Six lessons from the Start-up Nation

The take-away

  • The Microsoft R&D centre in Herzliya, which opened 25 years ago, was the first of its kind outside the US.
  • Daniel Elkabetz, Business Development Director at a start-up in Haifa, was drawn to Israel by its people’s boldness and constant questioning.

It’s 9.00 a.m. on bus 90 to Herzliya. The passengers, mostly between 25 and 35, are heading to the many high-tech companies with offices in Tel Aviv’s northern suburb: Apple, Dell, Microsoft, 3M, General Motors, Merck. The research and development centres setup by multinationals, 300 in all nationwide, pass before their eyes. In the shadows of these giants, hundreds of local start-ups have taken over new office space.

Israel is home to some 2,000 tech ventures, which raised $4.8 billion in 2016, 11% more than in 2015. How did a country of only 8.6 million people develop such a vibrant entrepreneurial ecosystem – and what can European countries learn from what authors Dan Senor and Saul Singer designated the “Start-up Nation” in their 2009 bestseller?

  1. Attracting tech giants

The steps taken by Israel to entice the world’s tech leaders at a very early stage provide a valuable lesson for Europe, says Patrick Aebischer, former president of the École Polytechnique Fédérale de Lausanne. “These multinationals capture the talent that can invent disruptive technology and inject a lot of money into the ecosystem, like Intel’s takeover of autonomous driving technology firm Mobileye for a record $15.3 billion.”

Microsoft was one of the first multinationals to move into Israel. Its research and development centre in Herzliya, which opened 25 years ago, was the first of its kind outside the US. It employs about 1,000 engineers and scientists focusing on security, artificial intelligence and interface improvement. From Tel Aviv, Zack Weisfeld manages the tech giant’s commitment to innovation through the Microsoft Start-up Growth Partners programme. “In Israel, Microsoft offers startups end-to-end support with a four-month accelerator programme, a growth guidance team to follow on from the acceleration phase and an investment fund”, Weisfeld explains. “The company also regularly acquires start-ups – five in the past 18 months alone.” Since its founding five years ago, Microsoft’s accelerator in Israel has supported 95 projects, 82% of which received funding.

  1. Valuing the chutzpah culture

The country’s entrepreneurial culture is a key factor. Daniel Elkabetz, Business Development Director at Breezo-Meter, a start-up in Haifa, grew up in Paris. He was drawn to Israel by its people’s boldness and constant questioning. “These are very useful character traits in entrepreneurship”, he says, wearing a short-sleeve shirt, kippah and a huge smile. That lack of inhibition creates a relatively flat structure in a start-up – people don’t hesitate to question what the boss is doing – while also pushing them to develop innovative products by driving creative thinking. They are also good at talking to all nationalities to sell their products.

Microsoft’s Weisfeld agrees: “That chutzpah culture is perfect for start-ups. But when a company grows, managers have to be very good to channel that energy in the right direction.”

  1. Encouraging venture capital

Israel has about 70 venture funds within its borders and more than 200 outside the country that invest in the ecosystem. “Europe and especially Switzerland should heed the fact that pension funds invest in venture capital”, notes Aebischer. About 3% of the money from Israeli retirement funds is believed to go towards financing start-ups.

Breezo Meter’s business model and technology, for example, have attracted Israeli, French and American investors. The $4.8 million raised was used to develop a product that measures air quality and provides results in real time, with street level accuracy. The solution combines data from a wide range of sources, including government sensors, traffic information, changes in the ozone layer and building topography. It can also tailor recommendations to specific user groups such as pregnant women, athlete sand asthmatics. “Our approach is mainly B2B”, says Elkabetz, “and we now have customers around the world, including Dyson, Cisco and AccuWeather”.

  1. Bringing in the army

Back to Herzliya to visit one of the local entrepreneurial gems, which raised $24 million. Its customers include software developer Oracle. The staff members at IntSights start their day in a friendly atmosphere. One employee, in a T-shirt and jeans and barefoot, serves himself coffee at the bar in the middle of the open-space plan. The offices, which still smell of fresh paint, are decorated with fashionable Scandinavian furniture and are surrounded by a bit of greenery. One would hardly guess that behind this apparently relaxed attitude, the start-up works to fight computer threats worldwide.

It embodies one aspect of Israel’s high-tech scene that is as surprising as it is necessary: the strong presence of the army and its élite units. It was while doing their military service that the three co-founders of IntSights gained the expertise in cybersecurity necessary to launch their product. Their software collects data automatically from the dark, deep and open web, filters relevant threats for their customer and sends an alert. It was also while in the army that the start-up’s creators formed a network of contacts. “Friends who served with us have become team managers”, says Alon Arvatz, founder and chief product officer. “These offensive and defensive units are also our main source for recruiting the young intelligence experts we need.”

“Élite army units play a crucial role in the Israeli ecosystem, because they select the very best and train these young people well”, Aebischer says. “But it would be difficult for Europeans to reproduce these units, as they serve a geopolitical purpose that is specific to the region.”

  1. Involving the government

In the early 1990s, Israel’s government set up the country’s first incubator to showcase the scientific knowledge that had come from the former Soviet Union. Since then the Israel Innovation Authority has created a total of 24. Domestic expenditure on R&D amounts to 4.25% of GDP, the highest in the world.

“The government’s role can be a model for other countries”, says Aebischer. “The whole system is both laissez-faire, with low legal and tax barriers, and dirigiste, with the government taking a close interest in promoting start-ups.”

  1. Building a network

Both inside the country and out, Israelis are known as professional networkers. “It’s easy to contact entrepreneurs for advice or help”, says Arvatz. “Many platforms and events are also organized to meet investors.” Adds Elkabetz: “You can get an appointment with the CEO of a large company from one day to the next.” “To create a start-up, we talk about it very early on, at school and in the army”, Arvatz continues. “Ideas emerge constantly. And when it works, we’re immensely proud.” One cannot help but wonder which of the young passengers on bus 90 will found the next Google. For them, one thing is sure: it’s just a matter of time.