AWS Startups Blog

The Israeli Recipe (and no, it isn’t for hummus this time)

 

By Noam Kaiser, VC Business Development, AWS

Israel is a startup superpower. You probably already knew that, but some of these facts and figures might surprise you:

  • Population: 8.06 million people[1]
  • Hi-tech exports account for 45% of GDP[2]
  • Technology companies: 5,720[3]
  • 1 in 12 startups globally is Israeli, making it the country with the highest number of startups per capita[4] (the same applies for lawyers, and I hope the two aren’t related)
  • R&D centers of multinational companies: 281[5]
  • Companies listed on NASDAQ: 76, ranked 3rd after the US and China[6]
  • Ranked 2nd following Switzerland in intellectual property (IP) innovation[7]
  • Exits amounting to $9.8B in 2014 and $9.2B in 2015[8]. Considering the IPO crunch, these records will not be broken this year.
  • Capital raising amounting to $3.4B in 2014 and $3.6B in 2015[9]. Considering the VC response to the same crunch, these records probably WILL be broken this year.

Pretty impressive stuff, and if you’re wondering how it happened I’ll get to that soon. But first let’s look at a fascinating change that’s been going on in the ecosystem in recent years. The best way to do that is to compare the startup environment five years ago with today’s environment.

Since 2011, there’s been a clear trend of a rising number of VC-backed companies, postponing a quick exit and advancing towards higher valuations and annual sales[10].

  • Over 30 Israeli IT companies crossed the $400M valuation threshold, compared with only three in 2011
  • Over 20 Israeli IT companies crossed the $100M annual sales threshold, compared with only six in 2011
  • 100 Israeli IT companies crossed the $10M annual sales threshold, compared with 50 in 2011
  • 8  Israeli IT companies performed NASDAQ/LSE IPOs and There were 16 IPOs in 2014, with an average valuation of $1.75B, compared with none in 2011

Yep, the numbers tell the story: The “startup nation” is changing into the “scale-up nation.”

In addition to the numbers, here is what we see happening on the ground:

  • VCs/LPs are more patient with turnover timing, aiming higher.
  • The local scene boasts seasoned entrepreneurs, engaging in their 2nd, 3rd, and even 4th run.
  • Funding is growing. Local firms, global firms, and corporate VCs are investing more, giving Israeli startups the greatest accessibility ever to growth-stage funding, the biggest cut of VC funding for eight quarters now. (IVC)
  • Foreign management is demonstrating an increasing willingness to join the leadership teams of Israeli companies, helping them grow.
  • More Israeli companies than ever are employing hundreds of employees, and some will grow to four digits soon. More and more foreign employees are coming in. These are signs of growth.
  • More Israeli startups are acquiring other startups globally. For example, IronSource, Jfrog, SimilarWeb, and Taboola have all acquired startups. They’re growing their businesses with new talent, features, and technologies. Some startups are even gaining additional market share.
  • The state of mind is there. You’ve come to expect young Israeli startups to disrupt certain industries. It is now completely conceivable to expect some to lead certain industries. For example, the following companies are leaders in these sectors:
    Big data: IronSource, SimilarWeb, SiSense, Panoply.io, Logz.io, Windward, Dynamic Yield
    Ad tech, content, and discovery: OutBrain, Taboola, MinuteMedia, Kaltura, PlayBuzz, YotPo, EyeView, SundaySky
    DevOps and infrastructure: Jfrog, Redis Labs, Cloudinary, SpotInst, Velostrata, Stratoscale
    Enterprise software: WalkMe, Capriza, Gong, SAmanage
    GIS and automotive: Moovit, Gett, Nexar, Innoviz, Via (and, of course, success stories like Waze and MobileEye)
    Cyber security and fraud prevention: BioCatch, Forter, Riskified, Cybereason, Argus, Coronet, Guardicore, Morphisec, Dome 9, EnSilo, Minerva Labs

 

So how did Israel get there?

How did Israel turn into a startup hub in the first place? I believe it’s due to a unique combination of factors:

  1. Israel is an immigrant country. The community of Israelis include individuals from all cultures and schools of thoughts. This diversity generates creative perspectives and new approaches.
  2. Necessity is the mother of invention. Unique security, agriculture, energy, and other needs brought about innovation across a range of fields including military, communications, medicine, irrigation, and solar energy. With limited trade with neighbors, nor significant natural resources, innovation was Israel’s only choice.
  3. Academic education. From its inception, Israel has emphasized the importance of academic education. Despite its small size, Israel has five of the top 500 leading academic institutions globally.
  4. Investment in innovation. 5% of Israel’s budget is invested in high-tech companies of all stages, through various plans and grants of the Office of the Chief Scientist in the Ministry of Economy, in order to increase the amount of Israeli IP and successes.Israeli also enjoys a vibrant and experienced VC ecosystem, now in its third decade, made up of local veteran VC firms, a promising wave of young local VCs, and a vast local presence of top corporates that are increasingly active.n addition, 281 multinational tech companies have R&D centers in Israel, including Amazon, Apple, Google, Intel, Microsoft, Qualcomm, Samsung, and Facebook. In fact, only the US hosts more multinational companies R&D centers than Israel. Usually it begins with a startup acquisition.This creates a cycle: Israelis gain experience with multinational acquiring companies, they launch new startups, global leaders acquire them and set up shop in Israel, and so on.
  5. The IDF technologies. Military tech developments find their way into private market applications, giving companies a unique global edge. A great example is Given Imaging, a medical devices company.
  6. Unique intelligence and data tech capabilities combined with the Military Service effect. Military intel and cybersecurity units like 8100 and 8200, along with other intelligence agencies, incubate some of the best Israel human resources. Young Israelis undergo unparalleled training and engage in sci-fi like activities. Through the military service, young Israelis learn what responsibility, true challenges, and mature proportions are. This molds many Israelis into natural problem solvers, potential entrepreneurs, and leaders. After they complete their service, they often complement their skills with business education. Guess what happens next. Yep, startups.
  7. Local market too small. From day one, Israeli startups think globally; there’s no point in aiming locally. They never use a “co.il” domain, it’s all “.com” (Well, recently it’s “.io”). Incidentally, that’s partly why many Israeli solutions aim at giving the little guy a chance to play in the big league, for example, Fiverr, EatWith, DubaMobile, Wix, and ProoV.
  8. Chutzpa (also known as chutzpah). It’s a Hebrew word that describes a bold attitude, something like “Of course our underfunded, three people strong, Middle East-based startup will beat up Fortune 500 companies! What other option is there?“
  9. Efficiency over protocol and hierarchy. By the time a non-Israeli company finishes outlining its company structure, product road map, and work plan, an Israeli startup will have its beta product ready for installation. It’s partly because everyone does everything in an Israeli startup: The VP of Product gets involved in sales, the R&D team joins marketing sessions, and so on.It all seems like an effective mess that somehow works…until it doesn’t. Israeli startups dash through the seed and early stages because everyone does everything. However, startups need more structure when they hit the growth stage with 100+ employees, and when there’s a risk that senior management might relocate. Local and global investors can help these startups add more structure during the growth stage. But the main point is that the Israeli casual approach works well as an early-stage method.
  10. Tolerance towards failure. Israeli investors are very “forgiving” compared with other global counterparts, with regards to past failures of a startup founder. The fact you failed COULD mean that you’ve learned, so past failure don’t necessarily get you shunned.

 

And then?

This unique combination of factors has made Israel an exciting, thriving hub for startups. Looking ahead, Israel will need to keep the momentum going by striving for new heights. It will present both a challenge and an opportunity for the Israeli VC and startup community.

In a sense, that’s the same challenge—and opportunity—that we at Amazon Web Services aim to help each and every startup with.

Noam is the VC Business Development Manager for Israel, Portugal, and Spain. He has been active in the Israeli VC and startup arena for over a decade now, working as a principal for two VCs (Gemini and Ofer Hi Tech) and CEO/VP of two startups (VentureApp and BAlink).

 

References:

[1] Worldbank (http://data.worldbank.org/indicator/SP.POP.TOTL)
[2] Ministry of Treasury (http://www.financeisrael.mof.gov.il/FinanceIsrael/Pages/En/Home.aspx)
[3] IVC (http://www.ivc-online.com)
[4] StartupBlink (http://www.startupblink.com)
[5] Ministry of Economy (http://economy.gov.il/english)
[6] NASDAQ (http://www.nasdaq.com/screening/companies-by-region.aspx?region=Middle+East&country=Israel)
[7] IMD World Competitiveness Center (https://worldcompetitiveness.imd.org)
[8] KPMG IVC Survey (https://home.kpmg.com/il/en/home/industries/technology/kpmg-ivc-survey.html)
[9] Ibid
[10] IVC (http://www.ivc-online.com)