• 2019 was a year of growth and prosperity for the Israeli innovation ecosystem. It broke records in capital raised, exports, output, and the number of people working in the high-tech sector. Total capital raised increased by 15% to 9 billion dollars,¹IVC data as of March 2020 and high-tech exports increased by 1.2% reaching a record 45.8 billion dollars. The year was marked by accelerated growth in the number of people working in the high-tech sector; for the first time in 15 years, the share of high-tech employees exceeded 9% of Israel’s total workforce.Central Bureau of Statistics data processed by the Israel Innovation Authority. Chart 20 – high-tech employees excluding the communications sector, according to profession and gender, 2012-2018 (2011 classification). The fortitude of the Israeli ecosystem is also shown in the Israel Innovation Authority’s High-Tech Index, which demonstrates sustained growth.²Analysis by the Israel Innovation Authority in this present report.
• In international comparisons, the Israeli innovation ecosystem continues to show global dominance. Israel has significantly improved its position in a variety of global innovation indices, ranking among the top ten in indices such as the Annual Bloomberg Global Innovation Index³The Annual Bloomberg Innovation Index, 2019 and the Global Innovation Index.⁴GLOBAL INNOVATION INDEX 2019 Israel continues to hold second place among OECD countries in the share of its R&D expenditures of its GDP sourced from private capital,⁵OECD STAT 2017 and is the world leader in its number of start-ups per capita.⁶2019 Startup Genome report
• The data indicates that in 2019, the welcome trend of Israeli high-tech maturation continued, with an increase in its number of growth companies. New data in this report reflects that 4,500 high-tech growth companies have sales revenue.⁷Central Bureau of Statistics data produced exclusively for the Israel Innovation Authority and processed by the Israel Innovation Authority. This trend is also evident in the high number of unicorns (start-ups valued at over one billion dollars) established by Israeli entrepreneurs, with 30 of these unicorns in 2019.
• 2019 saw substantial achievements in government activity in support of the high- tech sector. In 2019, the Israel Innovation Authority funded 1,650 R&D projects at a total sum of 1.73 billion shekels. The EU also granted R&D scholarships valued at 89 million euros (340 million shekels) to Israeli companies (SMEs) funded by the Israel Innovation Authority, with Israel ranking first place both in the number of grant applications and in application success rates. Achievements by the Israeli government in 2019 include the expansion of the Pilot Program, which promotes the growth of start-ups developing innovative technologies that have not been tested in a commercial environment.⁸The Pilot Program was launched in 2018 with the objective of helping high-tech companies conduct semi- commercial demonstrations of new technologies. The Authority helped launch the national program for quantum science to help Israel maintain its future lead in the field. The Authority also funded the creation of innovation labs and entrepreneurship incubators in the periphery, which encourage the propagation of innovation in new fields and in new geographic regions. The Israel Innovation Authority’s investments in projects for the advancement of human capital has led to the sustained growth of human capital skilled in high-tech professions in both academic and non- academic tracks supported by the Authority and inspired by its vision:

Alongside this promising data, the Israel Innovation Authority has also identified alarming trends that point to challenges and obstacles that could potentially delay the development and prosperity of the Israeli high-tech sector:

• Analysis of high-tech output and high-tech exports shows that while there was growth in the software and R&D sectors,⁹The Central Bureau of Statistics categorizes the high-tech sector into two primary fields: knowledge-based services sectors (including communications, computing services and R&D), which for the purpose of this report will be called software and R&D sectors, and the industry high-tech sectors (including the pharma industry, electrical components, communications equipment, industrial equipment, and machinery and aircraft) which will be called commodities sectors. Source: Central Bureau for Statistics, Subcommittee for Official Classification of High-Tech Industries (2004). the commodities sectors showed a decline in exports and output. This decline in the share of commodities sectors in exports and high-tech output is concerning. Israel’s high-tech commodities industry is critical for the economy due to its contribution to output and export, its nationwide distribution, and its employment of a variety of professionals including R&D specialists. A large share of companies in this field are complete companies that operate manufacturing centers throughout the country. This sector also plays a key role in creating and preserving Israel’s assets and innovation infrastructure. Scaling down the high-tech commodities sectors and relying on software, including the provision of services for multinational R&D centers (this was covered extensively in last year’s Innovation Report) narrows the diversity of the Israeli innovation ecosystem. This trend could hinder Israel’s ability to compete in the global market and to maintain its lead in identifying and developing upcoming technological trends.
• Today’s flux of new start-ups serves as the basis for the bolstering of growth companies and for the reinforcement of future high-tech output. Yet an analysis of data on fledgling start-ups indicates that in recent years, there has been a decline in the number of new start-ups, as well as a decline in the number of funding rounds for seed-stage companies. The Israel Innovation Authority believes that these phenomena are a call for action.
  These trends are the result of several factors: the maturation of the Israeli innovation ecosystem, global funding and technological trends that lead to more attractive funding alternatives, and the pull of creative and talented entrepreneurs by large multinational companies (in-house innovation). This has resulted in fewer funding sources at the initial funding stages. A survey conducted by the Israel Innovation Authority of 275 Israeli angel investors, and a study on the involvement of types of investors, indicate that in recent years, there has been less smart money¹⁰Investors experienced in the field or experienced entrepreneurs who help management guidance. accessible in seed stages.
• Data on growth companies points to difficulties raising debt financing sourced in Israel, which is critical for these companies’ sustained growth. Debt is an important funding instrument for growth companies that require substantial capital to finance marketing and production for their continued growth without damaging the company’s ownership structure. The Israel Innovation Authority’s sample data indicates that Israeli growth companies’ debt-to-equity ratio is significantly lower than the ratio in similar companies across the globe. This difficulty poses a potential barrier for their sustained growth in Israel, and encourages them to transfer central aspects of their activity overseas where it is easier to raise debt capital.
• Despite the increase in skilled human capital in the high-tech sector, high-tech companies operating in Israel are still lacking skilled personnel. Data also shows that in 2019, the number of open high-tech positions was higher than any other R&D positions, reaching 12,500 according to the Central Bureau of Statistics,¹¹Section 25, 31 and 31 in Central Bureau of Statistics surveys. Central Bureau of Statistics, “Employees, available positions, and the ratio between supply and demand” classified by occupation (2011 classification) in select groups, 3rd quarter, 2019. and 18,500 according to the SNC and Israel Innovation Authority report published in February 2020.¹²Human Capital Survey Report 2019, Israel Innovation Authority and Start-Up Nation Central. Based on data from the Zviran Institute This shortage is continuing to boost the average wage in the sector, which is eroding Israel’s relative advantage in the high-tech industry.
• Political instability in Israel makes it difficult to quickly establish and assimilate a stable, long-term government policy. Israel’s transitional government in 2019 slowed down government budget mechanisms, forcing the Israel Innovation Authority to delay its funding of companies. A transitional government also impedes the advancement of new policy and legislation processes required for the long-term growth of Israeli innovation. 2020 is expected to be under a continuous budget,¹³With this system, the budget allocated for each issue is identical to the previous year’s budget, with some slight changes which could further slow down government mechanisms. The Israel Innovation Authority is using all of its resources to minimize the damage caused to work processes and to the companies it funds to the greatest possible extent.

The complex picture depicted in this report demonstrates growth and prosperity alongside challenges and barriers. It shows that the Israeli high-tech sector is facing complex challenges that could prevent it from realizing its full potential, thus posing a threat to its continued prosperity.

The Israel Innovation Authority is devoted to addressing market failures. Private funding sources are not always optimally invested in the Israeli economy, and sometimes government intervention is needed in order to fulfill the significant potential for growth and its contribution to Israeli society.

This report provides an exhaustive description of these processes and trends:

Chapter 1:

Israeli high-tech in 2019 – Prosperity and Challenges. This chapter presents key data on the 2019 innovation ecosystem. The data is presented in the Israel Innovation Authority’s High- Tech Index,¹⁴Source in output data, exports data, and other data regarding the high-tech sector.

Chapter 2:

Investing in Progress – Israel Innovation Authority 2019. This chapter describes the main actions taken by the Israel Innovation Authority this year, offering a review of the Authority’s structure, budget and strategic plan. It includes analysis that shows that the Israel Innovation Authority focuses its grants on market failures that are overlooked in the private capital market.

Chapter 3:

Growth of the Israeli Innovation Ecosystem – From Start-Up Nation to Scale- Up Nation. This chapter provides data on high-tech growth companies in Israel that reflects their position and their needs. It introduces new data derived from analysis performed by the Israel Innovation Authority of the low debt-to-equity ratio in Israeli growth companies in comparison to similar companies across the globe. It also describes the barriers to debt financing in Israel and the ramifications of these barriers.

Chapter 4:

Accelerating Israeli Entrepreneurship – The Alarming Decline in the Number of New Start-Ups Must Be Stopped. This chapter presents data that points to stagnation in the number of new start-ups in Israel and in the amount of seed-stage funding. It offers an analysis of the reasons for this stagnation. The analysis is based on data derived from a survey of Israeli angel investors performed by the Israel Innovation Authority, which points to a shortage of smart money.

Chapter 5:

Bolstering Artificial Intelligence – What Can Be Done for Israel to Maintain its Leading Position in the Field of AI? This chapter was written as the continuation of a chapter that appeared in the previous Innovation Report, The Advent of the Smart Machine Era, which calls for the establishment of a strategy to advance this field in Israel. The chapter presents key achievements in AI alongside current data about Israeli AI companies, and reviews Israel’s position in relation to the rest of the world. It also details barriers to further developments in this field and the various actions taken to remove these barriers.

Chapter 6:

Bio-Convergence – The Future of Medicine. The chapter builds on the previous Innovation Report, which called for Israeli innovation to break down barriers and to identify new ecosystems to be developed. The chapter describes the main principles of the strategic work performed by the Israel Innovation Authority in 2019, which identified substantial potential in the field of bio- convergence. It details the field’s inherent potential and the steps required for its development in Israel.

Chapter 7:

The Israel Innovation Authority in Action – The Parts that Comprise the Whole. The chapter reviews the main achievements of each of the domains of the Authority’s operations in 2019. These domains address the challenges facing the Israeli high-tech sector.