Israel’s high tech engineers are worth their cost

By Batya Feldman, Globes

One of the great fears of Israel’s high-tech industry in recent years is the hundreds of thousands of Chinese and Indian engineers flooding the global high-tech market and competing against their Israeli colleagues.

The pwc Israel MoneyTree survey, summarizing the decade, states that the cost of an Israeli engineer is 2-3 times the cost of an Indian or Chinese engineer, and that many multinationals are diverting their development budgets to India. However, despite the higher cost of Israeli engineers, they have advantages that corporations are prepared to pay for.

One of these advantages is that Israel has a complete start-up ecology, including fairly friendly regulations, similar companies in each field at different stages of development, the presence of multinational corporations, investors, and service providers, which other countries lack.

In addition, many Israeli engineers enter the labor market after accumulating experience in the IDF. Many engineers served in technologically oriented units, such as the IDF Computer and Information Systems Center or the Intelligence Corps, and are not merely inexperienced university graduates who have to be trained in the real world of work.

Another factor favoring Israeli engineers is that the cost of Indian and Chinese engineers is rising. They won’t forever work for such low wages, at which point the battle for budgets will go head-to-head, returning the advantage to Israel. To achieve this, however, the Israeli education system must continue to graduate engineers at a high rate.

The mood in Israel’s venture capital industry appears to have changed direction. After two years in which venture capital funds did not raise money and entrepreneurs sought alternatives, venture capitalists and start-up entrepreneurs have begun in recent weeks to admit that, just maybe, the crisis is passed.

Pessimists will say, justifiably, that the crisis won’t be over until many Israeli companies go public or are sold at satisfactory prices. Although that is not yet the case, it seems that the number of people who believe that 2011 will restore some of Israeli high tech’s lost dignity, and that we’ll see fat M&A deals, is growing.

There is an important difference in the financing of ventures between Israel and other countries. Abroad, the usual method is for an entrepreneur to obtain financing from angel investors or family and friends, and subsequently from venture capital funds. If the start-up survives, a private equity fund will invest a few tens of millions of dollars to turn the company into a giant.

According to pwc Israel, the number of active Israeli venture capital funds has been halved from 44 to 20. Ostensibly worrying, the MoneyTree report does not mention the alternatives that have emerged to replace the vanished funds.

In the late 1990s, venture capital funds mostly invested in new companies, which were supposed to reach market 2-3 years after being founded. More than a decade later, these same funds now focus on later stage companies, clearing the way for angel investors and smart people, family firms, tycoons with investment strategies to invest in early-stage start-ups.

Israel’s high-tech industry needs a strata of investors for mature companies, such as private equity funds, in order to turn into a normal market in which private equity funds will play a major role and where great companies can grow.