What Will Israel’s Start-Up Nation Look Like in 2020?

Israel, a maturing start-up ecosystem

Returning to Israel in December I had a second opportunity to sample the innovation and enterprise environment of a maturing start-up ecosystem.
Israel lives under difficult geopolitical circumstances. A small country with limited resources and surrounded by potentially hostile neighbours. Israel survives by strengthening itself from within and by being a key ally of the United States.

Is Israel still a Startup Nation?

About Israel

The Israeli economy is strong. The country has enjoyed many consecutive years of growth, with GDP increasing on average by 4.0% annually since 2003, i.e. faster than nearly any other OECD country. This growth has been led by a flourishing high-tech industry.
A country, with a population of 9.1 million, maintaining its position in the Top 3 for the number of high-tech start-ups – the other two being the USA and China. Sharing top spot with South Korea on percentage of GDP (4.3%) spent on civilian R&D.

An increasing number of Multinational Companies, 380 to date, have set up R&D centres there. Over 40 corporate venture capital funds are active, in 2017 investing over $1 billion. And the government is implementing a successful strategy engaging start-ups with large companies most often via the 33 private enterprise led innovation hubs.

What’s the secret?
The CEO of the Israel Innovation Authority, Aharon Aharon, describes “the high-tech industry as the engine of growth for Israel.” And the organisation he leads is the government funded arm that supports this flourishing sector.

Aharon designates the 7 Pillars which enable the country to be so successful in creating high-tech start-ups.
The Pillars are described, 1. Academia generates both IP and talent. 2. A vibrant community of six thousand start-ups offers innovation and ambition. 3. Access to finance. Private funding is the highest per capita in the world, there are 30 Unicorns, valued at $1 Billion or above – private tech companies founded by Israelis.

4. Contribution of increasing number of locally based Growth companies. 5. Multi-nationals are playing a very significant role as is evident from their investment in R&D. 50% of R&D in Israel is being conducted by the multi-national companies (all well known, Intel, Apple, Phillips, HP, Google, Microsoft, Facebook and more). 6. Government supports mainly via the Israel Innovation Authority focus on market failures and industries open to future disruptive tech.

Finally, the 7th pillar, and probably uniquely, the Army plays an important role. A tradition of military research spending and the self-discipline and teamwork that come from mandatory military service was identified by the authors of the book, Start-Up Nation. Units within the military act as incubators for high-tech skills, skills that are utilised in the private sector after military service.

Aharon adds “I believe the secret sauce we have is that we are a very small country, as a result everyone is talking to everyone, people from all these pillars meet and talk about high-tech.” In other words a high concentration of innovation and entrepreneurship, successfully combines with a wide ranging connectivity between entrepreneurs, large companies and investors.

Challenges
It is widely recognised that diversity is an issue for the high-tech companies – 77% of the tech sector is based in Tel Aviv and 67% of the people in high-tech in Israel are male, Jewish, non-Orthodox and under 45 years old. The aim is for the tech sector to include all geographies and demographics including the Arab community, the Orthodox and women.

Like many countries there is a high cost of engineering, and it takes an inordinate length of time to hire new programming staff. There are now “fast track” visa programmes to enable companies hire from outside Israel.

Issues facing high-tech growth
Cost of commercial rents and cost of living is high, especially in Tel Aviv – and comparable to European cities.
Like many cities there are problems with traffic congestion, and a falling behind in public transport infrastructure in Tel Aviv and Jerusalem. The construction industry cannot keep up with demand.
According to the OECD, Israeli society is marked by large inequalities. Almost 18% of the population live in relative poverty.

Around half of Israeli-Arabs and Ultra-Orthodox are poor and live separately from the rest of the population. They have different school systems, live mostly in different cities, and neither group serves in the army and misses out on learning basic entrepreneurial skills and making connections. This leads to poor education results followed by worse labour market outcomes, notably in terms of earnings.

Summary
Israel continues to be a vibrant high-tech economy, strongly aligned with the US, economically culturally and politically. And leading at the edge of tech innovations – and is not slow to tell the world about it. And rightly so.
To quote Shimon Peres, the former president of Israel, in the preface to the book Start-Up Nation, “Israel bred creativity proportionate not to the size of our country, but to the dangers we faced…The next years will continue Israel’s commitment to a better tomorrow, with a readiness to take risks and seek renewal.”

Look out for further articles on Israeli high-tech companies and the Israeli start-up eco-system in Irish Tech News here.

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