"We closed a deal with a large client, but they had questions about what happens if Israel no longer exists"
"We closed a deal with a large client, but they had questions about what happens if Israel no longer exists"
The war's impact has pushed Israeli startups to expand internationally to navigate the challenges of the ongoing conflict.
Shortly after the start of the war in October, Israeli high-tech organizations launched the #NoMatterWhat campaign, designed to showcase the industry’s resilience despite the ongoing conflict. The campaign declared, "We Deliver," but the reality is that this delivery comes with complex costs and consequences. Since October 7, Israeli startups have been grappling with an almost impossible situation.
Local development teams have been severely affected as employees, including senior officials, were called into IDF reserves, some of whom are still intermittently recruited. At the same time, international customers began expressing concerns about Israel's stability, to the point of fearing its continued existence. This apprehension has impacted transactions and payment terms.
Investors, for their part, are now demanding detailed business continuity plans to address any potential disruptions. This requirement has led many companies to relocate significant parts of their operations outside of Israel. What was once a purely economic move has become an existential necessity for many businesses.
Gal Ziton, Chief Data Officer and one of the founders of the startup Octopai, which employs 30 people, lives in Ashkelon. In the initial weeks of the war, he managed the company from the Kfar Maccabiah hotel in Ramat Gan, where he had been evacuated. "We have been asked much more frequently about business continuity. We closed a deal with a large client in England, which was relatively standard, but there were many questions about our business continuity plan. They inquired about what happens if Israel no longer exists. The same client, fearing something might happen to Ocotopai, was not willing to pay a year in advance, and unfortunately, we had to agree to a monthly deal instead," he says. Ziton explains that the servers are located in Europe, the USA, or Australia, each with backups, and the company has strengthened collaborations with freelancers abroad as needed. According to him, investors and customers now demand international solutions to ensure the company can continue operating even in crisis situations. "In the past, we wouldn’t have been asked these questions, but now they are an integral part of business discussions."
Both international activity and the demand for business continuity plans from investors existed before the war. What has changed in the past year is that global activity has become critical.
"We began international operations long before the war due to the challenge of recruiting tech talent," says Ronen Yair, Head of ZIM Labs, Chief Architect and Head of the Development Department at ZIM. "We started with India, and when we struggled to recruit Full Stack developers, we expanded internationally. Today, we have a large group of talents primarily from Eastern Europe. During the war, when Israeli employees went into reserves, our foreign workers continued to operate. Working with international teams has led to higher productivity," he says.
At the ZIM Labs innovation center, which develops the company's advanced systems, there are employees from Poland, the Czech Republic, Ukraine, Russia, and Croatia. Some of these employees are team leaders, and all work remotely in pairs to ensure collaboration. "There are many advantages to this setup, but there is also a Zionist concern. It is money leaving the country, and we would prefer it stayed here," he adds.
Before the war, companies would set up development teams abroad to cut costs and address the shortage of tech workers in Israel. During the war, relocating activities outside Israel has become a necessity for operational continuity and survival.
"Startups with milestones and delivery dates experienced significant reserve recruitment because many of their employees are eligible for conscription. This intensified the need for operations abroad. Meeting deadlines often affects funding, so startups turned to international activities. Many companies adapted to this and found lower costs, so I believe this trend will continue even after the war," says Ben Pasternak, CEO and owner of the Aman Group, which provides outsourcing and offshore solutions from various centers in Israel and worldwide.
According to Pasternak, there has been a 20% to 30% increase in demand for workers outside Israel. The salary costs for technology workers abroad are significantly lower compared to Israel—about 40% less in Serbia, and about 20% lower in Poland and Portugal. Another trend that has intensified since the war is the desire of Israeli tech workers to relocate to company sites abroad. "One of our sites is in Portugal, and more Israelis want to work there for Israeli clients. This trend is becoming more common. We saw similar movements in Russia, where many Russians relocated to Portugal and Serbia when the war started," he says.
Regarding the types of employees and activities Israeli companies wish to move abroad, there is no specific technological characteristic. What has changed is the increasing trend of recruiting full teams, including team leaders, product managers, and architects.
"Many clients faced a lack of leadership due to managers and team leaders being drafted into the reserves. Therefore, they started recruiting local team leaders abroad to ensure the teams could operate autonomously," says Rami Nahum, one of the founders of AppGreat, which provides outsourcing services to high-tech companies in Eastern Europe, mainly Romania and Bulgaria. "New clients are now more frequently requesting full teams with local team leaders and project managers instead of expanding teams from Israel."
According to Nahum, since the war in Ukraine, the preferred destinations for talent abroad have become Romania, Bulgaria, and Poland. Poland is relatively expensive, with salaries about 40% lower than those in Israel, while salaries in Romania and Bulgaria are about 60% lower than in Israel. "Recently, there has been a significant increase in demand for roles such as project managers, product managers, and customer support. We are seeing five times the demand for these positions and three times the demand for team leaders, along with a 60% increase in demand for development personnel abroad," he says.
The explanation for these figures is investor requirements. Even companies preparing for recruitment and fundraising want to demonstrate they have a business continuity plan.
"The demand for business continuity has become especially acute in the past year in Israel and has become much more tangible. Technology companies, especially startups with few physical assets, ensure that all their information assets are backed up in various locations around the world. The more complex issue is human resources—many companies are now establishing 'human backups' in different parts of the world, especially for customer-facing teams. The war has significantly impacted the ability of young companies to serve their clients, particularly when teams were called into the reserves, leading to the creation of virtual and physical teams worldwide. What started as a temporary solution is becoming more permanent due to ongoing uncertainty in Israel," says Erez Shachar, a Managing Partner at Qumra Capital.
The relocation of startup operations abroad has a double impact on the Israeli economy. First, it affects state tax revenues. "Most of the tax money from the high-tech industry comes from labor taxes, not exits, so this relocation causes significant damage to Israel's future revenues," Shachar explains.
Additionally, creating a technological ecosystem requires talent developed within companies over time. "It is challenging to predict how new company teams will form. Often, this ecosystem emerges from connections between people in the company or military acquaintances. A talent exodus, particularly of young individuals with potential to create new ventures, risks disrupting this ecosystem. The continuity of the industry as we know it today is undoubtedly endangered by this trend," he says.
Despite these risks, one constant is the salary in high-tech in Israel, which is expected to remain higher than abroad. The competition for talent in Israel has always driven up prices without correlating to salaries abroad. While there are benefits to employing people in Israel, some jobs are disappearing, including the employees. "For Israelis relocating abroad, their salaries remain higher than local workers," Shachar concludes.
First published: 12:17, 08.09.24
