
Sela explains that typically, shares of Israeli startups are divided in the following manner: 10-30 percent of the shares are held by the Israeli founders; 10-15 percent of the company is held by the employees (usually through stock options); and the rest of the shares (about 60 percent) are held by foreign investors (through an Israeli VC or a foreign one). So, the “native” Israeli shares total 20-40 percent.
How much tax is then levied? Israel’s tax authorities typically deduct 20-30 percent of the Israeli earnings. For example, if a company is sold for $100 million, the Israeli group (founders and employees) get up to $40 million. The tax deduction in this case is up to $12 million – which translates into 12 percent of the total acquisition price.
No more tax havens? Israel succeeds in collecting tax on intellectual property
But recently the tide has started to turn. It happened when mobile navigation app Waze sold to Google for $1.3 billion, including tax, in June 2013 (one of the largest exits in recent years). Google paid roughly $357 million to the Israeli taxman – $147 million for the acquisition of the company and another $220 million for its intellectual property. In sum, on roughly $1 billion Google spent on buying Waze, it paid 36 percent in taxes.
Google’s case is different because many companies before Google took the IP offshore, to tax havens, in order to avoid paying tax in Israel. If Google had done that, its tax rate would have been slashed to 14 percent ($147 million). In terms of taxation, the Google-Waze deal was a milestone in Israel’s exit history, and tax authorities hope the trend will continue, so that wider parts of the Israeli public can reap some of the benefits of the booming high tech scene.
All in all, Israel’s tax policy, which generally encourages foreign investment is “good policy,” Sela says. Koby Simana, CEO of the IVC Research Center, agrees. “There would be virtually no high tech in Israel if it weren’t for foreign investment,” he tells NoCamels. “We regularly host delegations from all over the world, and they’re all amazed that in this small country there are 290 foreign research and development centers.”
Simana concludes that “the wonder that is Israeli high tech literally saves our economy. If it disappears one day, we will have a big problem, which is why we need to carefully keep nourishing this amazing industry.”