The self-proclaimed title of “Start-up Nation” is only part of the story of the technology boom in Israel. From maturing investor expectations to wealth inequality and the challenge of building an inclusive society, the future of Israel’s technology economy is undergoing a re-invention. This re-invention means changing the dream. Not everyone can or should be an entrepreneur.
I recently visited a number of Israeli venture capital firms and incubators meeting with over 25 start-ups based out of Tel Aviv and Jerusalem as part of a research tour I was helping to lead. We took delegates from both national and international companies from a variety of sectors to immerse them in the innovation coming from the self-titled “Start-up Nation”.
We take delegates annually to Silicon Valley and a variety of European innovation centres, however, this was the first time we had run a research tour to Israel. We stayed in a boutique hotel one block back from the beach, ate world-class cuisine in some of Israel’s best restaurants and rubbed shoulders with tech millionaires and political leaders. Life in Israel was good.
Israel has taken a winding path to get here. Back in the 1980’s stagflation had taken a grip on the economy. Inflation was at 445% and the lack of employment opportunities at home meant many Israeli’s left Israel to work in the emerging Silicon Valley start-up and venture capital scene. The successful economic stabilisation policy of 1985 meant that by the 1990s inflation was down and Israel provided a more attractive environment to remain and work again. Those links back to silicon valley would prove vital to kick-start the start-up nation, along with a surplus of engineers following the cancellation of the Lavi fighter jet programme. Combined with a constant flow of high-flyers coming from the Israeli Defence Force’s elite army intelligence units and the launch of a venture capital programme by the Isreali government, the scene was set.
While the tech millionaires can afford luxury high rise living, the low-rise masses find it increasingly difficult to afford to live in Tel Aviv.
The success of Israeli start-ups has shaped expectations; everyone wants to be an entrepreneur. However, the overall state of Israel’s economy means that it’s not more entrepreneurs that are needed. Investment in seed and early-stage start-ups has been down since 2006 and there are fewer domestic funds. Although the growth in the number of start-ups is high, success rates are low and overall employment in the sector is static. The desire to exit early, often listing on the NASDAQ means that the Israeli domestic economy is not maturing and there are few sustainable businesses which employ a range of skills across corporate activity.
The knock-on effect of this is that the tech economy is an isolated bubble in the overall Israeli economy. While the tech millionaires can afford luxury high rise living, the low-rise masses find it increasingly difficult to afford to live in Tel Aviv.
Investor expectations are a driver for new behaviours, but Israel must live up to these expectations and deliver. Key to this is unlocking untapped potential in those that don’t join the elite units of the Israeli Defence Force, either because they are not deemed to be top performers, are Arab or ultra-Orthodox. To deliver this Israel needs to build an inclusive society with appropriate quality educational opportunities for all. This combined with a higher proportion of start-ups scaling-up domestically will strengthen the Israeli economy bringing benefits to the broader population.
The start-up may not be dead, but for the sake of inclusivity and peace, long live the scale-up.