Why Israel will become the second Silicon Valley?

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Whether in the East or the West, entrepreneurship has become the coolest career pursued by young people in this era. In this wave of entrepreneurship, in addition to Silicon Valley, the world's center of entrepreneurship and innovation, many emerging entrepreneurial regions have begun to rise and achieved dazzling results, including Israel, known as the second Silicon Valley, and Beijing, Shanghai and Shenzhen in China.

Wikipedia has done statistics and found that the most frequently edited and controversial English entry is Israel. But previously, the media focused on the Israeli-Palestinian conflict, the Middle East situation and other political situations. However, [U1] in recent years, with the continuous rise of domestic scientific research companies, Israel has become one of the countries that appear most frequently in Chinese media. At the same time, capital including BAT has also begun to enter Israel. All this reveals a signal: Israel is coming.

How did Israel, a tiny country with less than 70 years of history, rise so quickly? What did Israel, known as the second Silicon Valley, do? How do Israel's entrepreneurial environment and policies differ from those of other countries?

A star-studded entrepreneurial nation

The characteristics of Israeli startups and investments can be summarized as: large number, intensive investment, focus on technology, fast in and fast out. According to online data such as MappedinIsrael, there are currently about 5,000 high-tech startups in Israel. In the past five years, the average annual increase is 927, with an average annual growth rate of 10%. For a small country with a population of only 8 million, an average of 2 to 3 startups are established every day, and one in every 1,600 people starts a company. It is no exaggeration to say that Israel is called a country where entrepreneurs gather.

Statistics on the number of Israeli start-ups from 2010 to 2014

According to data from Israel's IVC Consulting, in 2014, venture capital related to startups in Israel entered a breakthrough year, with 688 startups receiving local and global financing throughout the year, totaling $3.4 billion. Compared with the United States, the most active country in the world for entrepreneurship: the investment in high-tech startups in the United States in 2014 reached $47 billion, but Israel's land area is only 0.5% of the United States, and its population is 2.7% of the United States, but the venture capital attracted by Israeli high-tech startups exceeds 7% of the United States.

According to data provided by IVC Consulting, Israeli startups mainly fall into seven major areas, including IT and enterprise software, which mainly refer to more traditional IT companies, especially information technology companies engaged in network security; and Internet, which includes Internet applications, Internet devices, online advertising, e-commerce, online media, etc. According to statistics from the past four years, it can be seen that Israel's Internet and life science fields are accelerating, and venture capital is mostly invested in these two fields, the communications industry is gradually declining, and investment in IT and network security remains relatively stable.

Statistics on the financing ratio of Israeli high-tech companies in various industries from 2005 to 2014

In 2014, the total financing amount of the Internet industry reached 950 million US dollars. Among the 10 high-tech startups with the highest annual financing amount, Internet startups accounted for half, and IT accounted for 60%. Among them, ironSource is a software and APP distributor. Its basic model is similar to the combination of Huajun Software + App Store + Precision Advertising Platform. It raised more than 80 million US dollars in the previous year. Since its establishment in 2010, the only two rounds of financing have totaled more than 100 million US dollars, successfully joining the Silicon Valley "1 billion US dollar club".

The common feature of most Israeli Internet companies is that they are technology-driven startups rather than product-oriented ones, and they rarely conduct in-depth exploration of business models. This is one of the typical characteristics of the Israeli Internet industry.

In terms of IPO, Israeli startups mainly choose three places: the United States, Europe and Israel. According to the total number of listed companies in the past 10 years, 46% of startups were listed locally, 30% in the United States, and the rest chose to list in Europe. However, the total amount of financing obtained by listing in the United States far exceeds that of the local and European markets. According to data from NASDAQ in the United States, there are currently 76 Israeli NASDAQ listed companies. There is an interesting phenomenon. VentureSource of the Wall Street Journal conducted a study comparing the time between seed investment and exit of startups in various countries. Israeli startups only developed for an average of 3.9 years before exiting quickly. In comparison, Germany was 4 years, the United Kingdom was 6.4 years, and France was 6.6 years. Swedish entrepreneurs waited for 9 years of operation and development before choosing to exit.

Israeli company IPO merger structure chart from 2005 to 2014

When Israel was founded in 1948, due to water shortages, harsh natural environment and scarce resources, Israel had to invest a lot of energy and financial resources in agricultural and industrial technological transformation. These technological innovations promoted economic development. Since 1990, Israel has begun to implement moderate capitalist policies, and the economy has begun to recover. At the same time, a large number of Soviet immigrants have poured in, promoting social vitality. Since this stage, Israel's high-tech industry has begun to flourish, state-owned enterprises have begun to privatize, and the economy has grown 50 times in 60 years. According to relevant academic research data, in 2011, Israel's exports accounted for 43% of GDP income, of which industrial exports accounted for 57%, of which 47% came from high-tech income, 32% from medium and high-tech, 16% from medium and low-tech, and 5% from low-tech.

In 2010, the per capita venture capital investment in Israel was $170, while that in the United States was $75. The main high-tech workers are about 5,300 software and hardware engineers, 4,200 sales people, and 3,700 marketing people. The country's investment in scientific and technological research and development accounts for 3% or more of the gross national product every year, which is higher than most industrially developed countries. An important way for Israel to develop high technology is through independent research and development by small and medium-sized start-up companies. The international venture capital attracted by start-up companies has also promoted part of GDP growth. From 1999 to 2002, the international venture capital attracted by Israeli high-tech start-ups accounted for 0.6% of GDP, ranking first in the world. Therefore, "entrepreneurship" has contributed a lot to Israel's modern economy and enabled the entire country to survive and develop under conditions of scarce resources.

Percentage of GDP of high-tech companies in various countries receiving international venture capital from 1999 to 2002

Why Israel Became a Startup Nation

Jewish entrepreneurs have a common characteristic of loving entrepreneurship and working hard due to their national culture and development history. Due to the particularity of the Jewish nation, the entrepreneurial DNA flows in their genes. Historically, due to wars and other reasons, Jews were forced to leave their country and dispersed around the world, and their identities were all "foreign immigrants." They need to survive and earn money to support their families. This is called "survival entrepreneurship." Whether it is the early Jewish descendants who were scattered abroad or the Jewish immigrants after the founding of Israel, they are facing a life of starting over, and entrepreneurship is an opportunity for them to "survive from desperate situations." The proportion of "serial entrepreneurs" in Israel is 10%, which is twice that of Silicon Valley (5%). One of the reasons is the motivation for achievement, excellence, and social recognition rooted in Jewish culture and education.

Jewish culture encourages "being different", so young people are unwilling to follow the old rules and always have innovative ideas to create new things that are different. So it is natural for many people to choose to start a business. Historically, the Jewish people have experienced hardships, and even after the founding of the country, they were in an environment of scarce resources and enemies everywhere. Therefore, in a difficult living environment, Israel had to create better living conditions through risky and radical methods. As Saul Singer said, Israel's adventurous spirit was "forced". Jews believe that every entrepreneurship and innovation is a risk trial and error, and they value more the gains that entrepreneurship may bring, rather than the losses that failure may bring.

Also because of the historical experience of the nation, the Jews understand that success is not easy, so they allow failure to exist, and the family and society will not criticize the individual's failure too much. Therefore, in this situation, young people can try new things with a relaxed attitude, and are relatively calm and optimistic about failure.

In addition to historical and national cultural factors, the gathering of talents is also one of the important reasons for Israel's rapid rise. The founders of Israel are descendants of Jews who were once scattered around the world. These Jewish descendants had already achieved outstanding results in the fields of business and technological innovation before they founded the new country. Jewish scholar Tsvi Vining proposed that the phenomenon and spirit of the entrepreneurial nation not only began with the founding of Israel, but also runs through the entire Jewish economic history.

There are three types of Jewish entrepreneurs. The first type is immigrant entrepreneurs from the 18th and 19th centuries, such as Unilever, Goldman Sachs, Bloomberg, CK, Ralph Lauren, etc., all of which were established by Jewish descendants scattered around the world. The second type is contemporary Internet technology entrepreneurs, such as Google, Facebook, Oracle, Dell, LinkedIn, etc., most of which are located in Silicon Valley. The third type is Israeli local entrepreneurs, who can be called battlefield entrepreneurs, such as CheckPoint in the network security industry, RAD in the communications industry, etc., and are also the most active group of Jewish entrepreneurs now.

When did Israel become known as the “startup nation”? Israelis generally believe that it started in the 1990s, when a number of high-tech startups, especially IT startups, were established. At the same time, the government took the lead in developing and promoting Israel’s investment environment, gradually forming an active technology startup ecosystem.

The Tel Aviv University Business School in Israel conducted a study to find the source of the entrepreneurial nation, that is, Israel's first truly successful high-tech startup. It is believed that RAD Group is Israel's first high-tech startup, which was originally engaged in the research and development and manufacturing of IT hardware products. RAD founder Zohar Zisapel is also generally regarded as the father of modern entrepreneurship in Israel, or Israel's Bill Gates. Since the 1990s, Zohar has incubated new startups within his own startup company, which is known as the prototype of the first incubator in Israel. RAD has incubated more than 100 startups and cultivated 6 listed companies. Since the 1990s, it has inspired a large number of young people. Therefore, RAD is also known as Israel's largest high-tech development engine. The same phenomenon also has cases in Silicon Valley, and the "PayPal Mafia" is one of the best examples. The same is true for the domestic NetEase, Sohu, Tencent, etc.

In addition, the huge support and help from the Israeli government's policies played an extremely important role. The scope of intervention policies ranges from government subsidies, loans and guarantee projects to tax incentives. Israel promulgated the "Angel Law" in 2011 to encourage early investment. Qualified investors can reduce or exempt corresponding amounts of taxes if they invest in local high-tech companies. At the same time, for high-tech companies that meet the corresponding requirements, the government will subsidize 1/2 of the R&D funds, and for start-ups, the government will subsidize 2/3 of the funds. In addition, the Israeli government has established dozens of incubators, which can provide 85% of the R&D expenses for start-ups.

In order to attract outstanding talents from around the world, Israel has set up a special immigration absorption department. A scientific absorption center was set up in the immigration absorption department to provide employment consultation for scientific and technological immigrants and provide subsidies to employers. In the first two years, employers only need to pay 15%-20% of the wages of scientific and technological immigrants, and the remaining 80%-85% will be paid by the scientific absorption center. In addition, some groups and associations have also played a great role in promoting Israel's scientific and technological progress. For example, the Israel Society for Science and Humanities is composed of 60 of Israel's most outstanding scientists. The society is responsible for managing the Israel National Science Foundation and actively raising funds from home and abroad to support basic research.

Israel's Development Limitations and Sino-Israeli Relations

Although the situation in Israel seems to be very good, some people in the country have raised doubts and reflections. Uri Goldberg pointed out Israel's various problems in his book "What's next for the startup nation" very sharply, the most important of which is that Israel has too many small startups. Although it is known as the second Silicon Valley, it has never produced a world-leading large enterprise like Silicon Valley. This phenomenon has also attracted attention from Israel.

On the one hand, although small businesses are flexible and have strong innovation capabilities, their small size affects national production efficiency. Uri pointed out that innovation is not just about coming up with an idea to start a company, but about repeated trial and error, and small startups find it difficult to cope with these difficulties. As for whether small entrepreneurship can provide more employment opportunities, statistics show that startups will provide more jobs than large companies in the first year of their establishment, and after one year, startups usually have limited positions, and the number of jobs they can provide and the job growth rate are lower than those of large companies. Therefore, once society encounters external risks, it will be difficult for small startups to persist. Countries like Greece and Portugal, which are dominated by small and medium-sized enterprises, will produce a domino effect and will be difficult to recover quickly.

On the other hand, Israeli youth are deeply influenced by Jewish culture, and most of them choose to be independent and start their own businesses, which has led to the rapid flow of some outstanding talents. Everyone likes to "go their own way" and establish their own mountain. Therefore, this is also one of the reasons why it is difficult for large companies to emerge in Israel.

Due to the limitations of the local Israeli market, Israeli startups with advanced technologies objectively need to go abroad. The Chinese market is vast, and with the Chinese government highly encouraging entrepreneurship, more Chinese capital is looking for innovative technologies abroad, so China has become an important source of overseas capital for Israel. According to IVC statistics, for every European investor in Israel, there are 10 investors from China. China has invested in more than 80 Israeli high-tech startups so far, an increase of 88% compared to 2011.

According to rough calculations by the Israeli Ministry of Economy, China's investment in Israel has increased from zero to $4 billion in the past three years. In particular, Chinese giants BAT have begun to deeply deploy Israeli high-tech startups and fund companies, and have become strong competitors to American investors. Many Israeli entrepreneurs have also begun to pay more attention to the Chinese market. Although there are still many cultural differences, with more and more exchanges and cooperation, it is expected that there will be more actions in the future.