MENA special: The Israeli tech powerhouse

Behind the country's high-tech industries is a self-sustaining ecosystem of entrepreneurs, investors and innovation.

What do advanced driverless system Mobileye, augmented reality company Magic Leap and Google-owned crowdsourced traffic app Waze have in common? They were all founded by Israel-born or second-generation Israeli entrepreneurs.

Israel, a nation of less than nine million people, is a hotbed for innovative and successful start-ups. It has about 4,000 of them active and the country raises venture capital per capita at two-and-a-half times the rate of the US and 30 times that of Europe, according to the World Economic Forum.

Behind this is a culture of innovation and creativity. Young Israelis that join the military at age 18 are “into the culture of managing, taking responsibility, dealing with people and developing their own technology”, which has had a large impact on the country’s corporates and start-ups, according to Jonathan Saacks, founder and managing partner of Tel Aviv-based VC firm F2 Capital.

“Talent is one of Israel’s strengths,” he says. “Why? Because Israel is a very small country, with a small population and no natural resources. If you think of Israel in 1948 and all the geopolitical issues, the adversity that the country had to deal with, the only thing that the country could rely on was its human capital.”

It had to be innovative and creative, doing more with less and developing technologies initially in the military to survive, Saacks adds.

The abundance of talent and creativity is driving competition for talent, Saacks also notes, not just among start-ups but also from global tech giants and multinationals that can hire with lucrative compensation packages.

The life cycle of Israeli start-ups is also notable. Once established, these companies head first to the US, get recognised and then either are acquired by corporations or trade on NASDAQ. “From day one these guys were going global, as opposed to a British or German company that first went to the local market,” Saacks says.

A herd of unicorns

According to data from Tel Aviv-based IVC Research Centre, 2018 saw the highest amount of capital raised for Israel VC in the last five years, with more than $4.7 billion amassed versus $2 billion in 2014. This year is set to break 2018’s record – $1.3 billion was raised in the first three months alone.

Three positive changes explain Israel VC’s growth trajectory. First, it now has a well-developed ecosystem of entrepreneurs and investors – from accelerators to seed stage to early, late and growth, as well as from a variety of geographies.

Second, more companies have catapulted to unicorn status (private companies valued at over $1 billion), which has spurred others to follow. Among these unicorns are mobile software company ironSource ($1.5 billion) and on-demand mobility company Gett ($1.4 billion), according to research from CB Insights as of January 2019.

Third is the presence of leading US and European funds that partner with local VCs to build and develop sustainable companies.

Joining the unicorn herd has had a huge effect on the mindset of entrepreneurs. Intel’s acquisition of Mobileye two years ago for $15.3 billion set a new bar for how high Israeli companies can aim. “Up to 10 years ago most of them would’ve been satisfied with a $250 million-$300 million exit to a strategic acquirer,” Saacks says. “Now you have about 20 companies that are in billion-plus valuations, which means they are aiming higher. They can build these companies.”

Ross Morrison, a partner at Adams Street Partners, which has invested in the local VC scene for more than 15 years, agrees the industry has moved away from the stereotype of selling out early, which could result in less attractive returns for LPs.

“In such transactions, strategics were known for picking off great innovative companies at an early stage and before they scaled, preventing them from commanding a larger enterprise value at exit. This has changed, with a number of posterchild successful exits, which has created a trend for companies deciding to scale and exit at a later stage and generate more attractive returns.”