How Israeli Start-ups are weathering the storm

Earlier this year, the Israeli government, in collaboration with Israel Innovation Authority, established a new Start-up Fund to pump half a billion shekels annually into new tech and innovation start-ups. Additionally, a new incubators fund and YOZMA investment fund were established to draw in venture capital from foreign businesses and Israeli institutions, respectively. In order to give grant funds to early-stage firms that were caught in the midst of investor financing rounds prior to the commencement of the war, the Israel Innovation Authority also introduced the ‘Fast-Track’ funding initiative last year. The idea behind all the initiatives was to pump funds and cushion the hi-tech sector from war-centric shocks. It is interesting to note that despite the economic disequilibrium after October 7 Hamas attack, Israeli startups have kept up their innovation spree and attracted venture capital investments due to various government support programs.

Source: iStock

Compared to first half of 2023, when local political unrest around the controversial judicial overhaul forced foreign investors to pull out of the market, the amount of cash raised this year increased by 40%. According to the research, market sentiment was negatively impacted more by the political upheaval and uncertainties surrounding the proposed judicial change than by the current conflict. Israeli IT companies have collected over $7.22 billion from investors so far this year.

Israel is regarded as world’s startup capital. It is a global leader in technology and, behind New York and San Francisco, has the third-highest number of active startups globally. There are more startups per capita than any other nation in the world in this little nation about the size of New Jersey, with a population of 9.3 million, few natural resources, and a wealth of security issues.

So how did Israel become an entrepreneurial marvel? Dearth of natural resources, desperate need for self-sufficiency due to diplomatic alienation, unique civil-military cosmos, immigration policy and inflow of talent – all these factors collectively created a diverse intellectual culture which collectively contributed to Israel’s startup success. Galit Hemi and Sophie Shulman in their famous book The Israeli Mind: The Story of Israeli Innovation explain that the “millenia-old Jewish DNA of persistence and hope, coupled by a survival instinct, a long tradition of restless learning, and a fresh and burning ethos of hard work…” explains the ability of Israelis to thrive amidst persistent chaos.

From the late 1980s to the early 1990s, the Israeli startup scene started to take shape. Former members of military intelligence units such as 8200 Intelligence Corps unit and Unit 81 laid the groundwork for the high-tech industry. The unit looks for talented 10^th and 11^th graders who excel in STEM subjects and designates them for special units within the Israeli Defense Forces (IDF). After serving in the military, they get assimilated into the civilian economy as technocrats and open tech start-ups with multifarious applications. For example, in 1998, one of Israel’s most well-known unicorns ‘Given Imaging’ developed PillCam – a tiny pill-sized video camera that patients swallow in order to track and monitor their digestive system (capsule-based endoscopy). The technology was originally developed in the IDF for high accuracy video-guided missile systems.

Chutzpah and risk taking: Israeli tech executives are aware of the importance of having agile and adaptable organizational culture which does not view failure as a setback but as an opportunity to grow. The idea of “chutzpah” has been integral to Israel’s successful startup culture. The Hebrew term “chutzpah,” meaning audacity or courage, indicates a fearless readiness to take chances, break the rules and pursue risky objectives. This has helped to foster the growth of a workforce that is adaptable and resilient. These unicorns thus encourage employees to adopt an entrepreneurial mindset by encouraging them to take measured risks and pursue novel concepts.

Additionally, efforts from organisations like the Israel Innovation Authority have also proven crucial. The IIA spent almost 1.7 billion Israeli shekels, or $449 million, in direct support across its numerous grant programs for startups and businesses, according to its 2023 annual report on the state of high-tech in Israel. The organisation has stipulated approx. $ 500 million in funding each year. Additionally, IIA partners with investors in friendly countries to raise funds for Israel-based businesses looking for funds. IIA offers about 85% of required funding, while the rest comes from private sources. Venture capital investments in Israeli technology startups rose from $1.928 billion in 2013 to $14.95 billion in 2022.

Israel’s startup ecosystem is integral to Israel’s economy. Technology and innovation constitute approximately 15 per cent of Israel’s GDP and half of its exports. Resilience and drive, that are serving the country well during the ongoing war, also helped Israel navigate many previous crises during its 76 years of existence. The trend is likely to continue!