Why Israeli climate-tech isn’t going to save the world

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No one doubts Israel’s high-tech prowess.

We have been a major tech power for decades, certainly in terms of startups and research and development spending. Israel is a world leader in cybersecurity and autotech. The Iron Dome system we developed protects us from Hezbollah rockets, we’re one of only 12 countries able to launch a satellite into orbit, and one of an even smaller elite with nuclear bombs (nine, according to foreign reports).

Now Israel has been boasting about its climate-change startups. As Prime Minister Naftali Bennett said in his address to the United Nations climate summit this week: “Our carbon footprint may be small, but our impact on climate change can be mighty. If we’re going to move the needle, we need to contribute Israel’s most valuable source of energy: the energy and brainpower of our people …. As the country with the most start-ups per capita in the world, we must channel our efforts to saving our world.”

Inspiring words that come with the imprimatur of that rare politician who began his career in high-tech.

Okay, maybe he chose to focus on Israel’s high-tech to deflect attention from the fact that Israel has been embarrassingly laggard in climate-change policy. In fact, a week before Glasgow got underway, the cabinet demonstrably failed to agree on a climate change law or declaration of emergency. The tech-oriented 100-points agenda it did approve was seen as nothing more than a sop.

Yet the war on climate change isn’t all about shunning gas-guzzling plane trips, selling your shares in fossil-fuel energy companies and worshipping Greta Thunberg.

Technology can and will be a major contributor to reducing greenhouse gas emissions. The Boston Consulting Group estimates that 65 percent of the reductions the world needs to meet the UN’s 2050 net zero target could be achieved by existing technology – that is, if we have the political will to do it.

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The other 35 percent will come from technology yet to be developed. BCG projects it will cost as much as $5 trillion a year.

I wouldn’t take these exact numbers too seriously, but they do show in general terms how important tech can and should be. The process is already underway in the tech world: Venture capital investment in climate tech has jumped 30 percent so far this year, compared with all of 2020, to $30.8 billion. The buzz from Glasgow will almost certainly encourage even more money piling into the sector.

It all seems to add up to a unique opportunity for Israel. Except that appearances can be deceiving.

Nary a unicorn in sight

As a recent report from the government’s Israel Innovation Authority shows, Israeli climate tech hasn’t exactly been a stellar success, media coverage of the report to the contrary. Israel counts an enviable 1,200 companies addressing one aspect or another of climate change, of which just over half count as startup or growth companies.

But other metrics, as the Innovation Authority admits, are less encouraging. The annual number of new Israeli climate-tech startups peaked in 2016 and has since declined slightly. The share of climate-tech startups to total startups formed has been growing, but it still accounts for less than 10 percent of the total.

Climate-tech companies are small and don’t seem to be growing: Even among the most veteran of the bunch, few employ 50 or more people. Compared to their European peers, Israeli startups have not been very successful in getting funds from the European Horizon Green Deal research and development program (in other areas, Israel does much better). No Israeli climate tech startup has achieved the status of a unicorn (valued at more than $1 billion).

Based on a survey of the companies themselves, the Innovation Authority concluded there are three reasons why Israeli climate tech hasn’t matched the success of other tech sectors.

First, climate tech startups are having trouble raising venture capital. Most Israeli tech is software-based, but climate tech is often based on hardware, and that means companies have to raise more capital because the time it takes to develop a product is a lot longer and more complex.

The Innovation Authority doesn’t say it, but that fact is that Israeli high-tech, for all its other beauties and repeated claims that it has matured, remains mainly an industry of companies with no aspiration to get past the startup stage. Only a minority have the wherewithal to build businesses for the long term.

The second problem is regulatory. Climate tech is a lot like health tech – you are answerable to regulators and often rigid industry standards. Worse still, each country and sometimes even smaller jurisdictions have their own standards, which means a startup has to devote a lot of resources to lawyers and lobbyists, all of which take time and cost money.

The final major problem is scaling up, i.e., taking your company from a research and development operation into a profitable business. That requires establishing a supply chain and raising even more capital. Often that comes from outside the VC world familiar to tech startups.

Another barrier to scaling up – and one that other startups in Israel face – is the chronic shortage of human capital. Climate-tech companies are even more challenged on this front: You not only need engineers, who are in chronically short supply, but lawyers, finance professionals and even production line workers. The latter are available but often aren’t up to international standards. For a budding tech entrepreneur, it’s much less trouble to develop an app.

None of the above is to say that Israel has nothing to offer, but climate-tech isn’t shaping up to be the next big thing for the industry and it’s extremely unlikely to save the world. Alas, if we’re going to make a material contribution, we’re going to have to devise a real program for reaching net zero emissions.