Israel: The Unicorn Nation

“If you’re going to the Middle East to look for oil, you can skip Israel. If you’re looking for brains, look no further. Israel has shown that it has a disproportionate amount of brains and energy.” — Warren Buffet

Waze, founded by Uri Levine, Ehud Shabtai and Amir Shinar in Israel in 2008, is a social traffic and navigation platform that disrupted the mobility sector globally, and in June 2013 the company announced its acquisition by Google for USD$1.3bn. Just as Google did with this transaction, there are many multinational corporations and technology companies that seek to acquire startups founded by Israelis with the purpose of integrating innovation and cutting-edge technology into their products and processes. For instance, among the companies that made the most acquisitions in Israel in the period from 2010 to 2019 are; Intel with 10 acquisitions for USD$17.7bn, Cisco with 4 for USD$6bn, Covidien-Medtronic with 8 for USD $3.4bn, Salesforce with 6 for USD$2.3bn, Google with 12 for USD$1.8bn, Palo Alto with 6 for USD$1.5bn, Microsoft with 9 for USD$950mm, IBM with 6 for USD$900mm, and Apple with 7 for USD$830mm.

It is undeniable that the top global companies within their respective industries have been looking at the Israeli ecosystem for a long time now. But how is it that a country of 8.7 million inhabitants has become a global innovation hub?

• Population: Israel is the 3rd country in the world with the highest rate of university education per capita (equivalent to 50% of the population). Israel has also world-class educational institutions, has contributed to the formation of 12 Nobel Prizes, and is ranked #13 on the global innovation index by Cornell University, INSEAD and WIPO.
• Leverage technology to maximize its natural resources: The Dead Sea contains rich mineral deposits, and they have large phosphate reserves in the Negev desert. Israel uses its technological expertise and innovation in industrial processes by maximizing the value of sophisticated chemicals, such as fertilizers and pesticides, petrochemicals, and plastics.
• Geopolitical conflicts: Israel was declared a state in 1948, over the years it has faced various conflicts with the countries that surround it (Egypt, Jordan, Syria and Lebanon). Israel fought a war against its Arab neighbors between 1967 and 1973, preceded by peace treaties with Egypt in 1979 and Jordan in 1994. This threat has caused it to invest 5% of GDP in military spending (6th country globally), directing its efforts into technological development and innovation.

Similarly, in Israel military service is mandatory at the age of 18, men enlist for at least 32 months and women for 24 months. This preparation puts them in high pressure situations and leads to a higher degree of maturity. There are even special units within the Israeli army, such as the 8100 and 8200 units, where they specialize in cybersecurity, artificial intelligence, and cryptography. Upon completion of their military service, they use their acquired technical knowledge, tactical skills and experience to develop startups or get involved in the Venture Capital ecosystem.

These factors have transformed Israel’s economy over the past 25 years, turning it into an ecosystem of high technology and innovation. Some of the triggers for this success include the following:

• Entrepreneurial culture: Due to their survival instinct, Israelis seek to transcend and are taught to solve problems from an early age. This, together with the limited potential for economic growth within their country due to the small territory and population size, has created an entrepreneurial culture within the country and a global vision that encourages them to grow their startups in other geographies through innovation. For this reason, Israel is characterized for having serial entrepreneurs, technology clusters and quality startups, with 1 startup created for every 1,400 inhabitants; and it is estimated that more than 10,800 high-tech startups have been founded.
• High cooperation between institutions: All institutions in Israel have among their objectives to promote entrepreneurship, innovation, and technological development. As a sample we have that there are at least 24 incubators, 35 entrepreneurial centers and 62 innovation hubs in the country. For context, top Israeli universities, such as Weizmann Institute of Science, Tel Aviv University, Hebrew University of Jerusalem, Technion Israel Institute of Technology, and Ben Gurion University of Negev, are among the top 500 universities in the world.
• Smart capital: The dynamics of the Venture Capital ecosystem in Israel has managed to attract more than 2,300 investors, of which there are more than 300 Venture Capital funds. On the corporate side, there are more than 130 CVCs globally investing in startups in Israel, in the period 2015–2019 these investors participated in 34% of the transactions and contributed 45% of the capital invested in Israel. Venture Capital’s investment reached USD$10.2bn in 2020 with 600 transactions.
• Strong presence of multinationals: Multinational companies in search of innovation and development have a presence in Israel, there are more than 370 active research and development centers by multinationals. In 2019, investment by multinational corporations was USD$2.7bn.
• Government support: Government participation has been important in the creation of the Venture Capital ecosystem in Israel. Some of the most relevant entities are the Israel Innovation Authority (IIA), with 18 incubators funded by the government; Israel Advanced Technology Industries (IATI) and Startup Nation Central, in charge of connecting the ecosystem. In the same way, the Israel Foreign Trade Administration and the Economic and Trade Offices at the global level are fundamental to connect innovation in Israel with the rest of the world.

It is no coincidence that Israel is among the first places in global innovation, with the largest number of startups and with the largest amount invested in Venture Capital. They have managed to create a unique, complementary, and continuously growing system. Today it is unthinkable to imagine an ecosystem of Venture Capital and innovation without considering Israel as one of the most important players. Global economies and especially emerging economies could follow Israel’s example, fostering innovation and disruptive technologies for the benefit of economic development.

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Gonzalo Soriano. VC Investor at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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