Thanks to its audacious entrepreneurs, highly trained military and massive M&A activity, Israel has become a true startup nation
Whenever you discuss Israel’s entrepreneurial ecosystem, there’s one phrase that crops up time and time again: the startup nation. First coined by authors Dan Senor and Saul Singer in their book of the same name, not only is this an apposite description of a nation in which, according to government figures, tech accounts for a third of GDP but it also demonstrates just how much entrepreneurialism has become part of the national identity. “There’s a joke in Israel that 30 years ago every Jewish mother’s dream was that their son or daughter would become a lawyer or a doctor,” says Nir Zohar, president and COO of Wix, the cloud-based web-development platform. “Today mums want for their kids to become entrepreneurs.”
Given that Israel is something of a startup itself, it’s hardly a surprise that the country has embraced entrepreneurship in this way. After all, it has spent the last 70 years creating something from nothing – often in the face of incredible odds. “In the old days, we were often faced with challenges that were completely asymmetrical,” says Jon Medved, investor, serial entrepreneur and founder and CEO of OurCrowd, the equity crowdfunding platform built for accredited VC investors. “We didn’t have the money, the numbers, the weapons and we had to make that work.” Naturally the enormity of these kinds of challenges has led Israeli entrepreneurs to be far less risk-averse than their contemporaries in startup hubs elsewhere in the world. “In a country like ours, which still faces existential dangers and where people want to completely wipe us off the map, starting a company doesn’t seem like a big deal,” says Medved. “What’s the worst thing that can happen? You fail.”
Certainly this seems to have had a marked input on the character of the kind of founders the country produces. “Israeli entrepreneurs aren’t afraid to tackle things that seem to be impossible,” says Yovav Meydad, vice president of products and marketing at Moovit, the public-transport app and mapping service. “They’re the embodiment of chutzpah.” Without a doubt, the Yiddish word for self-confidence or audacity epitomises many of the characteristics deemed desirable in an entrepreneur and it’s something many Israeli founders exhibit in spades. “They’re bold, they’re not afraid to say something and they’re not shy,” he says. “Even when I see very successful entrepreneurs from other countries, their behaviour shares very similar characteristics with that of Israelis.”
But while temperament is vital in creating a thriving startup hub, it isn’t the only factor: ensuring your startup can find raw technical talent is also key. Despite Israel having a strong education system, it can still be difficult for the country’s startups to source the skills they require. “Access to talent is always tough, especially in a vibrant ecosystem that is [competing] continuously,” says Yifat Oron, CEO of LeumiTech, the high-tech finance arm of Bank Leumi, the Israeli bank. And this is set to become an even more intensely contested battleground: with increasing numbers of new businesses founded each year and tech giants like Google and Facebook flocking to cities like Tel Aviv, skilled engineers are in high demand. “There are multiple entities trying to gather the best talent: startups, large local companies, as well as [multinational corporations],” she says.
Fortunately Israel has an ace up its sleeve when it comes to training the next generation with these kinds of technical skills: national service. “There’s a very deep and profound relationship between what goes on in the Israeli army and our success in the startup world,” Medved says. Given founders from Israeli startups like Outbrain, Waze, Wix and Check Point all served in Unit 8200, the Israeli Intelligence Corps unit responsible for signal intelligence and code decryption, military service clearly proves an invaluable crucible for imparting technical skills. Additionally, in light of the fact that 10% of conscripts go on to serve as officers for at least five years, many young Israelis also pick up invaluable strategic skills during their national service. “They learn how to be mission driven because in the army lives depend on every decision they make,” he says. “It’s not just an academic exercise.”
And considering the sheer number of founders that have passed through the Israeli security services, it’s hardly surprising that the country is proving a dab hand at cybersecurity. “Today 400 of the 1,400 cybersecurity startups in the world are Israeli,” says Medved. But Israel is far from being a one-trick pony. Not only is the country producing startups in disciplines as diverse as consumer, IoT, fintech and drones but it has also built a rep for tackling the big problems, whether that’s machine learning, robotics, digital health or virtual reality. “These are things that require deep and fundamental technology breakthroughs and that’s moving into our home-court advantage,” he says.
An appetite for the innovations Israelis are creating has seen significant quantities of investment pour into the country. According to a report by the IVC Research Center, the research organisation dedicated to analysing Israel’s tech industry, Israeli startups raised $2.8bn of investment in the first half of 2016 alone – a 33% increase from the $2.1bn raised during the same period in 2015. “It’s become easy for professional investors to raise money from the US to build $100m to $300m funds,” says Ronni Zehavi, CEO of hibob, the HR and benefits platform. This means that while Israel was once subject to the same funding gap seen in many entrepreneurial ecosystems, there is now ample capital available throughout a startup’s lifecycle. “You can easily find investors to invest in your startup throughout the seed, A, B and C rounds,” he says.
But Israeli startups aren’t just attracting interest from investors: the nation’s businesses are also proving particularly enticing for those looking to buy. The IVC-Meitar Israeli High-Tech Exits report revealed that Israel saw $8.8bn in M&A activity in 2016 – which included the whopping $4.4bn acquisition of Playtika in July. Not only do these deals see huge amounts of capital making its way back into the Israeli economy but they also provide a massive source of inspiration for entrepreneurs just starting out on their journey. “They make a huge contribution,” says Zohar. “Thinking ‘I want to be the next Waze and sell my company for $1.1bn to Google’ definitely pushes people to keep on trying.”
However, while multi-billion dollar exits undoubtedly enrich the ecosystem, Zohar maintains that too many startups taking the first deal that lands on the table can prevent the growth of more home-grown unicorns. “My belief is that if more companies don’t sell or exit at the startup stage, over time they generate more knowledge and expertise,” he says. “That then creates a spillover effect that’s crucial for the growth of the local tech economy.” Fortunately Israel has seen increasing numbers of startups that are in it for the long haul: while IPOs have fallen from their $9.8bn peak in 2014, plenty of Israeli businesses like Mobileye and Wix have plumped for an IPO and continued growth rather than an early exit. “It’s supplying another alternative: entrepreneurs are starting to dream of building a billion-dollar company rather than building to an exit,” he says.
Regardless of whether they focus on growing at home or look to sell overseas, one thing is certain: Israeli startups are increasingly bringing their services to the world. “In the future, we’re only going to become more and more global,” says Medved. “We’ve gotten away from an obsession with the US: Europe and Asia are now a big part of what we do.” Not only have Israeli startups been seeing vast amounts of interest from Chinese firms and funds – according to the IVC Research Center, Chinese investment in the country’s high-tech hit £500m in 2015 – but Israeli startups are increasingly looking at opportunities throughout the developing world. “Many startups in Silicon Valley look at solving problems for the rich,” says Medved. “Increasingly you’re seeing Israel tackling the problems of the other five billion people on the planet.”
Employing more than 1,400 people across four continents, few are better placed than Wix to illustrate how home-grown Israeli innovators are now taking the world by storm. Founded by brothers Avishai and Nadav Abrahami and their friend Giora Kaplan in 2006, Wix was actually born out of the frustration of trying to build a website for an existing startup they were working on. “The internet had been widely used for more than a decade and yet you still needed a professional in order to put the key building blocks of a website together,” says Nir Zohar, the company’s president and COO.
Realising that many others must have shared their pain, they set about creating a drag-and-drop website development tool that would be useful for consumers, startups and corporates alike. “They wanted something easy and simple to use but that also had enough depth and complexity to it in order to create something that looks beautiful and amazing,” Zohar says.
The entrepreneurs’ efforts were vindicated almost immediately and the startup saw significant uptake right from the off. “It took us almost exactly one year to get to our first million users, from the summer of 2008 to the summer of 2009,” Zohar says. “Nowadays we’re adding more than 1.5 million a month.” In light of this impressive global growth, it’s not surprising that Wix decided to pursue an IPO rather than settling for an early exit: in 2013 it floated on the NASDAQ, raising $127m. And given that it’s still growing 40% year-on-year, this was without a doubt the right choice. “We are seeing amazing growth and that’s just the tip of the iceberg for us,” he says.