Key Takeaways
Obligatory military service teaches Israelis to achieve goals, gives them a chance to work with advanced technology, and builds a professional network of citizens who know how to work together.
Israeli culture encourages trying new things, accepts failure as part of the process and admires “chutzpah”.
Government programs have been wildly successful in Israel for attracting venture capital investment and R&D investments from multinational companies.
While Israel often makes headlines for political or military reasons, technologists and venture capitalists see the country as a hotbed of innovation and have nicknamed it “Start-up Nation”. How does a nation in the desert surrounded by turmoil come to produce 10% of the world’s unicorns in 2021? As part of a group of Harvard students, I spent the last week touring Israel and meeting with leaders including the President of Israel, members of the Knesset, and the founders of Israeli companies HiBob and Redefine Meat with this exact question in mind. This blog will summarize my findings and hopefully help others understand and learn from Israeli startup success.
Military Service
The most common thread in all of the answers from Israeli leaders about why Israel has so many successful startups was the skills and lessons learned in the Israeli Defense Forces (IDF). All citizens, male and female, are conscripted at the age of 18 into 2-3 years of service in the IDF. The IDF exposes troops to advanced technology and forces them to learn problem-solving skills. Furthermore, the IDF creates a network of Israeli citizens that are used to working together to accomplish goals. The IDF forces collaboration in high-risk situations, which is vital at a startup where teams must work together seamlessly every day.
Unit 8200
Many of the tech founders in Israel are alumni of Unit 8200, their intelligence corps and code decryption unit, which is similar to the USA National Security Agency. Getting into Unit 8200 consists of several rounds of coding interviews, and the training received there is enough to skip university and head straight into the workforce or start your own company. Alumni of Unit 8200 have founded dozens of IT companies including Palo Alto Networks, Waze, NSO Group, CyberArk, and Cybereason.
Chutzpah Culture
As part of our trip we spent a morning at the Peres Center for Peace and Innovation in Tel Aviv. The center highlights the history of disruptive innovation in Israel as well as current startups shaking things up today. As the tour guide told stories of breakthrough innovations, he kept using one word to describe what it took - “chutzpah”. 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. Israelis understand that a startup takes a little chutzpah and that it's okay to fail.
Government Programs
The origins of the now thriving venture capital industry in Israel can be traced to a government initiative in 1993 named the Yozma program ("Initiative" in Hebrew); which offered attractive tax incentives to any foreign venture-capital investments in Israel and offered to double any investment with funds from the government. Undoubtedly as a result of the Yozma program, Israel’s annual venture capital investments increased nearly 60-fold from 1991 to 2000 from $58 million to $3.3 billion.
Another incentive program offered by the government provides employment grants for R&D centers and large enterprises. The program offers a 4-year grant scheme covering on average 25% of the employer's cost of salaries for each new employee. It is no surprise that the world's leading multinational companies have all invested in Israel: Microsoft, Motorola, Google, Apple (three R&D centers), Facebook, Berkshire-Hathaway, Intel, HP, Siemens, GE, IBM, Philips, Cisco, Applied Materials, IBM, J&J, are just some of the names in a long list of over 200 MNCs who now have R&D centers in Israel.
The Israeli government also founded the Technology Incubator program in the early 1990s. Today there are over 25 incubators across the country, all of which have been privatized. The incubators offer government funding of up to 85% of early stage project costs for two years. They nurture companies from seed to early stage, thus minimizing the risk to the investor.
Additionally, the Israel Innovation Authority provides a variety of support programs, on an annual budget of about 400 million dollars. The main program is the R&D Fund, which offers R&D grants of up to 40% of the approved R&D program cost. Other programs operated by the IIA include bi-national funds (joint R&D programs with foreign counterparts such as China, Canada, USA, etc.), which are entitled to financial assistance of 50% of the Israeli company’s R&D costs.
Global-First Market Approach
Israel is a small country, about the size and population of New Jersey. This means they have a restricted local market. This forces Israeli companies to start thinking globally from the very start. They are quick to open international offices and have diverse multinational teams. This has also proven to be beneficial to their success.
Conclusion
My trip confirmed that many factors contribute to the startup ecosystem of Israel. Israel's unique society and culture, strong economy, government support, and "global-first" market approach make Israel's innovation ecosystem one of the most successful in the world. What can other countries take away from their success? Give young people responsibility. Investing in R&D pays off. And try to have a little chutzpah!