Israel’s Commitment to ‘Scaling Up’ is Paying Dividends for Fintech Innovation

Israel has long been recognized as the Startup Nation, but does its thriving fintech landscape provide the clearest evidence yet that the country is stepping up its scaling up initiatives? 

With Israel’s startup ecosystem continuing to thrive, rallying into Q1 2024 with an 8.5% increase in funding amounting to $1.8 billion across 114 rounds that continued to gain strength throughout the year, attention could soon be firmly on the growth of the nation’s most innovative players. 

2024 has brought plenty of promise for Israel’s tech sector, and the country now hosts a top three global tech investment market that’s matching the United States stride-for-stride in terms of short and mid-term perspectives. 

Optimism surrounding Israel’s future as a tech powerhouse has seen many of those within the ecosystem already begin to use the term ‘Scale Up Nation’, and Yaron Samid, founder and managing partner at TechAviv has highlighted the trend of first-time founders turning down lucrative exits with the goal of maximizing their impact over time. 

In this new entrepreneurial landscape where innovative minds are seeking to build a legacy domestically, Israel’s thriving tech sector can only benefit as a result. With this in mind, all signs point to the rise of scaling up throughout Israel’s tech hubs into the future. 

Foreign Investment Breaks Down Barriers

Evidence of Israel’s improving scale-up capabilities can be found in the breaking down of barriers to growth by high volumes of foreign investment and a conducive startup infrastructure domestically. 

According to the Israel Innovation Authority’s State of Climate Tech 2023 report, 57% of respondents cited that their biggest challenges to scaling up stemmed from matters of financing. This represents a significant drop on the 72% that listed financing as their main challenge two years prior in 2021. 

This falling figure suggests that Israel’s transition into a Scale Up Nation is helping to pave the way for an increase in the availability of capital for innovative startups. 

Bolstered by Israel’s vibrant ecosystem to support startups in overcoming their early challenges like finding access to VC firms, incubators, accelerators, mentorship, and strategic guidance, we’re steadily seeing more startups reach their potential without the temptation for founders to embark on their exit strategies due to growing pains. 

This supportive infrastructure is especially prevalent in fintech, with market leader Stripe establishing a strong R&D presence in Israel to tap directly into the nation’s innovation hubs. 

Foreign investment is set to become a key component in Israel’s transition from Startup Nation to Scale-Up Nation. Today, foreign investors account for 46% of the 217 active VC funders in the country. In total, they participated in 93% of all funding this year, representing a seven-year high for Israel. 

Notably, Index Ventures invested $60 million across five Israeli startups in the past year, while Accel raised $650 million in May specifically to invest in Israeli and European startups. 

Fintechs Flip M&A Trends

Israel’s strength as a Scale Up Nation can be seen in the trend of domestic fintechs flipping mergers and acquisitions to the buyside instead of exits. This comes despite the uncertain global economic climate that’s seen more of their global peers lured in by the prospect of selling to a larger international firm. 

This trend helps to underline the commitment of Israeli startups towards maturing and continuing to innovate further into the life of the company, uncovering greater potential for long-term growth. 

Key industry innovators like AI and open banking fintech Obligo is approaching its 10th year of operation, having sourced $55 million in funding. 

Offering a streamlined experience to help create a frictionless property rental market, Obligo has secured funding from domestic and international VC firms like 83North, HighSage Ventures, 10D, Entrée Capital, and MUFG. 

Despite a consistent flow of funding, Obligo’s founders, brothers Roey Dor and Omri Dor are showing no signs of exiting their position and are instead looking to scale into US markets. 

Fostering Innovation

As well as welcoming open banking and AI fintech services, Israel has its sights set on far more innovative initiatives throughout the financial sector. 

In recent months, the Bank of Israel selected 14 projects to progress its central bank digital currency (CBDC) program. Labeled the Digital Shekel Challenge, the test space is set to decide which projects are best positioned to take the nation forward in its bid to implement its own digital currency, which could provide further boosts to funding access and fintech innovation. 

Meanwhile, August 2024 also saw the Bank of Israel assign challenger bank Revolut a unique identification code, helping to pave the way for the company to integrate into the country’s regulated payment space. 

The move is set to help the development of more fintech services for consumers, which are already rapidly expanding across the country. 

One of the biggest payment trends in Israel today stems from buy now pay later (BNPL), an automated, zero-interest borrowing service to spread the cost of payments in a single purchase. 

PR Newswire data shows that NNPL payments are expected to grow by 40.9% in 2024 to reach $1.58 billion, with forecasted growth at a CAGR of 28.5% to $5.54 billion domestically by 2029. 

This rapid evolution of open banking services underlines the widespread benefits that Israel’s commitment to scaling up can bring to consumers as well as founders. 

The Pursuit of Sustainable Growth

Crucially for Israel’s fintech sector, the emerging trend of more founders shunning exits to help scale their startups for longer can help to drive a widespread improvement in business confidence throughout the nation. 

To evolve from a Startup Nation to a Scale Up Nation, confidence in the long-term sustainability of startups is key, and case by case, we’re seeing more evidence than ever before that Israel’s brightest fintechs have the staying power needed to deliver growth at scale.