Charles R. Goulding and Preeti Sulibhavi discuss Stratasys’ relationship with the Israeli military and what the ongoing Israel-Hamas conflict means for Israeli tech startups.
When a nation is at war with a large-scale mobilization, industry contributes its reservist employees for the duration of the conflicts. In Israel, companies of all sizes make this contribution.
Some Stratasys employees, including top executives, are in the Israeli military reserve and must be called to active duty in an instance of military conflict.
Some of the larger tech companies in this position are Intel and Iscar, the leading metals-cutting tool company.
Iscar is a Warren Buffett, Berkshire Hathaway company that is deeply involved in 3D printing related, metal production innovation. Iscar had a US$10 billion valuation in 2013.
Israel & Stratasys
Stratasys actually has a dual headquarters status with 477 employees in Israel and 1,148 employees in the United States in 2021. Companies with multiple locations can temporarily shift some engineering and production activities to other locations.
Stratasys has always been aware of the Israeli military risk profile and has the following disclosure related to Hamas and Hezbollah in its SEC filings for 2021, Form 20-F. See below for details from Stratasys’ 20-F:
Risks related to operations in Israel:
“Our Israeli headquarters and manufacturing and other significant operations may be adversely affected by political, economic and military instability in Israel.
One of our dual corporate headquarters, as well as our PolyJet system manufacturing facility, all of our PolyJet research and development facilities, one of our two PolyJet consumables manufacturing facilities, one of our FDM manufacturing facilities, and some of our suppliers, are located in central and southern Israel. In addition, many of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. Over the past decade, Israel has been engaged in armed conflict with Hamas, a militia group and political party that controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas where some of our manufacturing facilities are located, and negatively affected business conditions in Israel. Any armed conflicts, terrorist activities or political instability in the region, including Iranian involvement in Syria, could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we have agreements involving performance in Israel may claim that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements due to the political or security situation in Israel.
Furthermore, many of our male employees in Israel, including members of our senior management, are obligated to perform one month, and in some cases longer periods, of annual military reserve duty until they reach certain ages, and, in the event of a military conflict, may be called to active duty. Our operations could be disrupted by the absence of a significant number of Israeli employees or of one or more of our key Israeli employees who may be called to active duty due to a future military conflict. Such disruption could materially adversely affect our business and operations.”
Stratasys also has the Israeli military as a major customer and we suspect this relationship may expand during and after the war with the need to replace and repair military equipment including rockets, drones, tanks and munitions.
Israel & Startups
The Israel-Hamas war is having a major impact on Israel’s startup, technology industry.
Israel attracts a high amount of tech investment from abroad and is unofficially referred to as the “Startup Nation” because of these substantial investments in Israeli tech startups. Approximately 15 percent of Israel’s workforce is employed in the tech industry.
With 360,000 Israeli reservists that will now being called into active duty, Israeli tech founders and investors must prepare for roughly 15 percent of their employees to be called up, thereby disrupting their operations. Given the disproportionately higher percentage of young employees at startups, the military conflict will have a large impact on the Israeli startup tech industry.
The Research & Development Tax Credit
The now permanent Research and Development (R&D) Tax Credit is available for companies developing new or improved products, processes and/or software.
3D printing can help boost a company’s R&D Tax Credits. Wages for technical employees creating, testing and revising 3D printed prototypes can be included as a percentage of eligible time spent for the R&D Tax Credit. Similarly, when used as a method of improving a process, time spent integrating 3D printing hardware and software counts as an eligible activity. Lastly, when used for modeling and preproduction, the costs of filaments consumed during the development process may also be recovered.
Whether it is used for creating and testing prototypes or for final production, 3D printing is a great indicator that R&D Credit eligible activities are taking place. Companies implementing this technology at any point should consider taking advantage of R&D Tax Credits.
Qualifying US Startups
With sales of US$5 million or less, US startups can earn cash rebates of up to US$500,000 per year in payroll tax refunds. Historically, Israeli startups perfect their technology in Israel and then shift production to the US, because of its market size. During this challenging period, Israeli tech companies and investors may want to consider accelerating US activities and reestablishing Israeli R&D centers after the war ends.
After major conflict, the U.S. economy was transformed after World War II as was the Vietnamese economy after the Vietnam War. When the Israeli reservists return to their civilian positions, we believe the Israeli economy will also be transformed, including its thriving tech sector.