Why Does Israel Have So Many Startups?

Tel Aviv contains more startups per capita than any city in the world other than Silicon Valley, according to the 2019 Global Startup Ecosystem Report published by Startup Genome and the Global Entrepreneurship Network. Prior to 2019, Tel Aviv contained the most startups per capita, even beating Silicon Valley. With companies including Google, Nielsen, and Nvidia operating incubators, accelerators, and competitions around Israel, some are even calling Tel Aviv the next Silicon Valley.

But the authors of the Global Startup Ecosystem Report disagree-there's not going to be a "next" Silicon Valley. Quite the opposite actually; there will be many, and Tel Aviv is just one. Still, the report states, Tel Aviv is unique.

The report points to the Tnufa National Pre-Seed Fund, which is a risk-free grant that the government awards to entrepreneurs based in Israel to explore innovative technology. The fund is one possible reason why so many startups exist there. But it's not the only one-the study fails to mention several other plausible explanations to the question: Why do Tel Aviv and Israel have so many startups?

Like Israel itself, these theories are interdisciplinary, so it's hard to say whether their relationship to Israel's success as a technological hub is an example of correlation or causation. Karina Rubinstein, senior director of business development for the Israel Innovation Authority's Startup Division, explains that Israelis are defined by their entrepreneurial spirit. From a young age, she says, they're exposed to a different kind of thinking: "They face challenges where there's no box at all."

Part of that is due to the nation's mandatory military service. All Israelis are drafted into the army, known as the Israel Defense Forces (IDF), at the age of 18 and required to serve at least two years. During that time, they face life-or-death decisions and are exposed to some of the world's most advanced technology.

Photo: Zebra Medical Vision Eyal Gura

Venture capitalist and Zebra Medical Vision CEO Eyal Gura says at Zebra-Med, a digital healthcare startup that incorporates AI into radiology, 100 percent of the Israel-based team has served in the IDF-and Gura says everyone has benefitted from the IDF's "network." In addition to exposing troops to advanced technology, the IDF also forces collaboration in high-risk situations, which is vital at a startup like Zebra-Med where teams must seamlessly work together everyday.

In terms of funding, many foreign entrepreneurs with no ties to Israel also choose to base their startups in the small country. The Israel Innovation Authority's Tnufa National Pre-seed Fund may play a role in those entrepreneurs' decisions.

The Tnufa fund finances entrepreneurs, from Israel and elsewhere, at the ideation stage as long as they successfully secure a visa, with which the Innovation Authority will assist them. Once their visa is approved, they are eligible to apply for the fund, on the condition the operations remain based in Israel. The funding-up to NIS 200,000 over the course of two years-allows recipients to develop their ideas without taking on debt or venture capital.

While raising Zebra-Med's first venture capital (VC) funding years ago, Gura says he found more success in securing capital in Silicon Valley. But now, he says Israeli VCs are more mature and understand the importance of patience when working toward long-term goals. "VCs are now more willing to bet on unicorns and scale-up companies," Gura says. There's less pressure to sell early, he says, which is a key reason why there's now a record number of unicorns based in Israel.

Photo: Inbal Arieli Inbal Arieli

Inbal Arieli, Israeli entrepreneur and author of the book Chutzpah, says

there's also a cultural reason for Israel's startup success. It's common for Israeli parents to encourage an entrepreneurial spirit in their children, and she believes this does influence startup culture there.

She calls this spirit "chutzpah" (which is a word even my American Jewish parents instilled during my childhood). Chutzpah is Yiddish for having nerve, and being bold or audacious. It means trying despite the risk of failure, or approaching a problem from perhaps an absurd way.

"Israeli childhood is shaped by challenges and risk in a tribal-like community, where children develop the courage to pursue unorthodox and often revolutionary approaches to change and innovation," Arieli says. For example, during the holiday of Lag B'Omer, Israelis encourage their children to build fires; the holiday is seldom celebrated outside of Israel.

According to Arieli, parents encourage children to build the bonfires themselves, even in the city of Tel Aviv. Kids control the whole process, from collecting wood to igniting the actual flame. "Lighting the bonfire is a cooperative experience, where kids learn to manage risks and build self-confidence through actual experiment and activity," Arieli says. In her view, this helps kids form the soft skills they need to innovate when faced with life's challenges later in life.

Accepting the risk of failure is also a cultural norm in Israel. In 2006, Arieli joined the founding team of Israeli startup Modu, which was run by serial entrepreneur Dov Moran, who's credited with inventing the first flash drive. According to Arieli, Modu raised more than US $120 million and opened subsidiaries around the world. But after three years, the company closed. However, many of its previous employees went on to pursue their own startups. One failure caused the birth of dozens of new business ventures.

Part of that mindset probably comes from language-the definition of failure differs in Hebrew-while another part comes from the culture itself. Arieli says that making mistakes is widely accepted in Israeli society, allowing people to learn from their errors. Rubinstein agrees, saying that Israel does encourage failure. As she puts it, there's a "try again" mentality about Israel, where you have the right to fail.

Despite housing so many startups, Israel's next step is transitioning from startup nation to scale-up nation. Rubinstein believes that process begins with human capital, and the Innovation Authority is trying to create infrastructure for the next generation of data scientists and coders to live and work there, with hopes of seeing more such companies based in Israel. "Come to Israel and bring your ideas!" Rubinstein says.