23 October 2015

Israel: from ‘start up’ to ‘scale up’ nation


A thick haze shrouded Tel Aviv in early September, prompting the health authorities to issue warnings that people should stay at home. There have been no reports of such a powerful sandstorm in that time of the since Israel began weather recordings began 75 years ago.

Held in the HaTachana, Tel Aviv’s old Ottoman-era train station renovated into a stylish conference complex, the DLD Tel Aviv Digital Conference is Israel’s largest international high-technology gathering, featuring hundreds of start ups, venture capitalists, angel investors and multinationals. It is a fitting symbol of the nation’s tenacity that the conference was held as planned.

Israeli high-tech is booming. In the first six months of 2015, activity rocketed as start up raised 1.64 billion dollars, an increase by 65 per cent compared to the same period in 2014. The number of funding rounds grew by 38 per cent.

A world afflicted by low growth and unemployment is present to learn about ‘The Startup Nation’. Popularized by a book written by Dan Senor and Saul Singer in 2009, many nations try to emulate Israel’s model of innovative, knowledge intensive entrepreneurship. A big French delegation is present, headed by the minister of economy, industry and digital affairs Emmanuel Macron. China, with e-trade giant Alibaba in the forefront, is investing heavily in the Israeli start up scene.

By the early 90’s Israel left behind much of David Ben Gurion’s social democratic policies, as Israel could not any longer finance its welfare state, a government sector encompassing 75 per cent of GDP and two-digit of GDP defence expenditures through an inflation rate that averaged 450 per cent in the 80s. The labour market was deregulated, businesses were opened for competition and government took care in providing an environment favourable to entrepreneurship and research.

The much admired Yozma program has been called one of the very few successful cases of government intervention in venture capital. This is dependent on only funding a company if it has managed to get initial capital on the free market, and then only matching the investment with a few million dollars. Yozma thus relies on multiplicator effects, enabling the start up to increasingly find their capital globally by leveraging the VC firms’ international contacts.

No other country, except the US and China, has more companies listed on the fast growing NASDAQ stock exchange. The area around Tel Aviv’s famous Rothschild Boulevard is crowded with everything from smartphone apps designers to microchip developers. Israel’s share in research is almost ten times larger than the country’s share of world population.

The names of the companies are not well known to the general public, as they mainly produce content and software components in the final products of famous brands. Some exceptions are instant messenger ICQ, New Dimension Software and community-based traffic and navigation app Waze. Companies like Waze are among the first Israeli ‘“unicorns”, valued at more than one billion dollars.

Waze has become the symbol for the ‘Exit nation’, as it was acquired by Google in 2013 for a record 1.1 billion dollars. The IVC-Meitar Exits Report shows that in all of 2014, 99 Israeli companies sold for a total of 6.94 billion dollars, an average monthly rate of 578 million dollars. Critics say that Israeli start ups are unable to scale up. The “Series A crunch” is reaching Tel Aviv, with a much lower percentage of very-early-stage companies getting follow-on funding.

Many companies are started by people getting to know each other during their military service, particularly in the formidable Unit 8200 high-tech intelligence agency. The command culture of the IDF infuses them with the understanding that failure is an event, not a person, and that rules are meant to be bent if you can give a good motivation.

The domestic market being small, companies focus on innovation export and an international user base while being unable to find their place in the global value chain, or integrating themselves more broadly with their customers. The flaw of the IDF experience might be that it teaches entrepreneurs to think in finite missions on a platoon level, “getting the job done”, while a business needs to scale up operations strategically. There is never a ‘mission accomplished’. Thus the founders sell their company at a far too early stage.

Competition for talent is high. The ‘Exit nation’ seems to be creating relatively few jobs often highly-skilled and paid with employee share schemes. Israel has recently benefitted from an influx of skilled personnel, mainly consisting of Jews leaving France, but the difficulties in getting permits for non-Jewish specialist workers will stunt the tech sector in the long run. The city of Tel Aviv-Yafo is discussing the issuing of work visas with the Ministry of Foreign Affairs.

At the DLD Tel Aviv conference there was a lot of talk about how to achieve the ‘Scale up nation’, how to produce an Israeli Nokia or Ericsson, a global corporation able to dominate its ecosystem. The example given by the fallen telecom giants is rather that an economy might become too vulnerable to changes if it relies heavily on one company.

The start up Warranteer provides a cross-platform system that stores and keeps track of scanned warranties and their extensions while managing product identity. It functions as the single ‘to go to’ site for customer relations, while getting paid a fee for the service by the manufacturers. Many start ups at the DLD Tel Aviv, with services ranging from finding car parking, marketing platforms and water management, focus on better ways to gather information available in objects still outside the internet of things, while becoming the customer platform. Being placed on right spots in the ecosystem might be more important than dominating it.

The ‘Scale up nation’ formula to a full-blown ecosystem is to provide the space for the best tech start ups to grow into couple of hundreds mid-sized companies. Strategically savvy, yet flexible, this more vivid environment open up for opportunities in supporting sectors such as manufacturing, training, operations, logistics, etc thus creating more well-paid jobs than software development and R&D.

Waldemar Ingdahl is a science and technology journalist living in Stockholm, Sweden.