The rise of Israel as a tech hub is a well-known phenomenon. The famous ‘Start Up Nation,’ written by Dan Senor and Saul Singer in 2009, highlighted the story behind the attitudes, processes and norms in Israeli culture which resulted in its recent technological boom. With a geopolitical situation leaving many feeling conflicted, hierarchical societal structures virtually non-existent, and a tight traditional community where most are separated by a mere two degrees, to the Western observer, this can feel like a surprising place for innovation.
So why are companies increasingly interested in the Israeli startup ecocsystem? What is it about the people and culture that cultivates such growth? And finally, what can the rest of us learn from those in Israel in order to kick-start innovation and entrepreneurship elsewhere?
Israel has a population of 8 million people — less than that of New York City — yet it lists 93 companies on the Nasdaq (more than South Korea, Japan and India combined). There is more venture capital invested per person than anywhere else in the world. In 2016 alone, $6 billion dollars were invested in Israel startups, and there were over $9.2 billion worth of exits. Outside of the US, Google, Apple and Intel have their biggest R&D centres in Israel, and all three companies have completed notable acquisitions: Google buying Waze for over $1 billion in 2013; Apple buying PrimeSense for around $300 million in 2013; and Intel’s latest purchase of Mobileye for $15.3 billion in March 2017.
With scant natural resources and a relatively unstable geopolitical climate, the driver behind Israel’s success is its people. Over the last few years, corporates and startups globally have been discussing this all-important ingredient, to unpick how best to run a company. So what is Israel as a country doing differently to flourish?
- Entrepreneurship is the norm
Most Israelis have served in the armed forces, due to conscription occurring in the years following high school. 19 and 20 year olds are put in management positions within months of joining, men and women serve alongside each other in all roles, and work situations are highly volatile with roles changing unexpectedly. All this means that if and when Israelis leave the Israel Defence Forces, they tend to have a higher appetite for risk, be more comfortable with non-stagnant roles with possible insecurity, and perform much better in a problem-solving context: three key qualities required in an entrepreneur.
- Community is key
There’s a word in Hebrew – ‘firgun’ – which describes a key element of Israeli culture: a genuine, unselfish, ungrudging joy for another’s accomplishments. It also means to give support or assistance to another without expecting anything in return. In Israel, community is the most important resource – and when it comes to the startup community, it is as dense and close-knit throughout Tel Aviv, Jerusalem and Haifa as in Silicon Valley. Everyone is two phone calls away and the attitude towards a mutual friend is that they are already part of your family. When two people meet in Israel, there is an immediate yearning to work out how both can help or work with each other. With a community so strong and accessible, entrepreneurs find it much easier to reach those all important knowledge-bearers, commercial connections and key collaborators.
- Hierarchy is non-existent
There is a flat structure in Israel – class is a concept which doesn’t exist in the same way as it does in the UK and the US. Mirroring the nickname culture in the Israeli army, the Prime Minister Benjamin Netanyahu is almost exclusively referred to as ‘King Bibi’ or even just ‘Bibi’ – both behind his back and to his face. In even the largest of corporates, this also rings true, with the idea of ‘Sir’ and ‘Boss’ not holding the same dominance as in the West or the Far East. This means that approaching experienced influencers to ask for advice, or your boss to discuss a problem, is much more akin to having a conversation with a peer. Israelis quip that sorting out issues at companies means yelling at each other in a meeting room for a few minutes, sorting out the problem frankly, and walking out again as friends. With so many startups failing due to co-founder misgivings, its easy to see why this frank and open work culture contributes to more success.
- Talent is fostered young
With most Israeli young people going straight from school into the IDF, university education is postponed until after their service. 46% of the population holds a college or university degree, versus the OECD average of 32%, and 5% of the population in Israel has a PhD, whereas in the UK and the US, that number is closer to 2%. But fostering talent in future workers goes beyond traditional forms of education. The IDF is an educational scheme in itself, with some of the most lucrative high tech startups boasting founders from the infamous 8200 — Israel’s answer to the NSA. It means that those trained in cybersecurity and data analytics at a military level are taking these skills into the commercial market, and building some of the most technologically advanced companies worldwide.
What does this all mean for brands?
With the growth of the Israeli startup ecosystem surpassing that of anywhere else around the world, and an understanding that the talent and culture is ripe for innovation and growth, it seems only natural that corporates would flock here to make the most of this thriving economy. From research teams and university partnerships to startup accelerators and product testbeds, brands from all corners of the globe are setting up camp in Israel.
Three years ago, Coca-Cola established themselves as a key startup partner in Tel Aviv by carefully looking at what they, as a multinational corporation, could offer the ecosystem. They proposed entrepreneurship training, but found Israel was in no way in need of this. They thought about brokering introductions with some of their huge technology partners, but soon realised that in a country with 5% of the population holding a PhD, and with the highest number of patents per capita, this would be redundant. They toyed with helping with investment, but with the highest VC per capita outside of Silicon Valley, they wouldn’t really be adding much to the mix. So instead, Coke focused on bringing expertise in storytelling, branding, and scaling up to find the first customer, and created their startup ‘commercialisation programme’, The Bridge.
In just three years, Coke have helped their startups run 105 pilots, currently have 30 startup alumni, and have partnered with Mercedez Benz and Turner to grow the breadth of The Bridge’s expertise. With these three corporates placing big stakes in The Bridge — there are executive sponsors throughout the businesses who put money into the programme — there is incentive to ensure value is gained from accelerating the companies. Essentially, this is a way for Coke, Mercedez and Turner to find strong partners, as opposed to vendors, to solve problems throughout their businesses.
By having the corporates work so closely with the startups as they grow, barriers which can result in a failed deal, such as difficulties with licensing agreements for pilots, can be overcome at inception. And with the difference in speed between startups and corporates posing a great challenge to successful partnerships, The Bridge is set up ‘to serve and protect’ startups from long stretches of uncertainty which can result in startups losing money, or even folding.
For Coke, being in Israel works for three key reasons:
- Startups in Israel have more thirst to work with big brands, so they will flex towards working with them, and are more willing to change products to suit corporates.
- Community Size. Tel Aviv is a small ecosystem, which makes for a much easier task when seeking out new partners, and being connected to the right people at the right time.
- Ability to test. As the tech scene is less of a media pull, Coke has more freedom to test new ideas. If a mistake is made in Silicon Valley on the other hand, bad press is rife and brands are less likely to take public risks.
Having been in the country for 20 years, General Motors consider Israel one of their most important locations. Activity was ramped up in 2011 when all of the GM Israeli R&D was moved into one complex in Herzliya, and today there are over 200 researchers working for GM in north Tel Aviv. The approach GM take with their Israeli research is focusing on technologies that won’t be in cars for at least five years, predominantly in areas such as sensors, cybersecurity and machine learning. GM want to solve big problems, not just achieve small process gains, through their work in Israel.
The idea is for GM to look at things they don’t already know about; buying or partnering with Israeli startups if they feel they can incorporate the technologies at a future date, or simply using the vast employee-based expertise through their hiring of talented engineers out of the IDF or Israeli universities. General Motors recently partnered with Israeli startup Mobileye to integrate semiconductor chips that can map road conditions in real-time.
As a product-based company, General Motors must continue to invest in research. With the growth of demand for autonomous vehicles, intelligent driver systems and electric cars, it’s an exciting but competitive time for the transportation industry. It seems the best way to come out of the bottleneck as unscathed as possible is to invest in the new technologies driving the future of the industry – whether for use in GM products or for the industry as a whole, the market is ripe for innovation.
As Michal Lapidot, Project Manager for General Motors commented: “We have this unique entrepreneurial spirit that exists here…we have to live in an environment that isn’t very stable and where you cannot sit back and work in the same corporate environment for years – you have to come up with other ideas and go for this out of the box thinking.” Both Honda and Volvo have followed GM’s lead and opened innovation labs in Tel Aviv in 2017.
When Citi came to Israel six years ago, they met with the Chief Scientific Officer who told them that VC investment in FinTech in Israel was only 3% (by comparison, the UK VC investment in FinTech is 25%). Realising that this meant a relatively open market, the CSO office supported Citi in opening an innovation lab in Israel, with a $100m investment.
The Citi Accelerator in Tel Aviv takes on 10 startups per year in areas such as AI, mobile technologies and deep learning, mainly focusing on where 40% of Citi’s revenue comes from: Capital Markets. They run a four month accelerator, equity-free, recruiting mentors throughout Citi’s business to engage with the startups and advise on needs across corporate activities.
Comparing Citi to General Motors and Microsoft, with their specific research and sales goals in Israel, can leave you wondering what the true benefit is for Citi in running an accerelator for startups it may never actually work with, equity-free. However, open innovation is not always driven by clear monetary KPIs, but rather an approach which allows for serendipity, inspiration and collaboration. By having full view of and input into the development of the companies, Citi essentially have 10 new product development projects running alongside the business. Even if only one in each cohort ends up working directly with Citi, the return on investment has the potential to be outstanding.
For Citi, there are 2 clear benefits to running an accelerator like this in Israel:
- There are lots of startups in Israel, so there simply is more choice. With 6,000 active startups in a country of 8 million, and 1,300 new startups founded every year, the opportunity to seek out something early on is huge.
- There are lots of tools for new startups to grow and learn to work with large organisations. For instance, there are plenty of legal and accountancy firms geared towards working with startups in Tel Aviv, and there is a culture of giving back amongst already successful entrepreneurs — meaning new startups have plenty of support outside of Citi.
Microsoft have been involved in the Israeli tech scene for some time, as they are a strong investor and acquirer of startups, but six years ago they realised that Israel could offer so much more in terms of becoming an innovation channel for Microsoft customers themselves. So instead of focusing just on buying new products to add to their offering, Microsoft now act as an innovation partner for their global clients through their work in Israel; they don’t just sell Azure, they sell innovation as a service.
Microsoft look at the full lifecycle of startups coming out of Israel. They run an accelerator for A round companies to gain mentorship through Microsoft; they run a programme called ‘Success’ which is all about connecting startups to large corporates (Microsoft clients) worldwide once they are at global partnership stage; and then Microsoft are still active acquirers and investors in later stage startups to bring them into the Microsoft product offer. By working with Series A startups, Microsoft ensure they are working with companies that have the resources to do huge deals — and they also save their own resources for due diligence as VCs will already have done the work before they reached Series A.
For Microsoft, this is an ecosystem ripe with opportunity. With innovation originally sitting in the sales team, the value-add for Microsoft clients goes a long way towards forming long-term partnerships. Innovation now sits in the product team as Microsoft have realised that innovation has to be a part of the overall product strategy of the company, especially in the competitive environment Microsoft find themselves in with Amazon Web Services. Finally, with the startups themselves at high growth stage, Microsoft will be hoping to secure long term software partnerships as they scale their offerings up, so it makes sense for Microsoft to offer the companies help in growing through introductions now if they are to keep them as a customer later down the line.
With Israel such a relatively small country, Microsoft can benefit from the well-connected ecosystem in which startups find it easy to knock on the door of a VC. This means that Microsoft can work with startups that grow quickly, instead of having to wait as long for global scale. Also, the attitude that Israeli entrepreneurs have of always looking for opportunities to partner, no matter who they meet, means that Microsoft have access to companies au fait with open collaboration.
Challenges & Takeaways
As much as Israel is a place accustomed to large corporates and brands flocking to its shores, there are still areas which those who are newer to the market should be aware of when heading to the country for business – from the exploratory to the commercial.
Firstly, it’s important to ensure mutual benefit. While Israel is a relatively new country and ecosystem, it is advanced in terms of knowing what it excels at and where the gaps are. Corporates going in with agendas crafted outside of Israel are not well-received, particularly if the agenda doesn’t clearly benefit the Israeli ecosystem. Ensure that value is being created on both sides, work out what the brand or corporate can truly offer, and fill the gaps not already taken by other corporates. Competition is high to attract the best Israeli startups.
Secondly, know the customer. Israeli startups are predominantly looking at customer markets outside of Israel. With a small country and few B2B consumers on offer, the focus is on the foreign. Understanding the drivers for decisions made by Israeli startups is key to working out how best to conduct the corporate-startup relationship, and the ability to bring insight, connections and business in from large markets elsewhere is extremely important.
What can global industries learn about this micro industry producing such success? We can’t replicate Israel’s political, educational, geographical and cultural context as a whole, but with so many assets contributing to Israel’s innovative economy, some globally implementable concepts can be drawn.
- Israel’s greatest asset is its community, and if only one thing is to be learnt from its success it is that creating a closeness, an approachable atmosphere and an encouragement of ‘firgun’ is key to promoting entrepreneurship.
- Geography is key in terms of having everything in one place – in Israel, it is easy for young startups to get the outside support they need, and older companies to grow their network and commercial partnerships, when people and businesses are on your doorstep.
- Encouraging a less hierarchical and more frank culture within businesses and communities is natural in Israel, but that’s not to say it can’t be done elsewhere. With the reward being faster decisions and easier access to key influencers, the impetus should be to find ways to adapt and evolve traditional societal norms.
- A keen government which is willing to subsidise and push for progress by taking on some risk on behalf of industry, as opposed to simply talking about how important innovation is in their country, is a surefire way to accelerate entrepreneurship at early stages.
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