AnalysisAre emergency grants for startups merely postponing their inevitable end?
Analysis
Are emergency grants for startups merely postponing their inevitable end?
The Israel Innovation Authority established an emergency grant program after the outbreak of the war with the aim of extending the runway for startups, but the money often arrives too late
"It's hard to describe how turbulent the last three years have been for Israeli startups. It started with the pandemic, continued with the judicial reform and now the war. There is no company of our size today that isn't considering the possibility of closing," says Hadar Abramovich, one of the founders of edtech startup MagniLearn.
MagniLearn is one of the companies that received an emergency grant from the Israel Innovation Authority, which is meant to extend its runway and take any thoughts of closure off the table, at least for now. MagniLearn was founded by Lana Tockus, Michal Etzion, Prof. Ari Rappaport and Abramovich in 2019, and it develops artificial intelligence-based software for learning foreign languages. It raised a Seed round of about $3 million in 2020 and was selected for Microsoft's AI for Good Acceleration Program. It has customers, including the Israeli Ministry of Education, and generates revenue.
On the basis of the growth in its revenues, it began the process of raising a Series A round in 2023, but according to Abramovich, as the uncertainty regarding the judicial reform worsened, completing the fundraising became more difficult and in the end a number of entities from Europe that were supposed to invest, withdrew. This is how the company, which currently employs about 15 people, found itself in a war both at the national level and for its very survival. "We realized that the Authority grant would be a lifesaver for us, because we realized that even in 2024 a large funding round would be impossible," she explained.
Following the announcement of the Innovation Authority's emergency grants program last October with a budget of NIS 400 million (approximately $109 million), the leadership team of MagniLearn worked for five days on submitting the application, so that they were among the first to receive the money under the program. "We received about half a million dollars and this will allow us to close new contracts and according to the conditions of the grant to raise the same amount from external investors. We will have enough funding to last us a year."
The Innovation Authority's plan, which was announced about a week after the Hamas attack of October 7, received quite a few criticisms, the main one being the use of public funds to save startups that may not have been the cream of the crop to start with as they failed to raise money from private investors.
The program, which accepted applications until January 31, is by definition only intended for early-stage companies that have only enough money for no more than six months of activity. Companies that met the threshold conditions set by the Innovation Authority, had to also guarantee they would raise an identical amount to that of the grant from private investors. Initially, NIS 100 million was allocated for the program, but it was soon expanded to NIS 400 million.
According to Innovation Authority data, 700 startups applied for the grant, slightly more than 10% of all startups in Israel. Of these, 172 received a grant, 42% more than the Authority’s routine R&D track. "We were surprised by the demand, the number of applications was much greater than during the pandemic and the reason is not only the war, but also the difficult year in high-tech that preceded it," Kerem Nevo, Vice President of Growth at the Innovation Authority who took up her position on October 8, told Calcalist. Nevo previously worked at Wix for many years and therefore knows the industry intimately. "This plan is not to encourage growth, but really to serve as a Band-Aid for an emergency. However, we do not want to resuscitate companies, but to get private investors off the fence."
Venture capital funds, foreign and local, are sitting on tens of billions of dollars and can save the startups that have a future. There is no reason to throw away public money on projects without a future. Another question surrounding the program is what is the point of giving a grant in the range of half a million to two million dollars that will only postpone the inevitable end for a few months and see companies close their operation after burning some more money - this is what’s called in the business world "putting good money after bad money."
"The death of a startup takes at least one quarter, the employees are already looking for work outside, and even if customers still want the company's product, it is already afraid to sign new contracts. Therefore, injecting money two months before the company closes is indeed pointless," says Inbal Perlstein-Mandelbaum, a partner in the Pearl Cohen law firm that specializes in accompanying startups.
In recent months, Perlstein-Mandelbaum has accompanied dozens of startups that applied for emergency grants. "There was a crazy rush and the majority were refused. The bureaucracy was very cumbersome and required a large investment on the part of the companies that were already in a complex situation. Those who were approved received the money quickly and sometimes the amount was even greater than they expected to receive." She adds that "the main problem is that even after receiving the grant, the startup has to show that it knows how to supplement the amount with external fundraising or receiving a grant from another source, and this creates more uncertainty entering into a new commitment."
In her opinion, if the Innovation Authority is thinking about another round of emergency grants, which is not planned at this stage, the threshold conditions for runway should be changed, i.e. the amount of time left for the company given its financial situation. She claims that grants should be given specifically to companies that still have funding left for nine months or even a year.
"In such companies there is more to work with and it is easier to bring in external investors, who also see the Innovation Authority's grant as a testament to the technological depth of the company," explains Perlstein-Mandelbaum. Against this background, she finds it difficult to assess at this stage how much the grant track has helped Israeli startups from a macroeconomic perspective and points out that there has been an increase in startup closures in recent months.
Even in the venture capital industry, which became the focus of scrutiny and was previously identified by the Innovation Authority as the center of the problem, there is a belief that the program was problematic and did not stop the closing of companies. "The desire of the Innovation Authority to ensure that venture capital funds will also continue to invest in startups and not sit on the money is clear, but we have already put in the maximum we can in the last year, which was not easy either," says Tal Slobodkin, a partner in StageOne VC, which specializes in early-stage companies. According to him, many funds have already reached the maximum holding allowed according to the regulations in a single company and therefore can no longer invest in it.
The unencouraging picture of the investments in Israel shows that the Israeli funds almost stopped investing even before the war, for the entire length of 2023, while the foreign investors actually invested and therefore their share went up. According to Startup Nation Central data, the share of foreign investors in Israel rose to 44% last year, while total investments in Israeli startups shrank by 50% to $9.9 billion.
Israeli funds are sitting on a lot of money after they also raised new funds in 2023. However, sometimes the numbers of dry powder are misleading since not all the funds are able to call the money easily. When raising a new venture capital fund, the investors do not transfer the money at the time of raising, but give a promise to do so at a certain frequency or according to the rate of investments. According to information received by Calcalist, much of the money raised, mainly from investment bodies in Japan and China, stopped arriving for fear of increasing exposure to Israel during the war.
"We believe that the grants can add 3-4 months to a startup's life, and together with the nine-month matching, receiving the grant is a strong signal for investors and encourages them to invest. There were also companies that were helped by the Authority's letter of intent in dealing with creditors, and this helped them spread out the debt," Nevo explained.
