Israel: Necessity creates innovation 🇮🇱

As the organizer of the startup study trips as part of the CAS “Digital Masterclass” At the HWZ Zurich University of Applied Sciences in Business Administration, I have the great privilege of immersing myself in exciting startup ecosystems once a year and meeting interesting founders. To London, Tallinn and Stockholm The Study Tour took us back to Israel at the end of May 2022.

Israel is the startup nation par excellence - 15% of Israel's GDP is generated by high-tech companies, 10% of all Israelis work in high-tech companies, 25% of all income taxes are paid by high-tech employees, and 43% of Israel's exports are from high-tech companies (source: Israel Innovation Authority's 2021 - Innovation Report). In 2021, over USD 25 billion was invested in 782 startups invested - a record.

The startup ecosystem in Israel seems very professional. The entrepreneurs we met consistently describe the investors as fair and competent. The competition is not only fierce among startups, but also among VCs: investors are lining up for the best startups, so they can choose who they want to work with, especially since foreign capital is also flowing into the country.

Israel is a very small country - smaller than Switzerland, but with slightly more inhabitants. Similar to Switzerland, there are practically no raw materials in Israel, but the standards at the universities are very high. One big difference: Since the founding of the state, the country has been surrounded by hostile neighbors. The question arises as to how a thriving startup landscape can emerge in the dry desert.

In our conversations with entrepreneurs, VCs and support organizations, we were repeatedly told three main reasons for Israel's unique startup success:

"Necessity is the mother of innovation"

A young country, virtually cut off from the environment, and whose only gateway to the world is Ben-Gurion Airport, needs to come up with something. While we Swiss have become lethargic and risk-averse due to our wealth and geopolitically secure situation in the middle of the EU, Israel cannot afford such a luxury.

In order to be able to farm in the dry desert, for example, a water-saving drip irrigation system had to be invented in the 1950s.

Chutzpah, the Israeli character trait of questioning everything and being very direct, certainly helps when it comes to finding great startup ideas. For example, a young recruit is allowed to correct an officer if he makes a mistake.

The realization seems to have prevailed that the constant threat from neighboring states, but also from the Palestinian areas in the West Bank and the Gaza Strip, can only be countered with powerful weapons. Only an army that is practically invulnerable and equipped with innovative weapons can create peace. Many of these military innovations are marketed internationally by startups, for example in the cyber security sector.

Networking in the Army Special Forces

All Israeli citizens must complete 30 months of military service. The Israeli army maintains several special units, including for cyber security. There, young people take on responsibility early on, prove themselves in stressful situations and receive excellent training. The country's best talents work closely together even before they graduate, and quite a few use the network and acquired knowledge to found a startup.

But the VCs also use their contacts in the army: Before investing, the VCs obtain references from the military about the entrepreneurs. After just a few days, they receive a comprehensive assessment and decide on an investment based on this feedback, among other things.

In a direct comparison, the Swiss army is unfortunately completely different: it appears to be dominated by narrow-minded cold warriors who want to waste as much ammunition as possible pointlessly and have neither interest nor competence in a powerful cyber unit. This is of course disastrous; Accordingly, we are the first generation for whom a military career no longer pays off professionally (indeed it is counterproductive). This is also reflected in the fact that many men have to be forced to continue.

"International from day one"

Two rapidly growing population groups contribute very little to Israel's economic output: the ultra-Orthodox Jews are exempt from military service and spend the day studying Torah. Education in the Palestinian territories is relatively poor, and the economic performance of this population group is correspondingly low.

Even though many startups describe the Israeli population as tech-savvy and good early adopters, it has become clear that launching in Israel is not worthwhile because the market is too small. Products developed in Israel are often not even available in Israel, e.g. the many fintechs.

That's a shame, of course, but it also shows how big Israeli entrepreneurs (and VCs) think. It would never occur to a VC from Tel Aviv to advise a portfolio company to focus on the local market first. This still happens shockingly often in Switzerland.

The large-scale immigration in the 1990s after the collapse of the Soviet Union was a shock to the Israeli economy, but it also brought a lot of highly trained talent to the country. Even today there is through the Russian attack on Ukraine again an immigration of talent (all people of Jewish origin have one Right of establishment in Israel). These diverse cultural backgrounds certainly support early internationalization.

The startup hotspots in Israel

According to Swisspreneur, there are 16 (!) different ones in Switzerland “Startup mafias”. In Israel, investors do not work against each other, but with each other, which makes perfect sense in a small country.

The tech hotspots in Israel are mainly located in three regions:

The startup scene in Tel Aviv is certainly the largest. In the secularized metropolis there are many coworking spaces and offices with great roof terraces. But the fight for talent, wages and rents are very high.

In the much more religious one Jerusalem There are also startups and VCs that are strongly supported by the government.

In the south, in the middle of the Negev Desert Beer Sheva Many startups are currently settling in a newly built technology park around Ben-Gurion University. The focus is on cyber startups and desertech companies. This refers to startups that enable or improve life in the desert. Here, too, research is carried out locally in the desert, but the market is clearly international.

The distances and decision-making paths are short; In the startup scene, everyone knows each other through a few corners. Various governmental and non-governmental organizations such as: Startup Nation Central or the Innovation Authority support the ecosystem.

Literature tip: Dan Senor, Saul Singer - Start-up Nation: The Story of Israel's Economic Miracle (Wikipedia)