How Israel’s Hi-Tech Army Created the Startup Nation

By Marc Schulman

For decades, Israel had been viewed as a poor, weak, beleaguered state. Today, while Israel remains besieged — and maintains the dubious distinction as the only country in the world with fellow UN member states who vow to wipe it off the map — Israel is no longer either poor, or weak. Starting in the 1980s, Israel’s economy began a rapid transition away from its roots as a traditional manufacturer and exporter of products, focused on the agricultural sector and the diamond market; into an economic powerhouse, primarily fueled by its export of knowledge.

The metamorphosis of Israel’s economy can be attributed to two major phenomena, one external and the second internal. During this period, the world began an economic shift, of which we are still in the midst, i.e., the evolution into a knowledge-based economy. Simultaneously, the information-technology revolution was also transforming the Israeli military.

The first Lebanon War of 1982 is largely remembered for Israel’s siege in parts of Beirut. One of the most decisive moments in that war occurred during the first two days of fighting, when the Israeli Air Force destroyed the entire Syrian defense system. How was Israel able to accomplish that feat? Israel’s surprising success was thanks to its electronic warfare systems. From that point on, the IDF understood that Israel’s own development in the various fields of electronic warfare, and later, innovations in cyber could afford it the critical advantage. Israel promptly and wholeheartedly started to invest heavily in electronic and cyber warfare.

Cadets in the IDF programmers course. About one third are women. (Photo courtesy of the IDF)

In the years that followed, the young people who developed their skills in the army began to complete their service and enter the civilian workforce. Correspondingly, there was a rapid increase in foreign investment in Israel. From a few hundred million dollars invested in Israel each year in the early ’90s, foreign investments in Israel grew to nearly $20 billion in 2018.  This infusion of capital facilitated Israel’s transformation into the “Startup Nation.” It is important to note that while it is true Israel has a vast number of startups, they make up only one part of Israel’s high-tech sector.

Israel’s high-tech sector is made up of three clear sub-groups: 1) Famed “startups”, i.e., new companies pursuing innovations, generally financed by venture funds; 2) Relatively mature companies that have gone public, either on the NASDAQ, or the Tel Aviv Exchange; or 3) Subsidiaries of multinationals that have established R&D or other facilities in Israel, (often as the result of an acquisition of one or more Israeli companies). Today, over 350 multinationals maintain R&D facilities in Israel, including: Google, Apple, Microsoft, Amazon, Facebook, and Intel. In contrast to other companies, Intel not only does R&D in Israel, but also produces chips in and is, in fact, Israel’s leading exporter.

Israeli startups raised a record $6.4 billion in 2018; up 17% from a year earlier. In 2018, six-hundred and twenty-three different Israeli companies raised capital through investments. Undoubtedly, many of those startups will ultimately not succeed. Of the startups founded in Israel between 2011-2016, 37% had folded by the end of 2016.

However, numbers alone do not tell the story of the vast landscape of Israeli startups that cover almost every imaginable field. Israel has companies in the midst of developing every aspect of autonomous vehicles, from custom chips, to sensors for inside and outside of the car. There are literally dozens of Israeli companies involved in every aspect of cybersecurity. Israel is home to scores of medical device companies, addressing treatment needs as diverse as managing diabetes, to automatic detection of skin cancer. In addition, Israel has companies that make it easy to navigate and use Mass transit and travel (e.g., Moovit and Waze) and companies that help people effortlessly build websites (like Wix).

What enables and all this to happen, specifically now, is a robust ecosystem that supports startups, in all phases. For example, let’s talk about three fictional young people: Amiram, Anat, and Tzvi, who served together in one of the IDF’s elite technical units. The trio came up with a way to make the best virtual widget. On their own time, they developed the prototype, but coming out from the unit where they served, the three have many friends already in the startup world, who advise them and put them in touch with the right people. Their friends suggest they apply to be accepted in one of the many existing accelerator programs. They apply and get admitted in a program managed by Terra Ventures. When they join the accelerator, they immediately get $600,000 in funding, a place to work, and almost unlimited consulting and coaching.

At the end of one year, the above-mentioned team developed their widget into a really great product and made their first sales. Terra invests another $2 million in the company, as it moves out of the accelerator into its new offices. The widget takes off, but the company quickly needs more money to grow. With Terra’s help, they line up a group of investors, some from inside Israel (like Our Crowd), some from the US, and even a fund from China.

Before you know it, the growing startup has completed a large $5 million A-Round, to allow the company to continue to grow. By now, international interest in the company has grown, and their company is approached by Axis Innovation, a company that specializes in matching Israeli companies with International companies. One of the companies Axion works with is Ford Motors. Ford is convinced the new company’s widget could be important in its future cars. So, Ford decides to make a strategic investment in the company, providing $20 million in the company’s B-Round.

To summarize, in less than three years after getting out of the army, the company founded by Amiram, Anat, and Tzvi is now valued at 80 million dollars. While not every startup is as successful as this theoretical one, many are. Astrorre Modena, managing partner of Terra Ventures, told me about 17 companies that have come through their accelerator, and to date, only two have failed.  

Israeli high-tech companies and startups are located throughout the entire country, however, over 70% are located in the Tel Aviv area. The marvelous growth of these innovative technology companies have fueled the Israeli economy over the past two decades, and transformed Tel Aviv from a sleepy little city by the sea, into one of the most dynamic metropolises in the world. No one can predict the future. However, no one expects Israel’s startup boom to end any time soon.

Marc Schulman has divided his time between the United States and Israel, since 1975. He is the publisher of DigitOne, an app that tracks Israeli business and innovation. For the past five years, Marc has authored a weekly column in Newsweek, called “Tel Aviv Diary”.  He is also the editor of historycentral.com Marc can be reached via e-mail at Marc@Multied.com and followed on Twitter via @Multied.