Since the outbreak of the “2023 Israel-Hamas” war about three weeks ago, Israeli high-tech companies, with an emphasis on early-stage startups, have been facing significant challenges both in terms of manpower and funding. In order to rapidly assess the current challenge, the Israeli Innovation Authority conducted a survey and held discussions with key representatives in the hi-tech and venture capital industries, in which it was revealed that over 80% of companies in the industry have been adversely affected by the ongoing war.
To assist these struggling tech companies in coping with the wartime crisis, the Israeli Innovation Authority has introduced a series of initiatives designed to support Israeli tech companies:
Grants for Extending Runway
Aside from the operational disruption caused by the extensive enlistment of employees into military service, more than 40% of these companies reported difficulties in securing funding, primarily due to investment cancellations or delays. This situation is particularly critical for startups with a short runway (the period a company has before draining its remaining funds) with less than three months of cash on hand – over 60% of these companies reported funding challenges. Companies with short runways face a tangible risk of being shut down in the upcoming months due to insufficient funding or the need for external assistance.
Therefore, the Israel Innovation Authority launched a fast-track grants channel in the amount of 400 million NIS, which will operate subject to the R&D framework (and accordingly obligated to the provisions of the R&D Law – for example, royalty payments from sales), intended to assist startups with a short survival horizon to bridge the financing gap until the completion of their next funding round, with the goal of extending the survival horizon of these companies.
The grants are intended for companies in early growth stages such as at the beginning of a sales phase or those in the midst of an R&D stage, with significant assets (intellectual property, technology, work teams, infrastructure, customers, etc.) and a short runway (up to 6 months). They are not intended for companies just starting out (without assets) or for those that are very advanced – these can of course continue to submit requests through the various existing channels at the Authority. One of the main objectives of the grant is extending the runway for a period of at least one year.
In addition to the initial filter above, other criteria that will be examined include, among others: the technological and functional innovation of the product, competitive advantage and strength of intellectual property, potential for business-economic growth of the company, the excess yield for the Israeli economy, capital availability for investment by company investors, the scope of damage to employees and infrastructure, the contribution of the grant, if received, to extending the runway, the company’s ability and potential to establish itself as a “complete” company in Israel – meaning a company managed from Israel that maintains a significant portion of the global value chain in the country (management, operations, R&D, manufacturing, marketing, etc.), thereby providing high-wage employment for a variety of workers beyond the company’s core R&D staff.
Applications, which can be submitted starting in November, will be reviewed rapidly and responses provided within 4 weeks (assuming submissions are completed properly). As of now, the assistance period has been set for three months.
Under this rapid grant channel, financial support of up to 50% of a budget of up to 7.5 million NIS can be obtained by submitting an R&D program for a period of up to 9 months. In addition, companies will be able to receive an advance of up to 50% of the grant upon committee approval; and an accelerated review and decision-making process. Therefore, given that only up to 50% of the budget can be received, the remaining amount must be presented through matching funds.
The matching funds are private financing that complements the grant up to the budget amount approved by the Research Committee. For example, if the committee approves a budget of 5 million NIS with a participation rate of 20% (meaning, a grant of 1 million NIS), the company will be required to demonstrate the ability to obtain matching funds of 4 million NIS in order to meet the conditions for receiving the grant.
It is not necessary to present matching funds when submitting the application, but matching funds must be presented after committee approval within a period of up to two months (as part of additional reliefs that will be detailed later, this period has even been extended by an additional 3 months). Nevertheless, it is recommended to also present partial matching funds from existing and/or new investors, including a memorandum of understanding, as this may influence the evaluation of the application by the Research Committee. In a situation where a company fails to raise the full Matching after 5 months (including the new extension), the committee approval will be canceled.
Submitting the Application, its Approval and Activating the Application
The application is submitted through the Israel Innovation Authority’s online system. Some of the documents that must be attached to the application: application form, budget request (in a dedicated Excel format for Israel Innovation Authority support), resource summary form (required only in cases where there are additional requests at the Authority with overlapping performance periods), certificate of incorporation (required only if this is the first request to the Authority), and more.
After approval of the request, the company will be required to meet several conditions in order to be able to “activate the application”. One of the main ones is presenting matching funds as described above. In addition, the company will be required to sign a letter of undertaking and budget page (the agreement with the Authority). After signing these, the company will receive a confirmation letter. From the issuance of the confirmation letter to the company, the Authority will pay an advance payment as determined by the committee. This activation process is expected to take at least two weeks, and of course everything depends on the availability of the company.
Tips for submitting the Application
Make sure all required documents are gathered and filled out. Verify that the first application form and the Excel budget are completed as required (these are the first materials the Authority will see when reviewing the application).
Define the performance period – the timeframe in which the Israel Innovation Authority can recognize approved R&D expenditures. The performance period cannot exceed 9 months and can begin at the earliest in the month the complete application is submitted. When submitting, the requested budget amount from the Authority must be specified, of course within the limit of 7.5 million NIS.
As mentioned, for this stage the assistance period has been set for three months. Since within these three months there are 7 different deadlines for submitting applications, we recommend taking the time to ensure all documents are in your possession and that you meet the required criteria, and only then submit once, in an organized manner.
Postponement of European Grant Deadlines
Additionally, the Innovation Authority has reached out to the European Union and the Horizon program management, requesting an extension of the deadlines for the prestigious EIC Accelerator and Pathfinder Challenges grant programs. The European Union agreed to this request, granting approximately a 20-day extension to the deadlines for each track. This extension provides Israeli companies with additional breathing space of several weeks to submit grant requests of up to 2.5 million euros.
Additional support for the hi-tech industry
Furthermore, the Innovation Authority has approved a series of additional supportive measures for tech companies to help them navigate the wartime period. Importantly, these reliefs will apply to all Authority clients regardless of location, size or benefits track. The reliefs were approved immediately and for 3 months (beginning 10/18/23), and include (partial list):
- Extending deadlines for submitting documents and reports (including submitting corrections and clarifications, presenting matching funds, submitting periodic reports, etc.);
- A 3-month extension for presenting Matching;
- Ability to postpone or spread-out royalty payments and other debts;
- No withholding of payments to companies with small debts (not exceeding 10,000 NIS for only the last reporting period);
- Significantly increased flexibility in requesting changes to approved programs.
Even in times of tranquility, fundraising for high-growth companies and startups is a complex and challenging process that often takes considerable time, with its own set of difficulties and obstacles. During crises, the fundraising challenge is exacerbated, and many companies find themselves facing hesitant investors who delay their decisions. For many companies, the waiting period can be catastrophic in terms of cash flow, employee payments, and supplier obligations.
It is evident that the Innovation Authority understands the current plight of Israeli tech companies and is working efficiently to provide substantial assistance. However, numerous formidable challenges remain. It is worth noting that even before the war, the Israeli high-tech industry faced a challenging period due to global economic slowdown, political instability in Israel, a weakened Shekel, and a negative credit score.
In light of all the above, it seems that assistance will likely need to expand and persist well beyond the conclusion of the war to ensure the resilience of the Israeli high-tech sector during this crisis.
 For more info see: https://innovationisrael.org.il/route/fasttrack/#about_route
For more information please contact:
|Hanan Efraim, Adv.
|Ofer Inbar, Adv.