How did Israel become a hub for innovation?

As an Israeli, an entrepreneur, and the general manager of the Microsoft Ventures accelerator program, I’m constantly asked to explain the secret behind the massive success of Israeli startups. Even though there are successful entrepreneurs in almost every corner of the world, it seems that a disproportional amount of successful startups are located in Israel.

In the past year, Israeli startups enjoyed exits—meaning acquisitions and initial public offerings—worth about $15 billion, an all-time record, according to Forbes. Some of the Microsoft Ventures alumni contributed to this outrageous number: AppsFlyer raised $20 million, Webbyclip $4.2 million, Medisafe $6 million, and Appixia, KitLocate and ConferPlace were acquired.

How did Israel become this hub for innovation and entrepreneurship? Even with my 20 years of experience in the startup ecosystem, I don’t think there is a definitive answer to this question. Though a unique combination of circumstances, culture, and a strong will to succeed most likely has something to do with it.

History

For centuries, the Jewish people who started this nation had to run, hide, and fight to survive. They had to stand up for themselves when no one else did. So they did the only thing that made sense and transformed challenges into assets.

The land is arid—they excel at water and agricultural technology. There are no resources—they developed alternatives for fuel. Israel is surrounded by enemies, so its military technology is superb, and it inspires further innovation. Israelis had to learn how to work well under pressure, and since they had no other alternative, they turned adversity into a source of competitive advantage.

Military service

Mandatory military service for both men and women has had a big impact on Israel’s entrepreneurial culture. At 16, hackers and math prodigies are handpicked to undergo elite training that will give them extensive knowledge and experience in the most relevant technologies. Being part of the team, and working closely to accomplish tasks, creates natural partnerships that are later translated into startups teams.

In addition, the people in charge are not always the ones that have the most experience, but rather, the ones who know how to shout louder. When you are given so much power to affect others by making life-altering decisions, it makes you feel like you can conquer the world at the age of 18.

Many of the lessons learned in the army can be applied to other fields. Engineers who developed weapons find ways to use these techniques in high-tech or startup companies. (Missiles that can “see” their targets were the inspiration for the camera pill, for example.) In a way, the army is Israel’s national incubator.

Culture and community

Diversity is also a big contributor to the Israeli startup state of mind. Israel is a country of immigrants. Almost two-thirds of the population is made up of newcomers who were willing to uproot themselves and move to a new country. These natural risk-takers are the perfect candidates to become entrepreneurs.

Israel is a tiny country, with a population of just 8 million. And yet, Tel Aviv is the second largest startup ecosystem in the world, following Silicon Valley. Every multinational tech company in the world has an R&D center in Israel, including Intel, IBM, Microsoft, Google, Facebook, and Apple. Most of these centers were a result of making local acquisitions of Israeli startups.

Being small means Israel has no local market or even a regional one, so entrepreneurs are forced to think globally and prove to the world that size doesn’t matter. It also means Israelis had to find creative ways to get funding.

In 1993, the Israeli government initiated a plan called Yozma (Hebrew for “initiative”) offering attractive tax incentives to foreign venture-capital investments in Israel and promising to double any investment with funds from the government. As a result, Israel’s annual venture-capital outlays rose from $58 million to $3.3 billion between 1991 and 2000. The number of startups backed by Israeli venture funds rose from 100 to 800.

It’s also extremely easy to start a company in Israel. It costs a few dollars and takes about a day to have it up and running. It’s not just startups that are constantly looking to innovate. Israel spends about 4.4% of its GDP on research and developement: almost double the OECD average of 2.4%. This country is literally a startup.

Every Israeli family has at least one entrepreneur (yes, there are that many). Because it’s such a big part of the culture, communities were built around entrepreneurship. Accelerators and incubators nurture startups, and an astounding volume and velocity of meetups and events take place almost every day.

There is a strong sense of solidarity amongst Israelis. Many of the successful entrepreneurs stay in Israel (or come back to the country) and share their knowledge and resources with the community. Many of them become angel investors.

So why do Israeli startups succeed? All of the above. But above all, it’s their courage to try, and fail, and try again and again until they finally make it.

Your livelihood relies heavily on your ability to adapt to the times. As the years go by, your needs change. You expect something better. You want something new and different that is going to enrich your life. And you won’t get that without innovation. Fortunately, the ability to innovate doesn’t rest solely on your shoulders. […]

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