Israel a Hotspot for High-Growth, High-Potential Entrepreneurship

Dane Stangler | November 17, 2016
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Israel is known, for good reason, as a Startup Nation. A country of 8 million people today, it has over the past two or three decades punched above its weight. More Israeli companies are listed on the Nasdaq than any other country except the United States and China. It boasts world-renowned technology companies that are as vital to the country’s sense of itself as its religious and ethnic heritage.

The most recent well-known examples of this entrepreneurial success are companies like Waze and Wix. On a brief stop into the Innovation Center inside the Tel Aviv Stock Exchange (TASE) this week, I saw more examples of Israeli innovation and entrepreneurship in transportation, water, agriculture, medical devices, and more.

The frenetic pace of entrepreneurship continues today. In addition to an event at TASE, I had the opportunity to visit an energy company, two accelerators, a co-working space run by the city of Tel Aviv, and talk to many different people involved in different parts of the entrepreneurial ecosystem locally and across the country. Someone told me that there are over 200 accelerators, incubators, and co-working spaces in Tel Aviv alone. I don’t know if that’s true, but program density is clearly high.

At the Junction in south Tel Aviv, cohorts of startups gain access to mentors and investors (and free beer) as well as a plethora of corporate partners, including some of the tech world’s biggest names. The startups receive convertible notes and pay a fee for physical space. I asked the managing directors (one Israeli, one Swiss) how they gauge whether or not they’re adding value for the startups (something, admittedly, I try to ask everyone). They said they try hard to maintain the alumni network, they track funding, and they try to keep tabs on the startups that don’t make it. In contrast to other high-profile accelerators, they said the distribution of funding received by their startups was fairly even, rather than skewed.

(Few programs, it seems, have yet been able to crack the but-for comparison of accepted and non-accepted applicants. The folks at the Junction also mentioned the value their startups derive from the selection process itself, something I have heard elsewhere. One topic for future exploration is the impact of an accelerator’s funding model on its startups: what is the difference between a support model based on fee-paying startups versus one based on money from corporate partners versus one controlled by early-stage investors?)

Unsurprisingly, the Library, a city-run co-working space that is located within the Tel Aviv public library, was quieter with more of a low-key vibe. The woman who runs the Library said that, while they have a partial focus on civic tech startups, they were trying to make it easier for startups to work with the government—the bureaucracy, she and others said, is dauntingly complex even in Startup Nation. The Library sees itself, in addition to providing space, as a bridge between entrepreneurs and municipal government.

Given Israel’s reputation and much of what I heard, I was surprised to see differences in some of the global entrepreneurship data on Israel. The country has a relatively high new business density according to the World Bank, but its Global Entrepreneurship Index ranking is 17th, behind countries such as Iceland, France, Austria, and Belgium. Israel is only two spots ahead of the United Arab Emirates, despite a new business density two and a half times larger. The GEI gives Israel comparatively low marks on Competition, Risk Acceptance, and Start-up Skills.

In Startup Genome’s last Global Ecosystem Ranking, which only looked at cities and regions, Tel Aviv ranks fifth worldwide, and is the number one non-American city. One of the high marks for Tel Aviv is the Startup Experience of individuals in the ecosystem.

At the evening event where I spoke, I heard different perceptions about entrepreneurship in Israel. Young people in the room said they found it hard to start, that the entrepreneurship ecosystem had become inaccessible and only open to certain types of people. Some said the perception among their peers was that it was better to get a job at one of the many Western companies with offices in Israel. (Note for future post: one attendee said the proliferation of programs like accelerators and incubators had, in his view, raised the transaction costs of doing a startup.)

In fairness, some of these concerns were recognized by those deeply involved in Israeli entrepreneurship. I heard from many people that greater inclusion of those on the “social periphery” was a big challenge and priority for Israel—this is certainly not unique to Israel, of course. In particular, more dedicated inclusion of Israeli Arabs and the religiously orthodox was identified several times. One person claimed that, despite its success, Israel does not have enough foreign entrepreneurs.

Clearly, however, Israel—and especially, Tel Aviv, population 400,000—has managed to develop a vibrant culture of entrepreneurship and innovation in ways that other regions have not. The book Startup Nation offered many explanatory causes, including the massive immigrant influx from Russia, compulsory military service, and government initiatives like Yozma that helped stimulate greater venture capital investment. A few people I spoke to said that, in their experience, large corporations in Israel were more open to working with startups—even when these were multinational companies with operations in many different countries, their openness could differ from place to place.

The common denominator of military service was mentioned by almost everyone I spoke to. The focus of the Israeli Defense Forces (IDF) on adaptability and innovation is important, as are the networks that are developed during one’s time in the IDF. Intelligence units, in particular, are often singled out as hotbeds of technology and entrepreneurship. Management experience is gained within the IDF at a young age, as individuals have to contend with ambiguous and fast-changing environments, managing their units, superiors, and complex informational inputs.

The networks that are developed within the IDF are, however, much more than just connections or groups of people that served together. More than one person emphasized the team experience that is gained in the IDF—you learn how to work and cooperate with people in difficult environments. This not only forms a strong bond but also endows individuals with key abilities to succeed in teams, something that is surely helpful in the context of startups.

Military service is undoubtedly important, but it still seems to leave something unexplained. Not every country has compulsory service, but there are millions of people serving in militaries across the world. In the United States, entrepreneurship among veterans has actually fallen over the past 10 to 15 years. The context, not the mere fact, of military service, matters.

We had lunch with someone who has been working with Israeli tech startups for many years, and who is revered by many as one of the doyens of the ecosystem. He said the key ingredient in explaining Israel’s relative success is what he calls the “Falafel Factor,” and “after 30 years, I’m still not sure what it is.” There is something about “the way Israelis do things,” he said. They are serious problem-solvers who don’t give up on something. (Although he also claimed that Israelis are not always great “problem-choosers.”)

The reason, he said, is that Israel as a whole has needed to possess and demonstrate “extremely high survivability in the face of overwhelming odds.” The most obvious instance of this is the threat of existential destruction the country has more or less continuously faced, but he also pointed out that even daily driving is a test of survival (tongue slightly in cheek).

An observation like this—if difficult to prove empirically—helps frame all the other causes that have been put forth to explain Israel’s entrepreneurial track record. And it’s not exactly clear that something like this is transferrable or imitable by other places. On paper, many cities and regions can appear to have the ostensible elements for fostering entrepreneurship. But what it may come down to is something about a specific place, something cultural—a recipe, not a collection of ingredients—that helps it all coalesce.

Dane Stangler
Dane Stangler is vice president of Research & Policy at the Ewing Marion Kauffman Foundation. In this capacity, Stangler leads the Research... About the Author