5 Reasons Israel Is Ideal for Startups and What the U.S. Can Learn As entrepreneurs in this tiny country reap huge rewards, everyone wants their recipe for success.
By Shlomo Magdassi •
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The words Israel, "startup nation" and innovation have been thrown together in many a learned conversation of late, and for good reason.
Israel has one of the highest concentrations of startups in the world, estimated at about 5,000. And not just any startups: highly successful enterprises that are attracting the M&A attention of the world's largest companies.
In the last 12 months, Israeli startups have seen some major acquisitions. Sony purchased Altair, an innovator of LTE modem chip technology, for $212 million. Cisco followed suit, purchasing Leaba Semiconductor, another chip development startup, for $320 million. Most recently, Intel announced it was acquiring Mobileye, a company focused on developing driver assistance systems and autonomous driving technologies, in what will be the largest acquisition of an Israeli technology company, for about $15 billion.
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With the spotlight firmly on Israel, other high-growth companies, entrepreneurs, venture capital firms and investment banks across all sectors from the U.S. and Europe are setting their sights on the 8,000-square-mile country tucked away in the Middle East on the glittering Mediterranean -- and interest is high.
Over 350 investment professionals, business executives, entrepreneurs and technologists recently converged in New York on a rainy May morning for NEXUS:ISRAEL, a high-profile event sponsored by the Hebrew University of Jerusalem, to help American captains of industry uncover what the Israeli "special sauce" really is.
As numerous experts at this gathering attested, what makes Israel unique is an entrepreneurial culture that is embedded in the social fabric itself, which subsequently permeates all facets of business and life. While the following five factors may not be built into every environment, there are key lessons that the nexus of Israeli innovation can teach the broader global startup community.
1. The power of necessity
Israel was born out of unsettled times, and continues to exist within a tumultuous region. With tensions high among its neighbors, with trans-border trade relationships and regional resource partnerships complicated by politics, Israel has needed to be self-reliant. As a result, Israel learned early on that its greatest strength was its own people. The country was forced to take an insular approach to building a global presence. Israel built a culture that focused on the development and education of its people to best nurture and protect its inhabitants.
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2. Out of need, came innovation
As highlighted above, Israel did not have the luxury of "asking its neighbors for a cup of sugar" when needed, and with a lack of natural resources the people of Israel needed to get creative to thrive in a country that has perpetually struggled with drought. Israeli technologists have made incredible strides in water management, and have pioneered new technologies in drip irrigation, water recycling and purification as well as desalination. Today, Israel is largely water independent and, as the world's water crisis continues to escalate, other countries are turning to Israel for its technology and expertise. What this teaches us is that great innovation is often born from a need, a pain point or a gap that needs to be filled.
3. Learning from service
A highly technological military is where most young Israeli adults first experience life after high school. This environment throws its recruits into strategic intelligence operations where they rapidly become experts in the technologies needed to navigate warfare and military communications. As such, once their service is up they take this tech expertise and military-inspired leadership to university and out into the world. In the U.S., companies can reap benefits from seeking out military veterans who have not only gained highly specialized skills but also the discipline, commitment and responsibility to harness them. In addition to technical skills that are acquired by some of the soldiers, the young Israelis also learn values such as responsibility, relying on other people to accomplish a mission and being able to speak your opinion even to your superiors, when you have different views. They also learn that it is OK to take risks. The safest way not to make a mistake or not to fail is doing nothing.
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4. Classroom follow-up
A 2012 study by the Organization for Economic Cooperation and Development found Israel was the the second most educated country, after Canada and tied with Japan. The most recent data (from 2015) show that 49 percent of those between 25 and 64 have attained tertiary education. Israel's institutions tend to nurture the flames of curiosity, initiative and leadership instilled in its young men and women in the army. The universities are investing heavily in building out their technology capabilities and their labs and research and development (R&D) centers empower entrepreneurs to bring their ideas to life. At the end of 2015 the Hebrew University launched Israel's first center for 3D and functional printing, part of the successful Center for Nanoscience and Nanotechnology, and is doubling down on its tech investment by opening the Edmund and Lily Safra Center for Brain Sciences.
More than just the quality of the universities in Israel, it is their focus on R&D that has really underpinned the success of the "startup nation." Government support for R&D also results in a steady flow of experienced technologists, scientists and specialists into the ecosystem.
The government and academia are not the only ones who have recognized the value in Israeli R&D; a growing list of Fortune 500 companies including Intel, Google, Apple, Samsung, GE, Oracle, Microsoft, Stratasys, HP and Cisco all have an R&D presence in Israel, seeking to tap into the innovative potential of this vibrant workforce. The NEXUS:ISRAEL conference is just one other example of how education and knowledge sharing expands outside classroom walls, and the network and support received in universities does not stop once you graduate.
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5. An active deal pipeline
Available capital and funding vehicles means that money woes aren't a roadblock to innovation. More than 70 active VCs in Israel, nearly a quarter of those being international firms with local arms, have supported the growth of the tech and innovation sector.
We heard from a number of investment and financial professionals at NEXUS:ISRAEL including David Blumberg, managing director of Blumberg Capital, an early stage VC firm that specializes in seed or series A funding, as well as Yifat Oron, CEO of LeumiTech, a subsidiary of Bank Leumi, focused on providing commercial banking to the Israeli high tech sector. Blumberg highlighted that interest in Israel from VCs was high because of the exceptionally high quality of the technology coming out of the country's startups. Oron affirmed that there were many funding options available to Israeli startups, and the acquisition of Mobileye by Intel has cast a spotlight firmly on Israeli tech, investment and exits.
The tech-transfer and commercial activities of the Hebrew University are managed by Yissum, a company responsible for founding many startups and signing many licensing agreements that are based on various technologies and products developed by the university scientists over the years.
What NEXUS:ISRAEL really drove home is that ample opportunities will arise for US investors, businesses and technologists as a closer relationship is forged. The time has never been better for US and Israeli tech sectors to connect, collaborate and learn from one another.
