Innovative Region: Israel

Israel is known as the startup nation for its high density of entrepreneurs and venture capital in proportion to the population but with corporate help and notable exits, such as Mobileye’s acquisition by Intel for $15bn, it is increasingly becoming the scale-up nation too.

In 2018, Israel had the fifth-largest deal volume in the world backed by corporates, and eighth when measured by deal value – the actual capital invested – at $1.6bn. The Israel Venture Capital (IVC) Research Centre said Israeli startups raised a total of $6.47bn in venture capital last year, the sixth year of consecutive growth, with the number of corporate venturers making their first deal in the country going from 32 in 2013 to more than 130 over the past two years as more money flows into the country from Asia.

Thios is impressive for a country of 8.7 million people that turns out between 1,100 to 1,380 startups every year, according to Start-Up Nation Central data.

Now known as the startup nation – since the publication of Saul Singer’s and Dan Senor’s book of the same name a decade ago – at what point does Israel begin to scale? When does Israel become the scale-up nation, as attendees to the GCV Israel event in Tel Aviv this month discussed, and turn innovative startups set up for sale or flotation in other countries into one “focused on building large successful multinational companies that are headquartered in Israel and operate on a truly global scale, with thousands of employees and significant revenues”, as the Jerusalem Post argued in an editorial two years ago?

Corporate venture is growing in Israel, with the total deal value rising by $643m from 2017. The deal count is rising too, with 37 alone in the IT sector. The IVC Research Centre noted that in 2013-14 small deals of less than $5m made up the majority of corporate investments but since 2017 the majority have been in larger deals of more than $20m in size.

Those data are not as simple as they sound. Aharon Aharon, CEO of the Israel Innovation Authority (IIA), ahead of the GCV Israel event pointed to the lower number of first rounds for startups, even as the total amount of invested capital increases. Aharon pointed to this as evidence of venture capital units preferring “to gamble on a smaller number of promising startups and to fuel them over a longer stretch of time with generous funding in the hope of eventually profiting from a huge exit, even if the wait is long”.

According to Aharon, there are now 15 Israeli unicorns – companies worth at least $1bn – in part helped by this phenomenon. Landa Digital Printing received $300m from Germany-based Altana in 2018, the largest corporate-backed round in Israel yet. Of the top 10 corporate-backed rounds in Israeli history, seven are from 2017 or 2018, including Daimler, Mercedes Benz, SAIC and Hearst backing a $250m round for Via, and GE Ventures supporting the $150m round for InSightec.

Ornit Shinar, director and venture investing lead at Citi Ventures in Israel, said these larger rounds were evidence that the shift from startup nation to scale-up nation was really happening, in part because later rounds are becoming larger as IPOs are delayed.

She added: “Israel is experiencing a market transformation that matches the global trend of delayed public offerings. This can be explained by a number of factors. First, the IPO market has moved upstream with more large-scale private money available. Second, Israel has seen a surge of late-stage funds, facilitating the fundraising potential of companies once they reach growth. And, third, there has been a change in the way the market is behaving, with less startups raising seed or A rounds and greater opportunity to join later-stage rounds of funding. All of this would justify the scale-up name.”

While Singapore had a significantly lower deal count, at 57, those deals were backed by $6.1bn of capital, roughly four times that which Israel received, suggesting a more mature outlook. That said, Singapore is something of an outlier, with an estimated $108m in capital per deal – Israel is at $18m, and Canada and Switzerland are at $20m and $14m respectively.

For Aharon, Israel is “a global hub of innovation that excels in tech development and produces groundbreaking companies”, but it is also “falling behind developed countries in the consumption of innovation – meaning technology assimilation”. Creation does not always engender consumption, and Israeli business units are not as quick on the uptake as innovators would like.

Aharon’s job is to support innovation across the Israeli economy, and that means ensuring that innovation is used. For Aharon that is not about becoming a scale-up nation but becoming a “smart-up nation”, where the economy is just as adept at implementation as it is at innovation.

The authority is coordinating across government to facilitate implementation and assimilation of technology within Israel, but Israel’s business is, in some ways, profoundly international, as Aharon said: “The Israeli high-tech sector is particularly global by nature. Most of its industry competitors and clients are scattered across the globe, it is highly involved with multinational companies and foreign investors, and it performs most of its transactions in foreign currency.”

While being internationally-focused is an advantage in some ways, it does not mean Israeli startups can avoid every domestic problem. Some are more fundamental. Coming into the job at the IIA in 2016, Aharon identified a high-tech labour shortfall. Currently, the IIA is pushing, alongside the government, to fill an estimated 15,000 jobs in the sector. Pulling on institutional levers such as boosting maths and science eduction in schools, there is also a “heavy emphasis on integrating women and underrepresented populations in high-tech – Arabs and ultra-orthodox in particular – with a recognition of the notable unfulfilled potential in these group”.

Shinar, who has been involved with Yazamiyot, a group that supports women entrepreneurs in Israel, has seen this trend firsthand. “While this is subjective, I feel that in 2018, there has been a shift with investors – men and women alike – being vocal about wanting to invest in diverse management teams, and Citi has put diversity front and centre. In the final quarter of 2018, we organised a Pitch in the Dark event in which startups pitched their companies in front of some of the country’s leading VCs in a pitch dark room – pun intended. The point was to showcase the importance of not letting our preconceptions and unconscious biases influence our decisions and miss out on great entrepreneurs.”

Those entrepreneurs are coming into an ecosystem that is excited about many things, and perhaps one above any other – artificial inteligence (AI). Aharon has identified, like many others in the innovation economy, that AI is an area with huge potential for growth, and is proud of the work Israeli companies have done in that space.

He said: “The rapid growth of AI as the groundbreaking information technology of our generation points to the enormous potential of the Israeli industry in innovative applications of advanced information technologies. Israel’s high-tech sector has excelled at leading implementation technologies. As such, its ability to produce innovative companies that are prominent in the field of transportation such as Mobileye and Innoviz is not surprising.”

Shinar at Citi has seen the same trend, with one example being Contguard, in which Citi invested last year. The Israeli firm use internet of things and AI to provide real-time monitoring for goods in transit, applying modern technologies to old problems. Other Citi investments focus on cybersecurity, supporting small and medium-sized businesses, and trade-related startups, all areas Shinar points to as unsurprising, because Israel is “renowned as being a hub of innovation and excellence with an active startup community in each of these areas”.

A further promising sign for Israel is the amount of external capital being invested. Qualcomm, Microsoft, Samsung, Intel, Alibaba and ABB all did multiple deals in Israel last year, with Qualcomm and Samsung doing 21 each. While IT is the dominant, the number of deals in industry, transportation, health and financial services have all grown year on year.

Earlier this year, consumer electronics producer Samsung was in discussions over a $150m to $160m acquisition of Corephotonics, an Israel-based smartphone camera technology provider based on Tel Aviv University research. And universities have been instrumental in the startup nation’s success and in using venture increasingly to support the next generation of spin-outs and startups to go global. Tel Aviv University made history last year when it launched TAU Ventures with about $20m in initial commitments to become the first such vehicle to be created in Israel. And within a month of its launch, it partnered intelligence agency Israel Security Authority to create the Xcelerator accelerator.

Yissum, the tech transfer company of Hebrew University of Jerusalem, in January announced its participation in three international collaboration hubs to help drive the commercialisation of its technologies in the US, South America and China. Yissum has spun out 110 companies and currently generates $2bn in revenue annually from commercialised Hebrew University technologies but has only recently set up venture funding. Diversified conglomerate Reliance Industries in 2017 agreed to invest $25m in the Jerusalem Innovation Incubator, an early-stage program also backed by Yissum and run by venture capital firm Jerusalem Global Ventures.

Technion–Israel Institute of Technology is also setting up the $200m Technion Venture Fund. Late last year, Technion secured S10m ($2.7m) in government grant funding to establish the Technion Entrepreneurship and Innovation Centre assembling the institute’s various entrepreneurial services and partner Israel-based corporates, including drug developer Teva Pharmaceutical Industries, defence technology supplier Rafael Advanced Defense Systems and neuroscience product maker Alpha Omega.

These companies are already scaled up but the overall breadth of Israeli innovation is remarkable, and is a strong sign for the Israeli economy as a whole. Aharon is positive about Israel’s place in the global economy and the innovation ecosystem within Israel. What is now key for Israel is the shift into a fully digitised economy, something Aharon said was lacking.

He added: “We often cite the extraordinary accomplishments of yet another Israeli company that has developed a new, revolutionary product. Nevertheless there seems to be a significant discrepancy between the advanced high-tech industry and day-to-day life in Israel. We believe that increasing the penetration of advanced technologies into day-to-day life in Israel is critical for economic prosperity and for improved quality of life.”

Part of that penetration involves scaling. Scale means more customers, and more customers means more people. Scaling and maturation go hand in hand, and while Shinar says the Israeli innovation ecosystem may look like a “disorganised scramble”, it is showing signs of maturity, as “serial entrepreneurs and experienced executives bring a new depth to the quality and variety of startups we are seeing”, in turn leading to a greater number of unicorns.

While maturity may be upon the Israeli innovation ecosystem, there is a word of warning from Aharon – implementation needs to come sooner rather than later. As Aharon said: “The duality that has existed thus far between the innovative high-tech sector and the rest of the economy, which has been slow to adopt new technologies, is not sustainable”.