These days, the Israeli high tech ecosystem is taking off in an unprecedented way. I believe we are moving full steam ahead as some building blocks that are critical to sustained growth are falling into place.
Here are 10 reasons to be optimistic about I Israel:
- A major cultural change is taking place in Israel – Internet is becoming more pervasive than ever before and helps closing the gaps Israeli entrepreneurs were facing for decades: Starting companies on an “island” like Israel, far away from the global target markets; there are local and international time zones differences and we need to deal with cultural and language barriers. The Internet allows us to better market our products and leverage it for sales and distribution channels. It also allows us to “touch” our end users, thus creates bigger market opportunities. More and more startups are focusing their business model on B2C or B2B2C opportunities, as opposed to B2B only. As a result, more entrepreneurs focus nowadays on growing their businesses and turning them into significant companies before they start looking for an exit. Focusing on growth, not on early exits, resulted in investments in Israeli advanced technology companies growing to $5-6B annual run rate in 2016; more than double than just five years ago. Average exit valuation doubled, and same applies for the total accumulated exit value through M&A and Public Offerings in the last five years. Israel evolved from creating technology startups to feed global enterprises through M&A to growing category leaders, with all the hardships that come with building giants on an island. Checkpoint and Mobileye are just two names in a new generation of category leaders, with executives and operators who can lead more companies towards growth. Category leaders can attract new types of investors into the Israeli ecosystem, and drive new kinds of transactions. Cultural change leads us to focus on growth and as a result drives our national economic growth as well.
- Growing demand for a higher level of creativity and innovation – The second major trend I wish to highlight is that the world today is driving a higher demand for more sophisticated technologies.
I believe we move forward along 2 axes: the X axis is about deployment and relates to the mass markets; Y axis symbolizes higher level of innovation. Take for example the development of driverless cars; this huge revolution cannot take place unless we rise vertically along the Y axis, We need smarter technologies to support Artificial Intelligence (AI) a-k-a Machine Learning. We need to deal with enormous amounts of data to be analyzed, processed and utilized. We need to grow the IoT (Internet of Things) infrastructure and applications, and deal with the growing threats introduced to us in the Cyber world. These are just a few areas where innovation is required in a higher level than we see today. The more complicated, demanding and creative innovation is required, the better Israel is positioned to deal with the challenges. When we need to grow vertically, Israel is at its best
- Expanding into new areas of innovation – Opportunities to grow vertically means expanding into new areas of innovation we never dealt with before, areas that require deeper technology thus creating additional opportunities for us. The automotive industry is again a great example as it is changing into the “mobility” market bringing more global mobility players to Israel, seeking for new technologies. Financial services are becoming more tech-oriented, defined as the Fintech industry, and we grow our networks and traffic to support the rise of AR and VR. More industries are turning digital, creating more room for higher/deeper innovation.
- Global enterprises expand their presence in Israel – Over 350 global enterprises are operating in Israel. They innovate, develop products and drive our ecosystem forward. They are growing by numbers as innovation expands into more industries that are going through the digitization process and as the interest to collaborate with the Israeli ecosystem grows from new geographical areas, such as Asia Pacific. Their interest grows beyond pure R&D activities: they develop in Israel complete products and solutions and they leverage Israeli management skills. Global players increase their participation in earlier stages; they participate in innovation labs at seed stage and incubation, and strengthening our ecosystem by doing so. The more global players we have and the more active they become, the stronger we grow (read more about it in post#21: The ever changing roles of global companies)
- The Asia Pacific/Israel ecosystem effect – For many years, the Israeli tech market was oriented towards the U.S. and Europe; most of the global enterprise and financial investors came from the western world. In the recent decade we see tremendous growth in Asia Pacific interest to do the same. More investors and global players from China, India, Korea and Japan are increasing their level of activities in Israel. They invest in Israeli funds and companies, they partner and collaborate with universities and they acquire enterprises at all stages. Many are setting shop in Israel, while others are strategizing their Israeli approach to be implemented in the coming years. As time goes by, the Asian effect on the Israeli ecosystem will continue to grow. (See more in post # 13 about the subject).
- Bigger market opportunities allow for bigger enterprises to emerge – the world markets are globalized, and the X axis continues to expand. More innovation is implemented around the world, offering successful high growth companies reach many more customers and users. More people are using smarter devises which become more affordable. As a result companies can not only grow faster, but grow bigger. Israel, being globally oriented, can leverage the growth of new markets, as well as incumbent ones. The bigger markets are, the bigger their category leaders become.
- Israeli Governments’ approach – Israeli governments continue to help develop our market. Recently the government helped creating strategic incubators around different themes: Cyber security, Digital Health, Food-Technology and more. The way incubators were incentivized helps bringing strategic value and better investment methodology for the seed stage level. In addition, transitioning the CSO (The Chief Scientist Office) into a standalone and independent Innovation Authority may add more flexibility to its modus operando. The Government also focuses on inclusivity providing incestives for entrepreneurship within the Israeli minorities. Government support creates the right infrastructure for growth and expansion.
- Inclusivity – The main challenge for the Israeli technology ecosystem is shortage in talent. Israel has 8.5 million citizens, of which many are non-participant in the technology ecosystem. Government incentives alongside private initiatives and industry efforts are bringing Israeli non-Jewish minorities and the Ultra-Orthodox society closer to the world of innovation. More investment activities in both areas including focus on the peripheries decreases the number of people that are left behind. In recent years we see more than 500 startups emerging from non-participating communities.
- A sharp learning curve – After 25 years of venture capital investments and a experiencing a few major global economic cycles, the Israeli ecosystem became more experienced, knowledgeable and therefore more mature. Having second time entrepreneurs, angel investors and a more developed ecosystem, helps us focus the right opportunities and add value to them. It takes time to develop a complicated entrepreneurial and investment market and bring it to maturity. Israeli high tech ecosystem is starting to develop a legacy, maturity and it reaches a point where it can shift gears and become even more competitive than ever before in the global arena. There are no shortcuts, and we had to go through a learning curve. The market for innovation in Israel grows strong over time.
- A Multi-tiered market – As our market grows and mature, we see more players focus on technology sectors and themes, stage of investments and business models. In the past, many funds were investing in all stages and in all sectors in a much diversified way. Today we see a multi-tiered ecosystem emerge; we see a layer of early stage players (incubators, accelerators, crowd funding platforms, micro VCs and more) and on top of it early stage funds focused on rounds A+B, with specific technology sectors orientation (Healthcare, IT, Clean/Green-tech, Fintech, Cyber and so on). On top of these two layers we see growth in later stage funds (both early growth and expansion, and Private equity). In parallel, we see different players in terms of core business models (equity, credit, distressed, buy-out, venture lending, factoring, primary and secondary fund-of-funds) and so on. We also see the emergence of Impact Investing in Israel. Multi-tiered market allows for professional focus, and more sophisticated funding platforms, crucial to fulfill the growth ahead.
I am sure there is more to do. However, I do believe we have greater opportunities ahead of us, than ever before.