Report: steep drop in advertising and social media ventures behind 70% of the decline in new Israeli startups

A steep drop in the number of new advertising and social media companies is behind 70% of the decline in the number of startups in Israel

The report points to an alarming decline in new ventures in other areas as well, due to the multiplicity of options available to potential entrepreneurs and the difficulty of competing for human capital with large multinational companies

Dror Bin, CEO of the Israel Innovation Authority: “Startups are a critical source of high-risk breakthrough innovation. We attribute great importance to maintaining a balance of having growth and mature companies alongside Israel’s need, as an innovation hub, to continue to diversify through new ventures that will lead to innovative technologies in new fields. It is our duty to continue tracking these trends and to nurture seed-stage startups in a wide range of developing sectors, to ensure the industry can continue to advance and develop for the benefit of the Israeli economy.”

Uri Gabai, CEO SNPI: “The findings from this study indicate that the downturn in the number of startups incorporates two trends: a decline in entrepreneurship resulting from the maturation of the ecosystem and fierce competition for resources, particularly human capital; and a global shift in the “hot” tech sectors that has led to a decline in the number of new companies in advertising and social media. At SNPI we will continue to follow these industry trends and assess the policies needed to ensure the Israeli innovation ecosystem’s continued development.”

Technological changes on the global level have reduced the demand for solutions in advertising and social media, and respectively, the number of new companies – 70% of the decline in Israeli startups is attributed to a drop in new social media and advertising companies.

The report urges decision makers to take heed of the warnings over the decline in entrepreneurial ventures and to continue to track the number of new startups and their division into sectors, placing special emphasis on sectors with high-risk technology. However, the report also decides that the threshold that requires wide scale government intervention — beyond the Innovation Authority’s early seed-stage efforts — has not yet been crossed.

The consistent decline in the establishment of new startups has been an ongoing concern in the Israeli high-tech industry going back to 2016. A new study published today by Start-Up Nation Policy Institute (Start-Up Nation Central’s new policy institute) and the Israel Innovation Authority has found that this trend, which is not unique to Israel, is particularly impactful when it comes to new advertising and social media companies and is mainly due to global technological changes and “trends” in the global innovation market.

Data from Start-Up Nation Central’s Finder innovation business platform shows an average annual decline of 14% in the establishment of new startups since 2016. Data produced by the Innovation Authority, meanwhile, shows that this trend began two years earlier. Examining global statistics on new startups shows a similar trajectory with an average annual decline of 17% since 2016.

Between 2014 and 2020 alone, around 200 multinational corporations entered Israel. Combined with the increase in local growth-stage companies, their arrival sparked fierce competition for human capital, which is critical for the establishment of startups. As a result, the large and growth-stage companies attracted people who would have potentially become entrepreneurs into high-paying management positions with low risk and good conditions, which lowered their motivation to start new ventures. The rise in wages and benefits also increased the costs of proving new startups since the main expense of a typical young startup is in recruiting research and development team members who possess exceptional technical skills. These are the very same employees whose wages have risen most sharply in recent years.

Another trend found by the study is that the decline in the establishment of startups primarily focused on the social media and advertising sector. The decrease in the number of new companies in this sector was noticeable from the first year of the study (2014). When comparing the number of startups proved in 2019 to the number in 2014 (200), it appears that the decline in this sector constitutes about 70% of the total decline during those years.

The study also examined the often-touted claim that the decrease in the number of new startups is due to investors’ improved ability to figure out which companies will become successful. This claim was examined using an index that measured the percentage of companies launched each year that managed to raise seed rounds or later rounds, within a given period. The findings did not show an increase in the quality of startups established in recent years that can validate the claim of increased investor sophistication in identifying early-stage success.

There is room for concern but the threshold for wide-scale government intervention has not been crossed

The report’s authors believe that while the downward trend in entrepreneurship in an array of sectors should certainly worry decision-makers, industry market adjustments are not a source of concern. The relatively short timeframe, the delay in obtaining complete data, and the COVID-19 pandemic that disrupted the market make it difficult to clearly determine the causes for the decline.  Therefore, the researchers believe that there is currently no room for wide scale government intervention beyond the standard investments by the Innovation Authority, but that preparation for such actions is certainly in order.

Although the government aims to significantly increase the number of high-tech employees, and the establishment of a large number of new startups each year would increase the chances of growing a significant concentration of established Israeli tech companies, the researchers say it is not clear whether it is possible to determine an optimal number of companies and to balance between encouraging growth and encouraging competition over resources, and that therefore no government intervention is currently needed. They recommend that the government continue monitoring the industry and track the persistent decline in entrepreneurial ambition and its possible impact on additional sectors.

Link to full report

About Start-Up Nation Policy Institute: SNPI is an independent research institute dedicated to encouraging Israel’s innovation policies. The Institute collaborates with the public sector, the high-tech industry, and other decision-makers to promote policies that will maintain Israel’s technological leadership and expand the impact of Israeli innovation on other sectors of the economy and Israeli society in general. The Institute is part of the Start-Up Nation Central Group, a non-profit that promotes the Israeli innovation ecosystem around the world and is fully funded by philanthropic donations.

About the Innovation Authority: The Innovation Authority is an independent statutory authority for promoting innovation to drive inclusive and sustainable economic growth in Israel. The Authority’s tasks are to maintain and strengthen Israel’s technological leadership and entrepreneurial culture and to increase the economic value they generate for the Israeli economy, by contributing to the GDP and exports, by creating quality employment and maintaining Israel’s place at the forefront of global innovation. The Authority formulates policies and implements them through various support channels, funding platforms and assistance tools. In addition, the Authority advises the government and Knesset committees regarding innovation policies in Israel, follows and analyzes changes in the technology environment in Israel and abroad, and collaborates with other certified authorities worldwide to help promote technological innovation in industry and in the Israeli economy.