What Does the Increase in Closures of Israeli Start-ups Really Mean?

SNC’s time lag correction figures suggest that a record number of start-ups closed their doors in the year 2020, after a period of relative stability in recent years. This phenomenon pushes the Israeli ecosystem closer than ever to the breakpoint between the founding and failures of new start-up companies.

Recap

In our previous post, we discussed SNC’s time lag correction methodology and how it enables us to more accurately assess the number of new start-ups founded annually, without waiting several years for the adjusted data to include those companies that kept their founding a secret.

Time lag correction’s impact on the rate of start-up closures

Time lag correction is useful for instances when the available information in real time is incomplete for any number of reasons; this includes start-up closures. Start-ups are generally small, private companies, often in the early stages of their development before a product release. Many times when a company closes their doors, this event does not become public knowledge for some time. Data from recent years show that the actual number of start-up closures in any given year is actually about 2.57 times greater than the readily available figure at the year’s end.

Therefore, despite the decrease in closures of new start-ups that we observe in the current raw data, we estimate that the actual figures for 2019 and 2020 will be substantially higher when adjusted. The data also show us that the closure rate – the percentage of all active companies that close in a certain year – was fairly constant between 2016-2019, before spiking in 2020.

When juxtaposing the adjusted figures for both the forming and closing of new start-ups, we observe a potentially disconcerting situation in which the gap between the number of new start-ups founded and those closed has continued to narrow since 2016, and the figures are now almost equal.

 

How do these two trends affect the demographics of the start-up ecosystem?

As fewer start-ups are founded each year, the population of Israeli start-up companies is growing older; the time lag correction methodology allows us to more accurately calculate the average age of the overall ecosystem.

The chart below shows the average age of existing start-ups in the Israeli ecosystem. The bars indicate the adjusted average after the time lag correction; the dots indicate the initial calculation based on the raw data, with no adjustment.

Even before the time lag correction, we can see that the growth rate in the average age of Israeli start-ups is rising; the current adjusted figures demonstrate an annual increase of 8.5 months in the average age of start-up companies in the Israeli ecosystem.

End note

In this post we discussed two trends: the decline in the rate of new start-ups founded annually and the converse rise in closures. The first trend has contributed to a demographic shift in the Israeli start-up landscape, which is becoming increasingly older with each passing year.

However, while these figures provide a quantitative view of the average age of start-ups in the Israeli ecosystem, it is certainly not a qualitative one. What are the potentially relevant characteristics of the companies that are founded and closed? Is the increasing age of Israeli start-ups necessarily a negative trend? We will explore these questions in a new post, coming soon. Make sure you subscribe so you don’t miss it!