The story how a tiny country created a tremendous startup industry.
Israel is a small country situated on the southeastern shore of the Mediterranean Sea and the northern shore of the Red Sea. With the 8,5 million population, Israel has a high level of unemployment. Despite this fact, Israel produces a significant number of innovations and startups, especially in IT sphere.
There are different reasons for this situation, which we will consider and try to hit it over the fence.
- The Maturity of Thinking.
Israel is a country at war. This fact creates the mature approach to everything Israeli people do. The mentality of the people has no place for puerilism or childishness, that is why Israeli startups are not a sort of students’ pastime.
Their business is usually a well organized and competitive unit since the very foundation.
A strong and intelligent man in Israel is a profession. It is quite a common feature among the IT companies in Israel to take a real business shark aboard. Such kind of people is highly valued and appreciated by companies.
The maturity of thinking has come to Israelis due to the conditions they live under: they are surrounded by enemies and are being under the threat of boycott over the Israeli treatment of the Palestinians.
Most prominently, Israel lacks coal, natural gas, petroleum, large quantities of fresh water, and easy access to local emigrant labor.
Such harsh conditions provoked the nation to find alternative vectors of growth. Hence, today Israel is a powerful brain center.
- The Craving for Knowledge and Innovations.
The peculiarity of a whole Jewish culture is a high orientation towards knowledge and training. This probably began since the time when the Torah was not written down and it had to be learned by heart.
Then the trend intensified in the Middle Ages and later when Jews occupied the roles of bankers, artisans, and doctors.
Such a traditional skill has found a very good application in today’s world of the information age. The Israelis are really much more diligent in learning, not only at the university but all along their lives. Their craving for knowledge and the desire for innovations allow Israeli business to trim the sails to the wind.
As a spectacular example of how innovations are embedded in Jewish culture, they were once a water-deficient nation but had enough wit to become a water-surplus nation.
The innovation in Israel is something that they can not skip. Embodying innovations at every level is the rule.
If you want to start a business: look at how many Jews are in the industry. If there are no Jews, then there is no money. This saying can be perceived as a joke, but a joke with a grain of joke.
- The Realistic Goals and Approach.
In Israel, it is really hard to come by a development of exotic projects like websites for sexual minorities, or for a canine enthusiast club.
Israeli businesses are more down to earth and money.
There are things that generate profit quickly and sufficiently, that is why there is no need to get into screwing around.
Nowadays, Israel is considered the world center of marketing businesses. This fact leads to a large volume of transactions in the range of 20 million — 1 billion dollars, but it has its flipside. Israel has not set up his own Google, Microsoft, or Amazon yet, despite, its middle businesses are very strong.
- B2B and export-orientedness.
The distant eyes of Israeli businessmen are always aimed at export.
Primarily, at the USA. But if it does not work out in the US, it will work in Europe, China, Russia, or even Africa.
The buyers of successful Israeli startups are companies, whose R&D centers are located in Israel: Apple, Google, Intel, and others.
An honorable mention: more than 300 R&D centers of the world’s leading companies are located in Israel due to the availability of the dedicated experts.
Jews are well-versed and educated. Their population accounts only 0.2% of the world population, but it is not a problem for the Israeli to have 27% of Nobel Laureates in physics, 31% in medicine.
That is why big players like the above mentioned Microsoft, Google and others try their best to exploit the opportunity.
The formula of many Israeli startups is simple and effective:
- Undertake a research, revealing the timely product for perspective;
- Create the product.
- Offer the product to a large company in time and SELL it.
In the area of B2B, Israeli businessmen have found a synergy of communication and the ability to negotiate, that is why they are so strong.
A bargain is alike arm wrestling for Israeli. If you tie up a deal, fight longer.
In case you don’t — you’ll be perceived as a chicken-hearted weakling.
In Israeli culture, the expression “to make a deal” is a synonym for “to thrive on”.
Hutzpa (Chutzpa) is a word from Hebrew. Though it is hard to define it sidelines of the Hebrew, it has become a colloquialism all over the globe.
The Yiddish word that means nerve…and a bunch other things.
Hutzpa is a quality of audacity. It means, that you have guts to do something impossible. Moreover, it implies confidence in your will. This mindset is carried through generations.
Chutzpa is an essence, it is the way people work in Israel. Such an approach might seem rough and rude, but Jews use it as the strongest advantage.
The whip and carrot policy is not about Israeli people: they prefer to be brutally honest with you without sweetening.
Some people cannot overcome the frankness and the contentious interaction with the
Israelis, hence the chutzpah becomes a real barrier to Israelis in the aspect of doing business around the globe.
If you have a possibility to co-work with Israeli, remember chutzpa and interdisciplinary thinking. Remember the intense directness and impudence that Israelis embed into achieving their impossible dreams. And remember, if it seems that Israelis are rough and rude, there is nothing personal, it is just because they are Israelis.
The following part of our article is aimed at considering the auspicious opportunities that Israel offers for its startups.
- The Government.
The government supports and promotes the technological development inside the country.
Since the 1974, Israeli government supports a dedicated Research & Development fund. It runs and services more than 25 incubator programmes which give birth to numerous talented specialists and startups. Moreover, Israeli government provides funds to startups operating in the spheres of medical devices, clean technologies, heavy technologies. For example, the Office of the Chief Scientist granted nearly $30 mln. to innovative startups.
A grant from the Chief Scientist is usually evaluates several hundred thousand dollars, sometimes more.
If the startup is successful, the company returns the amount of money received back to the state. In case of failure, nobody will be brought to the book. Israeli officials are well aware of what a venture is. 9 of 10 financed projects can fail, but a single successful startup on a countrywide scale will cover losses from nine unsuccessful.
Israel runs a national program called “Technological incubators”. It is a network of incubators in which beginning entrepreneurs with innovative technological projects receive the necessary financing, as well as all necessary infrastructure and administrative assistance. Two years later successful projects leave the incubator — already in the form of a commercial enterprise and with private investments.
The Israeli government also reduces the tax burden to stimulate the development of high tech in the country. For example, the exit tax today is 25% of the revenue comparing to 42% which were earlier.
- The Israel Defence Forces and Army.
To start with, think of companies like Outbrain, Stylit, Comverse (Mavenir). The common feature between these companies is that their founders served in the Israeli Intelligence Corps unit, which is called the 8200.
A little bit information about the 8200 unit.
Israel admitted that unit 8200 exists, but no more. There is no information about its history, just odd bits.
Among the assumptions, there is one made by respective researchers: the unit 8200 existed before the war for the independence of Israel (1948).
In the 1930s, during the years of the British Mandate in Palestine, the “Shin Mem 2” department (Hebrew “information service”) worked on the present territory of Israel.
The staff of the Shin Mem 2 was engaged in monitoring the Arab telephone conversations in order to prevent the possibility of terroristic acts.
In 1948, the service was assigned the designation 515. The number was chosen optionally, so that the unit’s name could be said aloud. In 1956, during the second Arab-Israeli war, the designation was changed to 848.
The department faced its turning point in 1973, when the War of the Doomsday began. The attack of Egypt and Syria was like a bolt from the blue for Israel: the country’s intel has suffered the greatest failure in its history.
An officer of the 848th unit was captured and spilled the beans to the Syrians.
This event was the starting point for the “reboot” of the electronic intelligence department. Since the reboot, the department bears the designation 8200. All of the divisions in 8200 work separately and independently.
The Israeli authorities realized that the dependence on foreign technologies, mostly American, brings a lot of risks. Hence, the 8200 unit has become a national R&D center.
Today, 8200 picks the best 1% from the best 1% and involves these quick-witted and inventive young people into their staff.
The combination of blissful ignorance and intellect is a strong weapon, and it is the strongest weapon in the armory of the 8200 unit.
The demobilized veterans (young experts) are highly appreciated due to their ability to solve the real problems.
- The Venture Capital.
Israel has the world’s highest indicator of venture capital available per capita, and has ~75 active venture capital funds. Moreover, there are ~200 international funds that invest in Israel.
Next up, we would like to represent the Top-10 new venture funds in Israel:
- OrbiMed II, raised $307 mln.;
- Chinese fund Kuang-Chi, $300 mln.;
- Aleph, raised $180 mln.;
- Pitango, raised $175 mln.;
- Temasek, the Singapore National Fund, $150 mln.;
- Vertex Ventures, $150 mln.;
- TLV Partners, $115 mln.;
- Grove Ventures, $100 mln.;
- Atooro Fund, $100 mln.;
- Saban Ventures, $100 mln.
- The Exits.
Here is some of statistical data about startups in Israel.
- Israel is #1 in number of startups per capita: ~1 startup per 1,800 Israelis
- Israel is #2 in absolute number of startups after the US. Israel Startup Map will come in handy for those who want to figure out additional information about the startups, incubators and R&D etc in Israel.
- Israel is #3 in number of companies traded on NASDAQ after U.S. and Canada.
- Venture capital investment per capita in Israel is 2.5 times over the U.S. and 30 times than Europe.
- Israel is the world leader in number of patents per capita, and it’s also at the first line in rankings in R&D spending per capita;
As we have already mentioned before, Israel has the max. number of startups listed on NASDAQ. The major reason of this success is hidden in the approach. Israeli startups are focused on solving problems of large companies as well as on problems in cyber-security. Those big players, establishing the R&D centers in Israel, are constantly waiting for the new startups in order to acquire them.
The diversity of approaches applied to innovation ecosystem, predetermines the successful future. The well-known Silicon Valley is no longer a touchstone of innovation-aimed unit. Israel offers unique and peculiar advantages that companies can apply and leverage.
Some technological sectors are being already captured by Israeli innovators. They generate the most advanced technologies and business models.
There are many things to learn from Israel and Israeli entrepreneurs.
In order to be successful, you need to understand the various innovation ecosystems, be engaged, active, and creative, just like Israeli people.