Salty water, uncertainty and unicorns: Deconstruct...

Salty water, uncertainty and unicorns: Deconstructing Israeli entrepreneurship

Key Takeaways
  • The startup nation’s favourable perception of failure and risk in Israeli society is a vital ingredient. The ability to recover from or adjust easily to misfortune and change lies at the heart of Israeli entrepreneurship. If an entrepreneur has failed three or four times, the chances of raising money are higher than those who have never failed.
  • Israel displays unique factors that make for a thriving innovation landscape. The ecosystem comprises strong support from the military and the government, academic institutions and technology transfer offices, a rich network of entrepreneurs and startups, private funding, growth companies, and multinational corporations with strong R&D capabilities.

Israeli innovations are famous around the world. The country is widely known to have one of the most dynamic and dense hi-tech sectors in the world as well as a multitude of risk-taking start-ups and VCs. Many people look at the Israeli innovation landscape and are wondering what lies at the heart of the phenomenon widely called the Startup Nation. Some attribute the success of Israeli startups to a specific mindset, local conditions, the security situation, or Tel Aviv’s seaside location, which draws in much of the country’s talent. But what drives Israeli entrepreneurs to come up with seemingly miraculous technologies such as making the desert bloom, growing cherry tomatoes or desalinating water from the Mediterranean Sea? 

The “Startup Nation”

Local Israeli startups raised USD 25.6 billion in 2021, a 150% leap in raised capital since 2020. The country recently showed record levels of indicators of fundraising and exits, which exhibited that it is increasingly becoming a scale-up nation. Israeli IPOs reached USD 62.3 million in 2021, albeit before this year’s bearish trend in the global stock markets. 

Unicorns are private companies with a valuation of more than USD 1 billion and seemingly dominate Tel Aviv’s high-rises, as every tenth unicorn in the world was Israeli in 2021.  With more than 9,500 startups, Israel has the largest number of startups per capita globally.

Jeremie Kletzkine, VP of Business Development at Startup Nation Central, stresses that the so-called “Startup Nation” involves much more than just a trademarked term. For Jeremie, the spirit of entrepreneurship is found not only in the startup scene but also in infrastructure, education and large companies in the country. This may be due to the young age of the state and the manifold changes it keeps undergoing. These changes are connected not only to the country’s political reality or security assessment but also to demographic alterations, which keep innovating and influencing the Israeli identity and mentality. 

A key ingredient of the startup nation is the perception of failure and risk in Israeli society. “In Israel, if you failed three or four times your chances of raising money are bigger than of an entrepreneur who never failed”, states Jeremie Kletzkine. What’s more, resilience, which the Merriam Webster dictionary defines as “the ability to recover from or adjust easily to misfortune or change, lies at the heart of Israeli entrepreneurship. This does not come as a surprise in a reality that presents four national elections within a period of two years, in which budgetary planning is unstable due to political deadlock and in which there has been a gross average of four years between wars over the last 70 years. Hence, embracing uncertainty is understood not only as a virtue but also as a necessity.

Similarly, Dov Moran, one of the most seasoned Israeli entrepreneurs and head of a major Israeli VC fund, Grove Ventures, states: “People first. When we invest, we invest first of all in the people. Because at the end of the day, a major parameter for the success of a company is about who are the entrepreneurs. Do they have the right ability to withstand all the difficulties and disappointments on their way to success?” 

From Development to Opportunity

The hi-tech sector plays an important role in the country’s economic growth, amounting to 15% of Israel’s GDP. Moreover, 43% of Israeli exports are attributed to hi-tech companies and 25% of all income tax is paid by their employees. Thus, with its specialisation in innovative, high-quality niche and hi-tech products, Israel has succeeded in transforming labour-intensive fields into knowledge-intensive sectors. The country has moved from development to opportunity due to a favourable mix of risk capital, engineering, business and soft skills.

However, employees in the Israeli hi-tech sector represented just 9.8% of the overall workforce in 2020. Nevertheless, salaries in the sector are about twice the national average. An underrepresentation of people from the periphery, of people from minority communities such as the Israeli-Arab or the ultra-orthodox community as well as of women, is prevalent. At the same time, most of the hi-tech workforce consists of either Jewish immigrants or sons or daughters of Jewish immigrants. This fact is often stressed when pondering the success of Israeli entrepreneurship. For many, the immigration context is part of the explanation for the high drive and innovation in Israel. People want to make it, and they are willing to give it their all. 

Many Israeli entrepreneurs gain substantial experience and skills during their mandatory military service. This directly translates into the available skill set and work culture in the Israeli hi-tech sector. One is expected to say what one thinks right away and quick decision-making is crucial. Similarly, taking initiative and being proactive come from a sense of responsibility which an individual may have gained as a captain on the ground during military service. 

In fact, the Israeli military serves as an incubator and accelerator for Israeli startups. Israel’s military intelligence agency, Unit 8200, provides graduates with access to groundbreaking technology. Many startups result from this community due to the technical knowledge and experience their founders gain by working on problems in a high-pressure environment and acquiring valuable leadership skills early on. To date, former members of Unit 8200 have founded over 1000 startups. 

The Bigger Picture 

The military plays an important role in the high-functioning and integrated ecosystem of innovation. The ecosystem comprises strong support from the government, academic institutions and technology transfer offices, a rich network of entrepreneurs and startups, private funding, growth companies, and multinational corporations with strong R&D capabilities. Effectively, Israel is home to more than 375 R&D centres of roughly 270 multinational corporations including Microsoft, Apple, Facebook, Intel and Google. As of 2018, 20% of all hi-tech workers in Israel were employed at the international development centres. In addition, over 1000 Israeli startups work and employ people across Europe. Israel has the third-largest number of companies listed on the NASDAQ, after the US and China. This makes the business sector the main engine of R&D expenditure. 

These developments are enhanced by the Investment Law, which enables foreign companies to benefit from reduced company tax rates and investment grants. Furthermore, the government provides employment grants for R&D centres and large enterprises. R&D activity saw a substantial increase, from 2.5% of the GDP in 1990 to 4.95% in 2018. Thus, Israel is the world’s largest investor in R&D as a percentage of GDP, ahead of Korea and Switzerland. Government support for the Israeli startup ecosystem dates back to 1991, when the Israeli government launched a technology incubator program.

Similarly, the venture capital industry in Israel experienced notable growth due to a government initiative (hebr.: Yozma) in 1993. The initiative offered attractive tax incentives and used government funds to double any investment. As a result, Israel’s annual VC outlays rose almost 60-fold, from USD 58 million to USD 25 billion, between 1991 and 2021.  Israel currently has more than 265 Israeli VC funds, of which 70 are international VCs with Israeli offices. Over 85% of the money invested in the local Israeli VC funds comes from abroad, particularly from large US pension funds. Many early-stage funds drive opportunities within the Israeli ecosystem. 

One Fit for All?

The bigger picture showcases the unique factors in Israel that make for a thriving innovation landscape. But, of course, the reasons for the success of Israeli startups are manifold and vary among sectors and industries. One of the secrets to the success of Israeli healthtech startups lies in their ability to leverage anonymised big data. They undoubtedly enjoy a significant advantage by tapping into the anonymised Israeli health care database of major HMOs in Israel. This allows the startups to conduct comprehensive longitudinal research by accessing real patients’ information dating all the way back to the early 1990s. It is no surprise that Israel boosted its prime position in exchanging Pfizer vaccines with such data, which gave the company a  unique head start in fighting the pandemic. 

In light of the COVID-19 pandemic and the resulting economic recession, many tech companies experienced a strong boost due to the rapid shift towards remote online work and services. Thus, the economic downturn’s barriers to international travel facilitated much development, especially for earlier stage companies.

The biggest potential for Swiss entrepreneurs lies in learning from Israeli success stories, collaborating on research, and in connecting market expansion strategies, according to Jeremie. Working with an Israeli startup means reaching out to the world together. It also means learning from one another, as Jeremie points out: “Israelis are good at ‘R’. And Switzerland’s ‘D’ is very good. So, I do believe that you can connect those two letters by creating joint solutions.” 

(The Embassy of Switzerland in Israel offers the Swiss Israel Lean Launchpad. This is a lean startup exchange program aimed at supporting the journey of Swiss healthtech and life sciences startups along some of their many business stepping stones, such as raising capital, attracting clinical trial partners and closing with customers. This hybrid 10-week program gives access to the lively startup culture in Israel, which has produced experienced and sharp players, and opportunities to learn from as well as with them. Read more about it via Applications for the next edition of the program open in July 2022.)

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