How Israel is building the model B2B SaaS capital
By Julie Kainz and David Arndt
If it were possible to build a startup hub from scratch and by design, what would it require? You would begin with talent: a deep pool of highly trained, extensively knowledgeable technologists across a range of fields. You would add success stories: exemplar companies that provide a template for startups to replicate and a target for challengers to aim for. You would include culture: a collective drive to succeed and an ambition to go global from the earliest possible moment. And you would finish with a supportive environment — one that stretches from the incentives provided by the government to start and grow a business to a national ethos in which being an entrepreneur is both widely expected and aspired to.
In other words, you would build something that looks very much like Israel: a young country whose technology hub has matured with dramatic speed and remarkable results.
Israel’s credentials as a technology powerhouse are well-known: more startups per capita than anywhere else in the world, R&D investment running at twice the OECD average, and a burgeoning population of unicorns. Its tech production line has produced a succession of winners: among them, stock market darlings Fiverr and Wix, deep tech pioneers Waze and Mobileye (acquired by Google and Intel respectively) and fast-growing consumer financial brands such as eToro and Lemonade. The path from Israel to the US public markets has become increasingly well-trodden: only the US and China can claim more companies currently listed on the Nasdaq.
What explains this extraordinary culture of innovation and success? How can such a small country, most of which is desert, be such a fertile source of entrepreneurship? In a world hardly short on tech clusters, why is this hub different from all other hubs?
One well known fact is that Israel’s technology scene has access to a unique pool of talent: the engineers, programmers and technical experts who graduate from the Army, and specifically Unit 8200, its military intelligence arm. Those who are selected to do their military service in 8200 benefit both from access to leading-edge technology, and an environment which blends freedom to act with the responsibility to deliver: a mirror to the startup world. By one estimate, over 1,000 startups have been founded by former members of the Unit, among them Waze. The combination of technical knowledge, entrepreneurial skills and military discipline that many Israeli founders bring to the table following their Army service is both rare and immensely powerful when applied to business building.
These founders are not just individually capable, but collectively networked. Almost anyone launching a startup in Israel knows other founders well — whether through working in their business or serving together in the military. Every tech hub thrives on its network effect, but few are as densely interconnected as Israel’s. The result is that almost no-one begins the entrepreneurial journey as a novice, and the vast majority of founders have a base of experience to build on and a cushion of supporters to fall back on.
Those ingredients have combined to create a tech cluster that has birthed numerous global successes. Much of this can be ascribed to Israel’s compact market size, something that has driven a focus on B2B over consumer companies. With relatively few domestic customers, companies typically look to go global from the beginning. They can only gain velocity through international expansion, and therefore compete from an early stage in markets where they must be demonstrably better than their local competitors. The result is that most either fail or succeed fast, and the successful show the benefits of having emerged from the tough school of a non-hub location.
This international ambition, combined with the technical competence that is so characteristic of Israeli founders, has seen investors flocking to Tel Aviv. Almost $10bn was invested in Israeli private tech companies in 2020, a 27 percent year-on-year increase, and a third comprising deals with a ticket size in excess of $100m.
Cybersecurity was once the staple of the Israeli scene, but recent years have seen diversification across different verticals, with a particular focus on B2B SaaS. From listed companies such as Wix to Dawn investments like Granulate, the cloud is shaping the next stage of Israel’s tech economy — in the same way that it is shaping the global economy, powering business and commerce around the world. Granulate, which optimises cloud deployment and use for companies, is indicative of the kind of global cloud-native platforms emerging from Israel in droves. These are companies that can be scaled globally, shaping the planet, while much of the talent and operation remains local: giving back to the ecosystem which produced them and priming its next stage of growth.
They are the products of an environment like no other — one shaped by unique factors and advantages that cannot be replicated. In technology terms, Israel’s growth is prodigious, its moat is wide and its optionality is huge. The future potential is almost limitless.
Dawn has invested in five companies born out of this powerhouse including Minute Media, AccessFintech, Vulcan Cyber, Granulate and Firebolt.
