“If you are going to the Middle East to look for oil, you can skip Israel; if you are looking for brains, look no further,” said Warren Buffett, chairman and chief executive of US-headquartered conglomerate Berkshire Hathaway. “Israel has shown that it has a disproportionate amount of brains and energy.”
Israel has the largest number of startups per capita in the world, according to cloud computing conference CloudFest copywriter Jordan Yerman’s article, A Startup Nation: Why Israel Has Become The New Silicon Valley, and its level of innovation is only behind the San Francisco Bay Area.
The country also produces the highest number of engineers per capita and has the world’s second-highest research and development (R&D) spending as a percentage of the gross domestic product (4.3%), according to consultancy Deloitte.
David “Dede” Goldschmidt, Israel-based vice-president, managing director and head of Samsung Catalyst Fund (SCF), a corporate venture capital (CVC) vehicle for South Korea-headquartered consumer electronics conglomerate Samsung, pointed out the Israeli ecosystem’s strong suits: “First, a unique entrepreneurial culture: Israelis are very practical and agile in their problem-solving attitude, seeking a way for fast implementation of new concepts and technologies. They are more open to taking risks and be the first to operate in blue ocean, emerging domains.
“Second, relevant knowledge and expertise: The brightest minds that serve at Israeli Defence Forces have access to leading-edge technology and opportunity for high-scale implementation, and the very active and vibrant local tech scene with thousands of funded startups and over 350 multinationals’ R&D centres. Also, academia is very strong in multiple domains, such as computer vision – the foundation for [chipmaker Intel’s Israel-based autonomous vehicle subsidiary] Mobileye.
“For this reason, we see a lot of interest in Israel from foreign VCs. In fact, more than 75% of the direct investments in Israel are by foreign investors, whereas in Europe, traditionally the majority of capital invested was local. Moreover, the magnitude of venture funding in Israel is very high – Israel alone attracts more venture capital dollars than most large European nations.
“Israel follows Silicon Valley and is probably ahead of Europe in the maturity of the venture ecosystem. Earlier in this century, Israel had strong sources for early-stage financing; however it lacked the capital needed to fund growth. This resulted in early exits at relatively lower valuations. Over the past decade, we have seen many growth-stage players attracted to Israel, allowing liquidity to the early investors and growth capital to the companies, fuelling their growth and scale – by now Israel has more than 15 unicorns.
“SCF and many of the other CVCs have a strong presence in Israel, even compared with other regions in the world.”
Irad Dor, an Israel partner for US-based software supplier Microsoft’s corporate venturing arm, M12, added: “There is an exceptionally strong sense of collaboration between ecosystem players in Israel, significantly higher than in Europe and to some extent in Silicon Valley. You could easily find examples of multinationals co-operating within the local ecosystem to benefit individual startups, common social projects or even the ecosystem as a whole.
“Due to the size and connectedness of Israel’s technology ecosystem, and the constant flow of talent between multinational corporations, startups, the military and academia, the relative volume of multidisciplinary technology innovation in the country tends to be higher.”
Joseph Kowen, an Israel venture partner for Evonik Venture Capital (EVC), the strategic investment subsidiary of Germany-listed speciality chemicals provider Evonik Industries, also said: “Israel is a compact country with a small population. A large percentage of the academic, research, corporate and entrepreneurial activity takes place in a narrow strip of the country from Beersheba in the south to Haifa in the north. Israelis tend to be highly networked, so non-confidential information travels quickly between people. The effect is that a particularly hot area of startup activity finds its way around the country very efficiently.
“Some cultural characteristics play a part too. Israelis are willing to try new things, take some risks, and while driven to success are not intimidated by failure. They draw conclusions, pick themselves up, and go to work again. Driven by the natural proclivity of Israelis to network, digital tools and platforms such as WhatsApp groups are established and populated with great ease. Common issues are shared almost instantaneously.
“By way of example, I am a member of a WhatsApp group that shares information on foodtech, an area of interest for EVC, and so I am served a daily diet of information about new ideas, ventures, events and even a jobs board which gives an indication who is hiring and for what positions.
“There is a healthy interaction between academia and the tech community. In fact, a lot of serious basic research easily becomes applied research with the objective of taking the idea to market in some form, which explains the high level of activity among technology transfer organisations of all the main research institutions. Academic researchers are frequently bitten by the entrepreneurial bug and make an easy transition from academia into the high-tech world. Graduate students from a good higher education system often end up being employees in startups that are set up to commercialise the research. A prominent example is professor Amnon Shashua, a computer science professor from the Hebrew University, who led Mobileye to an acquisition by Intel for $15.3bn.
“Finally, I would add that Israelis are very international in their activities, directly as a result of the country’s size. As a very small country with a high percentage of immigrants, Israeli tech entrepreneurs are well-connected internationally from day one and think globally with great ease. Technology companies easily establish contact with their counterparts from many countries. The ecosystem here is enriched with contacts from around the world. For this reason, one can find investors, collaborators and business partners from a range of countries all active here, from North America to western Europe, through eastern Europe and Asian technology centres, such as Singapore, China and Japan. “There is no region that is not well-represented in the search for new ideas and investments.”
Israel ranked 13th among the world’s most innovative economies in the Global Innovation Index 2020 and is the most innovative economy in western Asia.
Corporate-backed deals in Israel peaked both in number (108) and funding ($2.5bn) in 2020 despite covid-associated lockdowns and disruptions. Similar to previous years, IT investments dominated the market, followed by healthcare and industrial ones.
Deals conducted by Israel-headquartered corporate venturers also reached a notable number (27) and overall funding amount ($907m), the latter only surpassed by the figure in 2017 ($1.3bn).
Significant deals from the past few years have included rounds raised by Landa Digital Printing, Yotpo, GetTaxi, BioCatch, Lightricks, Fireblocks, K Health, Innoviz, Cato Networks and Vayyar Imaging.
SCF’s Goldschmidt explained the innovation scene’s development: “The ecosystem has matured quite significantly in the past years and we are seeing larger Israeli companies and larger exits. 2019 was a record-breaking year both in startups fundraising which exceeded a total of $8bn raised and in exits with a total exits value of $21.7bn across 138 deals. We see more and more serial entrepreneurs, forming their third or fourth company, seeking this time to build category leaders.
“Our investment approach has changed accordingly and we at SCF now invest in more mature companies.
“With a long-term view, we see how Israeli talent has adjusted to serve demand, following ‘hype cycles’. Back in the 90s, the Israel ecosystem had very strong telecom and wireless systems startups such as Breezecom and others. In the early 2000s, we saw a rise in storage and networking subsystems and chipsets such as XIV, Passave and Broadlight.
“The second decade of this century saw a strong rise in cybersecurity, adtech, internet and mobile, with companies such as Waze, Wix and Trusteer. Later came the automotive and AI wave with companies such as Innoviz – globally leading automotive lidar technology – and Habana Labs – an AI chip developer, which was acquired for $2bn in 2019 – both portfolio companies of the Samsung Catalyst Fund.
“It is worth noting the emergence of data and AI-driven startups. Data-driven innovation is disrupting many verticals and we are specifically interested in the large, trillion-dollar markets being disrupted by these companies. Examples of such verticals are fintech, healthcare and digital health, and industry 4.0.
“We are looking to invest in these companies which have demonstrated a flywheel effect. As these companies grow and have more customers, they collect more data and improve the solution based on the collected data, which in turn drives additional customer growth.”
Global and local corporate exits reached an all-time high in the country, respectively logging 11 and four transactions valued at $2.1bn and $1.7bn.
Top exits from Israel have included Mobileye, IronSource, Habana Labs, Checkmarx, Anobit, Spot (Spotinst), Annapurna Labs, Medi-Tate, Skycure and OrthoSpace.
M12’s Dor added: “Until recently, Israel was a startup nation where startups were acquired for $100m to $200m by multinationals. In recent years, however, it has become a monstrous scale-up nation and Israeli founders produce unicorns at an unparalleled per-capita rate. More than a dozen privately held Israeli founded startups have crossed the $1bn mark in 2021 alone, a similar number to India.
“Today, Israeli founders make Israel the country which produces the highest number of per capita tech unicorns. Our investment approach in Israel is aiming to invest in startups with a real chance to become unicorns.”
EVC’s Kowen agreed and said: “There has always been a relatively high level of innovation in Israel from early days with the founding of companies such as Scitex, Elbit and Elscint. What has occurred over the years is a dispersion of technology and entrepreneurial activity across a broader range of companies and into new technology areas. This has affected the number of CVCs active here. Startup Nation Central lists 35 foreign CVCs active in Israel, of which 24 have become active since 2015.
“A lot has been written about the role of the army in developing important parts of the ecosystem, but we see increasing activity in non-military related technologies. This has been a driver of EVC’s increasing interest in connecting with the Israeli ecosystem. Evonik’s innovation growth fields are additive manufacturing, advanced food ingredients, cosmetic solutions, healthcare solutions, membranes, sustainable nutrition and digital aspects of these fields.
“Some areas of interest for EVC that we target in Israel are smart coatings and additives, personalised skincare, 3D printing, microbiome-related innovations, tissue engineering and cultured meat, and precision livestock management. The dispersion and broadening of the ecosystem have begun to present opportunities for EVC. The natural curiosity within the ecosystem generates a growing number of out-of-the-box ideas that complements EVC’s internal innovation activities.
“EVC’s investment focus lies primarily in materials, and it seeks out less well-known, but no less interesting hot areas. Alternative protein and cultured meat is an area of interest for Evonik, and this is a very hot topic in Israel right now. “Lots of money is flowing into the space. The broader area of foodtech and agritech is also very active.
“EVC generally addresses B2B companies and is interested in startups that are developing future-oriented technologies and disruptive business models.”
Similar to Australia, China and Malaysia, Israel also runs state-owned venture funds with some of the earliest government-led VC vehicles. Yozma – which means initiative in Hebrew – was formed in 1993 to provide tax relief designed for foreign VC schemes operating in the country and to help boost their deals with public money.
Another example is the Israel Innovation Authority’s Incubators Program, which invests millions of dollars in high-tech entrepreneurs who are building innovative startups.
Dor, who joined M12 in March 2021 to focus on early-stage investments in cloud infrastructure, cybersecurity and enterprise software in the country, said: “M12 is highly collaborative and financially driven, working to help support our portfolio companies and the local ecosystem in general. We share dealflow with partner VCs and have networked with local accelerator programmes to best stay connected to the next wave of homegrown, visionary startup leaders.”
He was a director for nearly six years at telecommunications firm SingTel, first at Singtel Innovation Centre in Israel and Europe before joining its corporate venturing unit, Innov8 VC. He then joined Eight Roads, a subsidiary of financial services and investment group Fidelity, as a venture partner where he spent almost three years from 2018.
Kowen said: “EVC began looking at investments in Israel some years back as interesting opportunities were presented to the company through its international network in the business, investment and technology communities.
“As open innovation is key for Evonik, in 2017 the company decided to upgrade its activities through the appointment of Lars Böhnisch as the executive responsible for EVC’s investment activities in the country. He began visiting the country on a regular basis and through his visits he established connections with VCs, CVCs, government representatives and universities in the country.”
In April 2020, EVC appointed Kowen as the local venture partner in Israel, and he has continued the task of building connections with key players in the ecosystem that are relevant for EVC’s areas of interest. The company has made two investments in Israel and collaborates closely with local VC funds and investors as it accompanies them in their technological and commercial development.
Goldschmidt, who was promoted from managing director for Israel and Europe to SCF’s global head in March 2021, concluded: “We work closely with CVCs and institutional VCs as co-investors. As a corporate VC, whether we lead or not, we will always prefer to invest together with a strong syndicate. We think it makes sense to have a financial VC in the syndicate. In addition, we look to the earlier-stage local VCs as a source for later-stage deals.”
