The Startup Ecosystem of Israel

In spite of its turbulence through the years, the Israeli ecosystem is truly outstanding. Per capita, the number of unicorns started by Israeli founders is the highest in the world. The mystery of the Israeli ecosystem’s success is best explained by Uri Adoni in his book “The Unstoppable Startup.” In a nutshell, Israeli entrepreneurs have chutzpah, which is defined as "The challenging and the defiance of the prevailing order."

Israel is not only a startup nation, but also a brain drain nation. Over 80 Israeli unicorns are now operating in the US. Part of this exodus can be explained by the need to be close to clients and major markets. However, a substantial part is also related to Israel's relatively low friendliness toward startups. Israel's startup ecosystem books outstanding results, although the country significantly lags behind competitors in its business climate. The paradox of Israel’s ecosystem success and its entrepreneurs' talent can be tracked by basic financial apps, as Israel is also trailing on policy, regulation, and infrastructure. Fintech is broken in Israel, where Stripe and Revolut are not available, while leading Israeli fintech companies such as Payoneer, EToro, and Lemonade thrive internationally. UBER doesn’t operate in Israel, and the public transport system is notoriously inefficient, yet automotive startups such as Moovit and Mobileye secured exits at astonishing valuations.

This reflects a massive gap between the quality of local entrepreneurs and the ability of public sector policy makers to create an environment that encourages vibrant startup ecosystems. In the last decade, there have been some positive signs that this gap can be narrowed, and if it will, Israel has a massive potential to produce a substantially better startup ecosystem than it has already.

It should be noted, however, that the Israel Innovation Authority is an example of massive public sector success in Israel. The Authority’s programs and initiatives are used as models for many other ecosystems globally, and should be held in high regard. We are also impressed with the activities of Startup Nation Central, a philanthropic organization that spends vast resources to help the local startup ecosystem grow. Last but not least, the public sector organization which unintentionally had the biggest positive influence on the local ecosystem is the Israeli Army, which can be regarded as a massive startup accelerator. The IDF incubates solutions which can be later used by private companies, while it also allows networking among potential co-founders in integrated units. Israel is a great example of how countries can turn a difficult geopolitical situation into an advantage. Adverse situations make innovation a necessary strategic advantage for survival. Many innovations were born out of existential necessity in Israel.

Recent decades in Israel showcase how startups can transform a low productivity, developing economy into a high efficiency, developed economy. The Israeli startup ecosystem is a cash cow, generating tax revenue for the country both from exits and high salaries. Israeli apps like Waze, Wix, Fiverr, and Viber have made their mark around the world, but a few, like Mobileye (sold to Intel for US$ 15 billion), are the hidden powerhouses within the ecosystem. There is a wide variety of industries where Israel excels, including autonomous driving (Mobileye, Waze), advertising (Taboola), and services (Fiverr). One maturing industry that shows substantial potential is cybersecurity, leveraging the unique challenges that the Israeli army faces.

The high cost of living in Tel Aviv and the presence of global companies such as Microsoft, Intel, and Google make it challenging for startups to find affordable talent. This shortage of tech talent and a high cost of living present real challenges for Israeli startups. Israel is not doing enough to attract talent from outside. The Israeli ecosystem cannot rely solely on native founders if it wishes to close the gap with international hubs such as San Francisco and London.

We believe that Israel relies on an important ingredient: the quality and mindset of its entrepreneurs. As long as the country manages to keep them happy, the Israeli ecosystem should continue to thrive.