An entrepreneurial ethos

In their first years of existence, successful startups follow a well-trodden path, burning through cash reserves to develop a product and capture market-share, before rocketing up to and beyond the point of breaking even. The “J-curve” is a bumpy ride that few conventional lenders or banks have the stomach for. Instead, it is venture capital (VC)—from angel investors to venture funds, and even equity crowdfunding—that provides the kindling.

The US is a leading VC market, with US$100bn invested in 2018 alone, but Israel wins the gong for “VC intensity”—funding per capita was US$674 in 2018, more than double the US rate of US$303.¹ Despite having a population of just 8.7m people—smaller than that of New Jersey—Israel churns out innovation on a global scale. The country is the birthplace of the first Intel PC processor and Google’s Suggest function, and has raised tech giants such as Waze, a navigation app, and WeWork, a provider of shared workspaces.

On first inspection, Israel’s relatively small size has clear economic benefits: investors can find ideas at lightning speed while the concentration of brains encourages collaboration. The investor and tech communities are also geographically compact, centred predominantly in Tel Aviv, the country’s commercial centre. But a closer look at Tel Aviv reveals a unique innovation ecosystem, made up of entrepreneurs and investors with a shared sense of responsibility to advance the country’s technological prowess.

“Israel’s tech ecosystem is characterised by a ‘can-do’ attitude, and perhaps the most important differentiating factor is how the Israeli ecosystem embraces failure,” says Amos Meiri, co-founder and CEO of Colu, a blockchain startup that raised US$30m earlier this year.² “In fact, it is almost viewed as a necessary step towards success.” Entrepreneurs or startup CEOs who have suffered setbacks are valued for their crucial experience and lessons learned, he says. “The effect of this is that people are more inclined to take risks and experiment.”

Ludivine Nornberg, CEO of Pictet’s representative office in Tel Aviv, characterises Israelis as risk takers. “One difference compared to Europe is that people not only tolerate failures, but even value them, whereas in Europe people can be ashamed of it,” she says. “Waze was a rollercoaster business until it reached success; they are proud of the fact they have overcome failures”.

Ms Nornberg believes Israel has a culture of “building from scratch” that contrasts with other innovation hubs, like Switzerland (where Pictet is based), which excel in optimisation. While both countries rank high in global innovation indices, they operate from polar opposite perspectives. “In Switzerland, we have big innovative corporations. Israeli DNA is more about creating companies. The Swiss are experts in improving a product. Israelis are masters of disruption.”

MIsrael is also helped by a “play it forward” culture, in which successful entrepreneurs frequently mentor and support the younger generation. “A lot of serial entrepreneurs become angels after their success,” says Ms Nornberg, pointing to Yossi Vardi, Israel’s so-called “tech godfather”, who has invested in over 85 high-tech companies, including his son’s firm, ICQ, the world’s first instant messaging platform. ICQ would go on to be snapped up by AOL in 1998 for US$400m.

Mr Vardi was an early proponent of Israeli entrepreneurs looking for a quick exit when big multinationals made an offer. But to reach that stage, startups need support, and the veteran investor believes that “a strong feeling of joint destiny”³ is key for Israeli start-ups to survive the J-curve. Some CEOs are even proud to see their staff leave to pursue entrepreneurial ventures, Ms Nornberg observes. “They see them as the next generation who will go on to develop the startups of tomorrow and the new brains Israel needs.”

Israel was built almost from scratch in the aftermath of World War II, without much infrastructure or natural resources. The Jewish population, many of whom were refugees from Europe, quickly set to work, with agricultural communes known as “kibbutzim” successfully bringing food to an arid climate. The country’s science and technology capacities advanced owing to high investment in education and R&D, and occasional demographic fillips, like the inflow of highly educated Russian immigrants after the end of the Cold War.⁴

Israel’s culture of ambition was also a product of necessity. Lack of access to oil markets in the Middle East prompted the country, as far back as the 1950s, to be one of the earliest innovators in solar power—an industry in which it is today a world leader.

Although the story of Tel Aviv and Israeli progress is a product of past necessity, there are lessons for other countries and aspiring innovation hubs of today. A recognition of the value of failure can be engendered through regulations as much as through softer factors such as culture. Some countries have laws that trap businesses in lengthy court procedures and even send borrowers to jail for bankruptcy and commercial failures, which is hardly likely to encourage risk-takers—or their potential backers.⁵

Although few countries can benefit from the physical compactness of Israel, and Tel Aviv in particular, they can quicken the flow of money to founders by simplifying regulations, including across borders. Recognising the imperative of pace, the EU has moved towards a common framework for continental VC to include issues like the marketing of funds and the categories of investors allowed to take part.⁶

China, the opposite of Israel in physical size and population, also sees the vital role of venture financing as it develops its own ecosystem. The government has even developed its own VC funds to bring market discipline to the state-owned enterprise sector and to drive progress in emerging industries, including robotics and AI. The plan even includes requirements that provincial-level funds be invested in local startups to boost innovation in specific cities.^7,8

A shared sense of history and community has given Israel a unique culture of innovation. Countries looking to develop their own entrepreneurial communities should start by considering which elements startups need to survive the J-curve, and what brings them closer together.