The Israeli Ecosystem: View of a European VC

Whether you’re familiar with Israel or not, if tech is of any interest to you, you must have heard about it a couple of times: Israel is the Startup Nation. I spent a couple of months in Tel Aviv with OneRagtime trying to get a sense of the meaning of this sentence. Israelis are throwing it all over the place to get their country marketed but it’s more than the title of a famous book. It’s a reality. Israel is not only a Startup Nation, but a nation of startups.

But why is Israel known as the Startup Nation and not Canada, Germany, or France, which sits in a more stable geopolitical environment and boast larger economies?

Here are some amazing facts about Israel’s Ecosystem:

  • #1 country with Nasdaq-listed companies except the U.S. and China
  • #1 country in terms of VC Investment per Capita and as a % of GDP
  • #1 country in terms of startups concentration: there’s 1 startup for every 400 people and 1 startup each 19km2
  • #1 startup ecosystem after the US according to the 2015 Compass Global Startup Ecosystem Ranking
  • #1 country in terms of R&D employees concentration: 140 per 10,000 (the U.S. comes in second with 85 per 10,000)
  • #1 country in terms of high tech employees concentration: 250 000 high tech employees (around 1 per 10 working people)
  • #1 in the production of scientific papers
  • #1 out of 148 economies in innovation abilities, #2 in entrepreneurship and #3 in global innovation according to the 2016 IMD Competitiveness Yearbook
  • #1 out of 60 leading economies around the world for technological and scientific abilities according to the annual Global Dynamism Index (GDI)
  • #2 on the World Economic Forum
  • #2 most highly educated country in the world according to WSJ
  • #4 in its ability to attract foreign investors according to Deloitte
  • #5 in the number of patents per capita
  • #10 on the Bloomberg Index

So the question remains : How is all of this possible? What makes Israel an innovation powerhouse?

The entirety of Saul Singer’s Startup Nation book is dedicated to this question, but who’s got time for books nowadays? I’ve thought that doing things the Israeli way was far more valuable. So, here’s a pragmatic one pager infographic picture we came up with at OneRagtime :

The Pillars of Innovation

1) Military

In Israel, the military service is mandatory from 18 to 21 years old. It’s shaping the future of all citizens there. There are several exceptional intelligence units that create tech or cyber experts, hackers.. like nowhere else. For instance, 8200 is the supreme IDF intelligence information unit and 81 focuses on supplying the newest technology to Israeli combat soldiers. The culture and educational methodology there are exceptional:

“There’s nobody around to tell you how to do it. The culture inside — and it’s by design — is that your superiors just tell you to go figure it out. That gives you the huge freedom to think differently. It’s you or nobody else. And when you’re an entrepreneur, that’s the most important skill. When you do 5 or 10 or 20 of those projects, you’ve just built 3 things that could be a startup.”

Avishai Abrahami, Founder of Wix.

When we assume that most of the technological innovation that we know today such as the GPS or internet are coming out of the US army, we can only imagine how much Israel’s military contributes to these innovations. More than 1,000 companies have been founded by 8200 alumni, from Waze to Check Point to Mirabilis, the parent company of ICQ — 90% of the intelligence material in Israel comes from 8200 according to Forbes.

2) Government Support

In Israel, the Government dedicates a huge part of its budget to the military and to the R&D in technology (20% and 4%, respectively, of GDP). The map below produced by The Samuel Neaman Institute (not so) clearly shows how the government and public corporations contribute to the emergence of all types of innovation clusters.

Credit : Samuel Neaman Institute — Israel’s Innovation Ecosystem

3) Innovation Centers & Multinationals R&Ds

Credit : Lior Weizman — Deloitte Israel

According to a 2017 Israel Innovation Authority Report, “There are roughly 350 multinational R&D centers in Israel, many of which were established following the acquisition of Israeli hi-tech companies. The R&D centers constitute an important part of the Israeli innovation ecosystem and create significant technological value–they represent about 50% of investments in R&D. In addition, these R&D centers positively affect the economy from the perspective of salaries and productivity. In addition, alumni of the R&D centers often move among different players in the hi-tech industry over the course of their careers, thus distributing the technological and managerial skills they have acquired, a phenomenon known professionally as spillover.”

4) A strong VC ecosystem

There are roughly 150 active VC firms in Israel. Some of them are known for their sector expertise like cybersecurity, life sciences, or manufacturing, and others are known for their track record (Magma, Pitango, Gemini, Canaan, JVP, etc.). Any way you look at it, the funding ecosystem is impressive and there’s no need to explain how it contributes to the success of — the data speaks for itself:

  • In 2017, Israeli high-tech companies raised $5.24 billion in 620 deals
  • In 2017, Israeli startups exited $23 billion in 112 deals, including 92 M&A deals, 13 IPOs, and 7 buyouts with 18 exits over $100 million

Below is a nice summary of the Israeli funding landscape info with all the actors.

Credit : iAngels

5) Competitive structure

Israel has 8.5 million people, of which around 480,000 live in Tel Aviv. When you consider only half of those people to be consumers, and fewer still to have access to free capital, one thing is clear: you can’t count on launching your product or service locally with any real measure of success. It means that thinking big and thinking global is the only choice. Having no market is better than having a small one. To survive, you’ll have to go big. That’s it.

Having said that, Israel has incredible metrics relative to its size. For instance, Israel doubled its population in 30 years (from 4.1 million to 8.2 million), increased its GDP by 400%, foreign currency reserves by 3%, while at the same time reducing government debt by 76%. Security expenditure as a percentage of product also fell by 75%, government deficit by 82%, the tax burden by 30%, and American aid (as a percentage of product) by 90%. The jump in Israeli Gross National Product since the beginning of the century has been nothing less than astounding — from 500 billion shekels to more than one trillion. Israel owes this impressive growth at least in part to the achievements of the technology industry which saw a long line of successful exits and invited a stream of foreign investments according to the Israel National Technological Innovation Report of 2016 by Luzzatto Group.

6) Culture of empowerment

For this part I’ll let you read this great article by Startup Nation Central about why Israeli entrepreneurs feel so empowered and are so unique.

Hint : Diversity & Chutzpa..

Link 👉🏽: https://www.startupnationcentral.org/israeli-entrepreneurs-uniquely-distinctive/

7) The synergies

Israel has great components to be a world class leader in innovation. But what makes it even better is the fact that all of those components are connected to one another. Thats why 1+1 = 3:

  • A strong cultural framework influenced both by the army and the competitive structure that has a huge impact on the mindset of Israeli people.
  • An efficient transfer of both expertise & technology involving the army, the educational structure, the incubators, the government and the multinationals that share and pull ressources together to offer the population what’s been made in fields and labs.
  • An easy access to funds from the government and the VCs alongside strong hubs allowing corporates to acquire startups and build R&D centers. This strongly contributes to the virtuous cycle of Israel’s innovation process.

We are always looking for startups and investors to meet so feel free to send me a mail at eytan@oneragtime.com, I would be happy to get to know you.