A Giant Leap for Israeli Tech?

There is enough literature out there harping about Israel’s coveted title as the “start-up nation.” A quick glance at the numbers - 700 tech startups (the most startups per capita than any other country in the world), 260 accelerators, the largest R&D center outside of Silicon Valley and 280,000 jobs in the high-tech industry - will re-affirm that.

Impressive!

Then comes the serious talk. What does the country have to show for all its potential? Sure, there was that Wix Super Bowl commercial this year bearing the flag for successful Israeli startups, but what else?

Nowadays, the nation’s promising startups are making more headlines for their multi billion-dollar exit deals than their scale-up success stories. It appears that there are not enough unicorns emerging from the large pool of startups which brings to question:

“Can Israeli startups scale up on their own without inevitably fizzing out?”

How did Israel become the “start-up nation?”

Before delving into the question, let’s explore what makes Israel such an idyllic setup for startups?

  • The quality of the talent in cities such as Herzliya and Tel-Aviv is on par with the upper echelon of talent in Silicon Valley; there are more PhDs per capita in this tiny nation of 8 million people. This differentiates it from the likes of other off-shore-Silicon-Valley-copycats such as Banglalore or Shenzhen.
  • The fearless attitude of the talent, with their inherent chutzpah outlook, is also unique to Israel. Israeli techies are unafraid to challenge experienced personnel at larger companies coaxing the bigwigs to sit up and take notice.
  • Israeli culture normalizes risk-taking and failure which in turn encourages more Israeli entrepreneurs to take the startup plunge.
  • The Israeli army’s intelligence division, Unit 8200, has been producing graduates who are behind some of the country’s best-known technology start-ups in the cyber-security arena.
  • The ease of access to seed funding from local and international VCs as well as accelerator programs reduces the barriers of entry for early-stage startups. This allowed many small firms to sprout up quickly.
  • Israel is America’s closest collaborator in cyber security and military technologies. A lot of US-based investors also take an active interest in Israeli ventures while its firms actively recruit Israeli talent. It is this intricate exchange of ideas and talent that has led to Israel’s Silicon Wadi mirroring Silicon Valley in many respects.

Problems Scaling Up

Now that we know why Israel is such a flourishing tech-hub, we can resume our attempt to answering the question posed earlier. The reasons why Israeli startups have had trouble scaling up include:

  • Despite all its technical know-how, the startups lack the upper management and marketing expertise needed to go from small-time innovator to global powerhouse.
  • The small Israeli market means that there is only so much room for growth in Israel. High-tech is better suited for a larger audience, thus it goads better for Israeli firms to eventually look towards the lucrative American market.
  • Because the North American market is a different ball-game, the Israeli firms have a tougher time navigating it. The entrepreneurs are then faced with the conundrum of relocating to America and displacing their Israeli ops or the prospect of struggling remotely by remaining in Israel.
  • Due to strict visa regulations, Israeli firms have trouble attracting top talent into the country. They are left with a non-diversified pool of ideas and outlooks that does not bode well for an aspiring global powerhouse.
  • While competing for international talent, the firms also face competition for local ones from tech multinationals operating in Israel. A large chunk of local talent also choose to relocate overseas in pursuit of bigger opportunities which gives rise to the talent brain-drain problem.

The bottom line is that Israel has the infrastructure to support many unicorn success stories. They have all the ingredients — talent, capital and fearlessness — to take the initial startup dive but it is the lack of expertise in the business management side that is their greatest impediment.

Signs of Scaling Up

Despite the shortcomings, more and more entrepreneurs are deciding to ward off exit deals by prolonging their startup journey and retaining their operations in Israel. In fact, the average time to exit for startups has increased from 6 to 7 years recently.

Because the North American market is tantamount to their overall growth, Israeli firms have resorted to establishing satellite offices in the region. They are hiring the marketing talent familiar with the American psyche to better assimilate with American needs. And, it seems to be working. Meanwhile, Prime Minister Netanyahu has committed to opening up Israeli doors for the right talent, thus there will be no dearth of talent for the country.

As startups refute exit deals, they are find it easier to get a hold of late-stage financing as well. The total late-stage funding figures went from $1.3 billion in 2014 to $2.2 billion in 2015. This figure represents the lion’s share of VC funding for Israel in 2016, representing 60 percent of the total funds.

If that wasn’t enough, more companies are also opting for IPOs. Another astonishing figure pops up: Israel has the most number of companies listed on NASDAQ after the United States and China.

In conclusion, the numbers speak for themselves. A larger-than-ever crop of early stage companies are trying to cross the chasm into the growth phase, which is a great opportunity for investors. Israel’s tech arena is unlike those from China, India and the EU combined because it shares a unique relationship with the US and it is about to break out into a full-fledged #scaleupnation.