How Israel Became a Startup Nation
Photo by Fabian Irsara
Originally Posted On: How Israel Became a Startup Nation (aboutjewishpeople.com)
50 years ago, few would have imagined that the tiny nation of Israel would become the technological powerhouse that it is today. With a small population, limited resources and surrounded by enemies, Israel’s priority seemed more like survival than economic thriving.
Today, Israel is considered one of the largest technological hubs in the world and one of the best places for new start-ups, particularly in Tel Aviv. How this start-up nation unfolded is a testament to Israel’s unique social, political and geographical influences
How the Israeli start-up nation started
After gaining independence in 1948, the Israeli economy quickly had to establish itself in order to support this new nation. 50 years ago, the bulk of the Israeli economy was in traditional industrial production, including food processing, pharmaceutical production, plastic synthesis, and textile manufacturing, among other industries.
The surge in industrial growth was the product of increased investment to ensure that Israel was relatively self-reliant, given the surge of immigration from Europe after World War II, and disinterest in relying on European producers, and the wars that ensued with Israel’s neighbors that deterred trade in the region.
It wasn’t until the 80’s that the technology began to bloom. An arms embargo that motivated the production of independently-sourced weaponry and the return of employees from companies such as Apple and IBM helped to create the technological backing to advance various processes.
The arrival of highly-trained scientists, engineers, and programmers in the 1990’s help to expedite the acceleration of the technological sector in Israel. In 40 years, by the middle of 2000’s, Israel had already doubled its technological service exports.
By 2009, Israeli tech firms were helping to contribute immensely to various technology platforms and tech giants. The Google suggest feature is the product of Israeli developers around that time. Since Israeli technology firms have contributed products and development to companies ranging from Amazon to Google and Volkswagen. This development has resulted from a substantial increase in investment from private industry and the Israeli government.
With a relaxing of socialist tendencies for private industrial development and a security improvement, private investment began to flourish in the 1990’s. By 1999, foreign investors in Israeli technological firms accounted for 3.7 billion dollars worth of investment.
Primary corporate investors included Motorola, which has had long-term development in Israel since the ’70s, Sunguard, seeking vehicle and aerospace software, and Siemen’s. Many of these corporate investors buy the Israeli development firms to facilitate the development pipeline. Other companies, such as Samsun in 2015, have made substantial investments in developing specific products, such as medical monitoring devices.
Given the robustness of the Israeli technology sector, various venture capital firms have made substantial investments in Israel’s technological growth. In 2017, Israeli venture capital firms invested 814 million in local start-ups, and in 2018 a venture capital fund was launched affiliated with Tel Aviv University. As impressive as private investment has been government investment.
The Office of the Chief Scientist, or OCS, has distributed upwards of $400 million in grants to various start-ups, an arrangement that allows royalties to be returned to the OCS from product sales. There are also a variety of international technology alliances, including the US, Canada, and Singapore, which facilitate training endeavors and funding.
The Israeli tech sector has continued its unprecedented growth, albeit with some output reductions along the way. The financial crisis of 2008 had impeded investment in the tech sector that caused a rebound to be somewhat stymied by the economic policies of the Trump presidency.
Given the size of the US tech sector relative to the Israeli tech sector and the tax reductions made to regain US tech talent, Israel has had to find a niche in this turmoil. Ironically, the trade war between the US and China facilitated development opportunities lost to these nations.
Despite the onset of the global health crisis, interest in artificial intelligence applications, cybersecurity, and the internet of things has bolstered the Israeli tech industry. Israeli tech firms could garner $ 9.93 billion in investments in such companies as JFrog, Nanox, and Gencell. With top venture capitalists such as Ourcrowd, Pitango, and Alef continuing to fund tech development, the Israeli tech sector continues to be resilient and the core of the modern Israeli economy.
Why did Israel become a start-up nation?
Although few might have predicted the extraordinary growth of the Israeli tech sector, many have cited that it is the emphasis on abundant human resources over limited natural ones that have allowed the Israeli technology sector to flourish.
Foremost among the factors influencing the social development underlying Israel’s tech growth has been the motivation to survive in the Middle East. As was noted, Israel’s initial economic development coincided with the various wars fought within and against Israel up until the early 1990’s.
Developing a strong technology sector has not only allowed Israel to overcome the economic and social setbacks of these conflicts but has, as noted previously, attracted exceptional foreign investment in Israel’s tech firms. With foreign investment comes increased incentives for diplomacy that help to support and deter further conflicts involving Israel.
Although Israel does have various mineral and natural resource deposits, including potash, bromine and even natural gas, the contribution to the overall GDP is very minimal, at less than 1 %. Compared to more resource-rich countries such as Brazil, Nigeria, or even Saudi Arabia, Israel has had to have a much more substantial economic alternative for export purposes.
Likewise, although there are other sectors that contribute substantially to the Israeli economy, including the agriculture and tourism sectors, none have the potential for growth and development as the technology sector.
What some consider to be one of the greatest sources of inspiration as well as preparation for the growth of the Israel tech sector is the influence of the army. Since, all Israelis, unless exempted, have a mandatory service requirement once they turn 18, the Army invariably influences the outlook of Israelis.
Army life, with its inherent risk and rigidity, has instilled the spirit of inspiration, risk-taking, and problem-solving inherent to success in the technology industry. Further, the structure of the Israeli Defense Force, or IDF, attracts and trains top-level talent for military purposes who then are capable of contributing immensely to various start-ups and enterprises after completing military service.
The IDF’s unit 8200 is considered the premier cybersecurity unit in the world. With training that includes coding, hacking and cyber-espionage, members of this elite unit are already prepared for the challenges inherent to maintaining adequate civilian cybersecurity networks. Beyond cybersecurity start-ups, IDF recruits trained in coding can go on to facilitate network and software development for a variety of other start-ups. Indirectly, the IDF is a considerable incubator of talent within Israel.
While the Army and a lack of resources may motivate and train various individuals, it is the tradition of learning within Israel that is the foundation of the continued technological growth. Israel has one of the most well-educated populations in the world, with 47% of 25-34 year-olds with a tertiary degree, higher than overage compared to other Organization of Cooperative Economic Development (OECD) nations.
This development owes in part to the considerable investment in education, with 6.2% of Israel’s GDP being directed towards educational funding compared to 4.9% in other OECD countries. Likewise, teachers enjoy a favorable advancement system that promotes retention and performance, allowing for quality educational services throughout the country.
Most impressive is that 26% of college graduates have degrees in engineering or computer science, areas critical to pursuing further development in the virtual economy. Likewise, the Israeli government has an active visa program for tech-oriented foreign employees to bolster and keep pace with the rapid growth in the industry. All in all, the cultural investment in education provides a substantial footing to sustain the growth Israel has shown to date.
As much as education paves the way for developing the theoretical backing to pursue the venues necessary to develop Israel’s tech network, the unique way of thinking inherent to Israelis provides the critical edge to pursuing the challenges necessary for sustained growth. Israelis are naturally competitive, another byproduct of mandatory military service and living in a hostile region.
While this may seem to be counterproductive, the competitive nature of life in Israel helps to cultivate top talent willing to compete on a global scale while also harnessing the camaraderie intrinsic to successful tech teams.
Another unique aspect of Israeli thinking is a latent tendency to challenging the rules. While this attribute may also seem counterintuitive, it has allowed Israeli firms to develop innovative means of countering problems. Whether within the cybersecurity realm, assisting tech giants such as Google or even in developing innovative agricultural mechanisms that address global problems, Israelis are not afraid to step outside the box and think differently to come up with solutions.
Lastly, Israelis are not afraid to fail. While this attribute is not so coveted in other venues, particularly in military service, tech start-ups are notorious for the high failure; as of 2019, estimates suggest that around 90% of tech start-ups fail. While this may not bode well for individual ventures, those ideas that persist in the market are that much more likely to succeed, as successful ventures such as Waze have demonstrated. This combination of seemingly counterintuitive traits has helped Israelis become a pre-eminent tech hub.
Funding, philosophy and innovation are critical to development, but the Israeli government’s emphasis on hi-tech growth have been critical to its success as a start-up nation. Various government agencies, most notably the Israel Innovation Authority, or IIA, serve as start-up incubators to facilitate funding as well as research and development.
In addition to funding and creating start-up incubators, the government has provided tax cuts and tax exemptions for start-ups. Further, the government has enabled various alliances with other countries that has facilitated start-up development.
The US-Israel free trade agreement facilitated bilateral trade yielding $39 billion. Much of this investment has been in the hi-tech investment and research and development to help bolster trade. The IIA has also helped to distribute grants to various startups, with up to 40% of the initial investment round being granted and up to 50% for companies with founders from under-represented communities, including Arab Israelis.
With recent political developments helping to improve relations with Israel in the Middle East, greater opportunities are available within Israel and within partnerships growing in the Middle East. In this capacity, the tech industry is not only helping to bolster the government, but the government is also helping to expand the benefits of tech development throughout the country.
Overall, Israel’s success is due to the overwhelmingly startup-friendly environment that exists within the country. As noted above, Israel benefits from having multiple locations throughout the country that attract tech talent: Tel Aviv, Herzliya, and Jerusalem.
Being in such a small country, the size of New Jersey helps to streamline the logistics network and facilitates collaboration between the abundant start-ups. Top universities such as the Technion in Haifa, Tel Aviv University, and Ben Gurion University in Beer Sheva help to train top talent and, given their positioning to these tech centers, creates an employment pipeline that directly channels talent into or towards start-ups.
Like other tech sites such as San Francisco, Austin, or even Bangalore, the warm weather and youthful culture in Israel create an environment that retains talent for the long-term. That’s why large tech start-ups such as Mellanox and Wix, among others, continue to thrive while newer start-ups continue to vie for coveted mergers and funding acquisitions.
With abundant collaboration between start-ups, a surprising aspect given the relative competitiveness of the industry, and the ample funding from various venture capitalists throughout the country, it’s no surprise that all of these factors have come together to make Israel a successful start-up nation.
Technological trends of Israeli start-ups
Given the success of tech start-ups in Israel and the recognition they’ve garnered relating to industries ranging from aerospace to agriculture, it’s no surprise that many are heavily invested in the future of Israeli technology. Despite the health crisis and its influence on worldwide markets, Israeli companies are continuing to influence the tech sector, particularly in the fields of cybersecurity, fintech, and biotechnology.
Beyond these fields, Israeli start-ups are influencing various other fields, such as Fiverr with talent acquisition and Talkspace with therapy. Fiverr is an app-based network that connects businesses with freelancers, helping to sustain the growing gig-economy while keeping overhead low for burgeoning businesses around the world.
With revenue in 2020 nearing $185 million and growth projected at 30%, Fiverr is poised to continue its accelerated growth into the labor-coordination marketplace. Talkspace, another app-based platform, is in the process of going public having posted $125 million in earnings in 2020.
With the health crisis shifting various services, including therapy, to a digital format, Talkspace is poised to continue its upward ascent and provide mental health treatment to an even broader audience courtesy of its app.
One might consider cybersecurity to be Israeli tech’s bread and butter export. Given the heavy investment from the Israeli military in cybersecurity developments, it’s no surprise that there are so many start-ups continuing to impact this field.
Companies ranging from Axonius, a leader in network integration and asset management, to Insights, a content regulator keen on combatting fake news, to Cato Networks, a pioneer in remote security systems, Israeli companies are pioneering cutting-edge developments in the cybersecurity world. Given the perils of hacking, phishing, malware and other cybersecurity threats that have abounded during the global health crisis, Israeli ventures will play a critical role in ensuring network security on a global scale.
Another military-inspired venue where Israeli start-ups are having a tremendous impact is with developments in artificial intelligence. Artificial intelligence is sought in fields such as medical diagnostics and business intelligence software; with a resurgent economy as the health crisis wanes, Israeli companies are certain to have a continued impact amid firms from the US and China.
Companies like Gong are pioneering applications for AI applications, with Gong generating $ 60 million in revenue in 2020 with a platform that helps companies improve their sales conversion rates. Gong is just one of many Israeli companies seeking applications for artificial intelligence, particularly since the Israeli government is investing heavily in improving training and increasing the number of employees with artificial intelligence skillsets.
A program backed by the Israel Innovation Authority was piloted in 2020 and involved 6 companies in fields such as aerospace and software development to train AI scientists, engineers and experts. With the government backing investment in artificial intelligence applications, Israel is paving the way for greater development for start-ups in this field.
The internet of things is changing the way that we interact with and rely on our devices, and Israeli companies are again striving to innovate in this domain. Companies such as Valens, Orcam, and Celeno are developing unprecedented products to tackle a variety of problems: real-time, wireless microchips; reading assistant devices for the visually impaired; and wireless weather interpretation, among other applications.
These are just some of the many applications being sought via the internet of things, from medical analysis of human waste to security scanning devices and virtual breathalyzers.
As technological innovation spreads through industries and devices gain greater connectivity to cloud storage systems, wifi transmission and other devices, services that allow for greater convenience, more accurate diagnostics and expanded capabilities will only continue to increase. Among them, Israeli start-ups will continue their search in developing the internet of things.
While Israel has long been an innovator in the agriculture sector, with various innovations including drip irrigation and better food transportation, Israeli tech start-ups are continuing to stake their claim while improving the food industry. The Israel Innovation Authority has extended its services to the food industry as well, with its support of various food startups, in addition to private investors such as the Strauss Group.
Among the developments, these start-ups are advancing include biodegradable and compostable packaging, alternative meat and seafood development, personalized nutrition through gut microbiome analysis, and creating alternative sweeteners.
An example of the paradigm shift is the company Aleph farms, among the industry leaders in alternative meat production with its development of tissue from cell bioreactors. One of the newer companies in the food industry, Aleph farms seeks to continue its growth, with funding to date of $ 14 million dollars, and expand its product of antibiotic-free, alternative flesh products. Aleph farms is just one of many start-ups in the Israeli food industry seeking to disrupt the norm and apply technological innovations, including Artificial intelligence and the internet of things, to improving the food system.
The future of Israeli start-ups
It’s almost impossible to document the development of all of the start-ups in Israel since Israel is currently ranked third best start-up ecosystem in the world, behind the U.S. and the U.K. With start-ups influencing just about every industrial sector, including agriculture, aeronautics, therapy, software development, and talent acquisition, Israeli companies seem poised to continue to grow in influence, scope and quantity.
Given the meteoric rise of Israeli start-ups to this point and the exceptional private and government investment in individual companies as well as start-up training programs, the foundation for future growth seems almost certain. In many ways, Israel has been destined to reach this point: a small self-reliant nation that values military problem-solving coupled with a cultural tendency to innovate and break boundaries.
These are the characteristics that define ground-breaking developments in any field, but especially in tech start-ups. As the health crisis demonstrated, the world economy will always be a volatile realm and it will always be difficult to project which companies in which industries will have the greatest long-term impact; this, of course, is par for the course in the fast-paced, unpredictable and risk-prone world of technological innovation. For the near future and almost certainly for a long-time to come, the elements that have contributed to Israeli technological success will only continue to fuel its growth as the start-up nation.