Israel: Startup Powerhouse

Israel is at the front of pack with China and the United States when it comes to tech startups. But when it comes to large, indigenous tech giants, the country is nowhere to be seen.

Virtually every major semiconductor company does business in Israel, and many have a strong presence there through centers of excellence or companies they have acquired. But after decades of innovation ranging from autonomous vehicle systems to security software, chip analytics, and AI, there are no giant semiconductor companies that are Israeli-owned.

Over the past couple decades, Amazon, Google, Facebook, Alibaba and Baidu reshaped the tech world. Israel created many of the ideas that either supported those companies or supplemented that growth. Waze, now owned by Google, is widely used for helping drivers find their destination, or tourists navigating through foreign countries. Mobileye, which was purchased by Intel, is the market leader in autonomous driving. And over the past couple decades, Israeli startups have developed everything from advanced communications and security to AI systems at the leading edge of technology.

But few of those companies head to IPO, despite intermittent attempts by the government to reverse that trend. Moreover, those companies that do go public often are snapped up quickly by larger international companies, a pattern that isn’t likely to change anytime soon.

“The industry here is a combination of startups and big companies,” said Raanan Gewirtzman, chief business officer at proteanTecs, who began his high-tech career working for IBM in Israel. “When you’re in a small company with tens or hundreds of people and you want to sell to a big corporation, the benefit of actually working for one is something that you can leverage a lot. And that’s the combination you get here in Israel. You can start your career working for a startup, and if it’s successful enough it’s going to be bought by a big international company. That gives you access to the most advanced techniques, the best engineering there could be on a larger scale, and it gives you a broader view.”

The list of companies that started in Israel is lengthy. There are literally hundreds of startups at the very leading edge of technology. But the real focus is on the technology, not the business side.

“The big, international semiconductor companies came through first,” said Hagai Arbel, CEO of Vtool. “They opened design centers in Israel and the government gave them a lot of money to do that. Then, in the ’90s, a lot of people can out of these companies with a very good understanding of the industry and it became a trend to open startups and sell them for a lot of money. It was obvious that if you open a semiconductor company, then you do it in order to be acquired, not with the mindset of becoming a big company.”

Others have a similar perspective. “If you want to become a big player, you need to focus less on developing more technology and more on marketing and sales,” said Kiki Ohayon, vice president of business development at OptimalPlus, which was recently purchased by National Instruments. “Israelis get bored too fast doing the same things again and again, and they’d prefer to do the next big thing. For a long time there was no school in Israel for business development. That’s starting to change. We’re seeing more ex-CEOs or vice presidents of big companies in Israel. But if you don’t have enough of a pool on the marketing side, it’s hard to set up a corporation. Schools only began offering business expertise in the past 10 years.”

Fig. 1: Israel’s startup ecosystem. Source: Israel Innovation Authority

Still, the appetite for large, Israeli-based companies is growing.

“Companies like Mobileye or Mellanox had the mindset of a big company,” said Vtool’s Arbel. “Mellanox had several thousand employees before they were acquired by Nvidia. And now, if you look at a some of these companies, they’re not doing everything to get ready for being acquired. They’re thinking like big companies.”

The Israeli market
The key ingredients for successful startups are available capital, a strong higher education system with a sufficiently educated pool of talent, and an entrepreneurial spirit. Typically these factors are concentrated in relatively small areas, such as Silicon Valley in California. But that’s just a pre-requisite. It doesn’t guarantee success.

Many countries or regions have tried to emulate the success of Silicon Valley, with limited results. In France, Grenoble has been the center of much development, but like Israel it has produced few major companies. In contrast, China has funded hundreds of startups, some of which have resulted in technology giants such as Huawei, Alibaba, Baidu, ZTE, SMIC and Yangtze Memory Technologies Company. Joint ventures between the government and private investors have underwritten hundreds of startups ranging from electric car manufacturers to chipmakers and assembly houses.

But China is roughly 3.7 million square miles in size, and it has 1.393 billion people, according to the World Bank. Israel, in contrast, has roughly 9 million people in a country that is 290 miles long and 85 miles wide, which is roughly the size of the state of New Jersey. Nevertheless, it continues to play a significant role at the leading edge of technology. Rather than just fast following of trends and technologies, it has created or led many of them.

“Startups are part of our culture,” said Uri Beitler, CEO and founder of Pliops, which makes accelerators for flash-based workloads. “We motivate non-conformism, so if you can think of a better way to do something, that’s rewarded. We also have a very good academy in the army, which develops core technology with no limitations. That gives you the opportunity to think way outside of the box. If you have thousands of guys who are young, there is an expectation of how to do things in a unique way. They also work around the clock, which means you learn faster, and that becomes part of of the culture.”

The military is a key piece of this development, too. “There is a lot of high tech in the military,” said proteanTecs’ Gewirtzman. “So you get young people on an accelerated path into technology when they’re exposed to that in the military. There are other benefits from that training, too, such as leadership and taking responsibility. That requires innovation, because Israel is a relatively small country in our neighborhood.”

Another key piece of the puzzle is the ability to fail repeatedly without consequence. This often has been one of the key differentiators in Silicon Valley versus China or Japan. Israel takes this a step further. Failure is both acceptable and common. In fact, the Israel Innovation Authority makes investments with fewer strings attached than most other governments.

“The government understands there is a risk involved,” said OptimalPlus’ Ohayon. “In other nations, the government expects you to return money if you fail or take personal responsibility. In Israel, you do need to show that someone else is willing to invest. But there is no expected return if you fail. And you can fail six times and still apply for a seventh time.”

Follow the money
Israeli investors have struck it rich a number of a times over the past decade, and there are plenty more possibilities on the way.

“What we’re seeing now is a blossoming in investments in three major categories — the problem companies, the solution companies, and what I like to call the frontier technology companies,” said Zvika Orron, partner at Viola Ventures in Herzliya, Israel. “The problem companies are ones where there is a major issue that is unserved. This involves companies like Elon Musk’s SpaceX and Tesla, and in Israel it’s Mobileye for autonomous vehicles. These companies usually are founded by very visionary entrepreneurs and they require significant funding, but if they succeed there is great potential to create a very substantial company.”

Fig. 2: Billion-dollar purchases of Israeli tech startups. Source: Company reports/Semiconductor Engineering

The second category involves companies that are providing a better solution for existing problems. “A good example of that is Habana [Labs] in Israel, which is working on a better processor,” Orron said. “We have about 10 companies that are doing AI chips, and they’re doing it better. To get an investment, they have to demonstrate at least an order of magnitude improvement in performance because they’re competing with the mega semiconductor companies. And the third category is frontier technology, and here we’re more ambitious. We’re meeting companies that are trying to solve problems by entering into chemical biology and physical spaces. We’re seeing startups that are getting funded that are not pure computer science or math. We’re seeing more hybrid teams that combine physicists or chemists or biologists. Usually these companies are leveraging a well-demonstrated proven scientific innovation that could be in one of those three disciplines. And now they’re leveraging this understanding by either using AI or big data capabilities, or maneuvering this technology to for a different purpose.”

This includes everything from DNA storage to computational biology, where the main effort is around AI/ML applied for individualized medicine. In effect, this is coupling AI with domain knowledge at the edge, and pushing the boundaries of where this can go.

“Most of the money now is going to AI technology,” said Ohayon. “That can be everything from enterprise solutions to health care or financial services. In mobility, there also is a focus on electrification, and there is still interest in the IoT and sensors.”

Vtool’s Arbel agrees. “Just because you were in an AI semiconductor company, investors were willing to put money into that company,” he said. “There were a number of startups that were recently acquired by Intel. But there’s more to this than just AI. Israel has been very good in identifying where the market is going. They were out in front in AI, and today everyone is involved in automotive.

Startup funding for Israeli companies is primarily from Europe, the United States, the Israeli government, and venture capital firms and corporate VC arms in all of those regions. Until a couple years ago, a large number of startups also were funded by China, but that has dropped precipitously, according to several sources, due to the ongoing trade war between the United States and China and restrictions involving which technologies can be sold or licensed to China. That poses a potential threat to the overall capital investment for Israeli companies.

Conclusion
Israel is well out in front when it comes to technology, and it has all of the raw materials needed to continue driving innovations across a variety of markets. But because of its size, it also has to contend with the geopolitical effects of trade wars and regulations that vary from one region to the next. And regardless of its size, it has to contend with regional conflicts that have been part of the Middle East and the surrounding area for thousands of years.

Nevertheless, the country appears to be thriving economically and technologically, and left alone by its neighbors and superpowers, there appears to be little to stop its growth. For its size, Israel remains a powerhouse of startup technology and entrepreneurship, and some day that could produce some giant companies that dominate different market segments or entire broad markets.

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