Can Israel Become the Next Tech Capital?


Can Israel Become the Next Tech Capital?


By Michael Brodsky for Global Risk Insights

Israeli tech industry first developed in the mid-1990s, but only recently has Israel’s tech sector reached maturation. Between 1999 and 2014, 10,185 Israeli tech companies emerged on the scene.

About 5,400 are still in operation, with 2.6% garnering annual revenue that exceeds $100 million. Venture-backed exits have grown every year since 2011, with high-profile acquisitions like Viber, Waze, and Varoni claiming international headlines.

High-tech exports are valued at about $18.4 billion a year, comprising about 45% of the country’s exports.

With this level of export, Israel has also become a leader in research and development (R&D), leading the international community in start-ups, engineers, and venture capital per capita.

This growth has been largely facilitated with American help. Not only have American investors provided resources and capital, but they’ve also lent helpful perspective on U.S. markets and insider knowledge of its competitive landscape.

China has also begun exploring the space. Government and private companies alike are searching for energy, agriculture, and water technologies to help offset the problems of rapid urbanization.

Baidu, a Chinese Internet services company, recently recruited two Israeli technology experts to search for opportunities throughout the Israeli ecosystem.

Meanwhile, Alibaba is in the final stages of closing investment in an Israeli e-commerce company, and is rumored to be establishing its first R&D facility just north of Tel Aviv.

Some speculate that the rapid growth in Israeli tech was prompted by its accelerated turn-around times. Unlike their counterparts in Europe and North America, Israeli startups seldom scale for market share.

They tend, instead, to exit early (two to four years before most of their competitors), a penchant that might be explained by the size of their country. Not only is Israel untenably small (from a sales perspective), but it lacks many of the services necessary to scale with international ambition.

Today’s generation of entrepreneurs is more experienced than those prior, however. They understand the pitfalls of exiting too early and have come of age in a tech-centric ecosystem. The country has begun to produce more serial entrepreneurs, many of whom have experienced business development backgrounds.

There has also been renewed emphasis on cutting-edge technology and strategic partnership, which triggers interest at very early stages. An exemplary network of international chambers of commerce, led by the California Israel Chamber of Commerce, helps foment introductions and a network of critical interest.

One aspect of the ecosystem in need of improvement, however, is the Tel Aviv Stock Exchange (TASE). When Israel was upgraded from “emerging-market” to “developed” status in 2010, there ensued substantial outflow of foreign capital.

This decline in investment sapped money from the exchange and made TASE, in the eyes of many local companies, a less appealing forum for public offering. Trading volume shrunk by 40%, and the number of initial public offerings (IPOs) dwindled from seventeen to four.

While Israel boasts more startups per capita than any other country, it also sees most of its IPOs on American exchanges. “If I had gone public in Tel Aviv instead of the U.S., I’d have gotten a much lower valuation, simply because the people in Tel Aviv don’t know the space,” writes Nir Zohar, president and CEO of Wix, an Israeli cloud-based web development platform. “We are a global international Internet company, and global international Internet companies are being traded on the NYSE or the Nasdaq.”

Yossi Beinart, president of TASE, hopes that recently debated regulatory changes, actively being discussed in Israel’s parliament, will lower barriers to entry. He hopes that Israeli tech leaders will be more inclined toward an initial IPO in Tel Aviv, writing, “If I can be the on-ramp to Nasdaq, I’m fine.”

On the whole, Israeli tech has not only grown, but thrived. Six new startups were acquired this January alone, predominantly by American companies like Microsoft and Dropbox. Amazon also purchased Annapurna Labs, which is expected to function as the company’s first significant Israeli R&D facility.

The country’s tech sector has matured to significance, and experts project start-up growth and critical product development for many years to come.

Taken together, Tel Aviv has firmly established itself as the only technological rival to Silicon Valley.

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