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Israel - How are Tech Startups Thriving?

With several unicorn status companies, the country is becoming a startup powerhouse

22Jan

In 2006, ‘FreeMap Israel’ was founded by Uri Levine, software engineer Ehud Shabtai, and Amir Shinar. Its aim was to provide a platform on which community users could create a free digital database of the map of Israel. The idea grew to cover other areas, and it began providing traffic updates and looking at user-provided information to find the best routes. In 2009, the company was renamed ‘Waze’, and by June of 2013 it had 50 million users. The same month, it was acquired by Google for $1 billion. The sale was a milestone for Israel's fledgling startup scene. Waze co-founder Uri Levine explained to Business Insider, ‘This was the first time there was a billion-dollar consumer app out of Israel. We thought we were setting a new beacon for the industry.’

Levine’s instincts proved to be correct. The sale kickstarted a national obsession for creating unicorns that continues to this day, with startup founders competing with each other to see how far they can get their valuation past the $1billion mark. While tensions flared up again between Israeli and Palestian Territories towards the end of 2015, technology companies in the region continued to flourish, spurred on by eye-popping levels of venture capital investment.

Despite a population of only 8 million, Israel has made a real name for itself as a hotbed for startup success and innovative technology on the global stage. It is the world’s second biggest producer of startups, behind only Silicon Valley, and has approximately 4,800 tech companies. Startup Genome ranked Tel Aviv second in the world for startups. Startups are a major part of the reason for Israel’s all-round thriving business environment. Forbes, the World Economic Forum and the Heritage Foundation all rank Israel among the 30 best economies in the world in which to do business.

There are a number of reasons for the success of Israeli startups. Access to venture capital is a major one. Gal Kalkshtein, an active investor and entrepreneur who runs the Startup Lobby in Israel’s parliament, noted that: ‘Israel is an island of stability. The political/security issues we face do not affect the type or size of investments in the Israeli market. On the contrary, Israel has been globally leading the cyber and IT fields for a few decades due to the middle east conflicts and the need for powerful intelligence forces.’ Today, there are well over 50 VCs funding Israeli tech, with private-equity bankers such as Blackstone, SilverLake, KKR, Apax Partners, TPG, JPMorgan, and Morgan Stanley, entering the country in their droves, and writing some huge cheques. In 2015, more than $5bn was invested in Israeli tech in total - up from $2.2 billion in 2013. Israel boasts $170 in venture capital per person, the most in the world. Co-operation between US and Israel in tech is one of the key drivers behind the countries’ success in this sense. The bond between the two countries is well known, and has raised controversy, but its benefits for the tech scene are tremendous. In many instances, investors in all their forms open up their first office outside of the US in Israel. The country has also proven a big hit with China, with Alibaba and Chinese search giant Baidu also both investing heavily.

Cultural reasons also play their part. In Dan Senor and Saul Singer’s book, Start-up Nation: The Story of Israel's Economic Miracle, they argued that one of the major factor for Israel's economic growth was the culture of the Israel Defense Forces (IDF). It is mandatory for most young Israelis to serve in the IDF, and the authors believe that this gives potential entrepreneurs the chance to develop a wide array of skills and contacts. It also provides experience exerting responsibility in a relatively un-hierarchical environment, in which creativity and intelligence are highly valued. This was a reason also cited by Gil Galanos, Founder of the US Israel Business Counci (USI), in an interview with Bloomberg.

Senor and Singer also credited immigration as a central cause. Immigrants are, by definition, risk-takers, and 9 out of 10 Jewish Israelis today are immigrants or descendants of immigrants in the first or second generation. Immigrants are used to starting from scratch and facing adversity, and this kind of mentality translates well into building innovative startups.

So what are we likely to see moving forward? SimilarWeb is nearing unicorn status, and looks set to complete its mission to overtake Alexa as the most popular service for analyzing web traffic. Companies like Zutalabs, a mobile printer, have also had great success, raising $500,000 on Kickstarter and an undisclosed investment from VCs. The influx of capital from Asia should see even further investment in companies like these, and this year should see no let up in the pace of growth for Israel’s tech startup scene.

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