How Did Israel Become a Start-Up Nation?

When people think of Israel, initial perceptions vary a lot. It’s usually considered as the cradle of humanity and part of the Holy Land. And you think the country is still stuck with its biblical past.

But Israel is also dubbed the “Start-up Nation,” and for a good reason. It has a high concentration of startup companies – at least 6,000 of them. Israel has the highest number of start-ups per capita in the world (with 1,400 start-ups per person). It is also home to companies like Waze, Fiverr, Mobileye, and SodaStream.

Israel has become a start-up powerhouse that it attracts other countries, such as China and Japan, who are on the lookout for ingenuity.

The tech and start-up boom in Israel seems a mystery to any outsider who considers it as a small, young country, with no natural resources, surrounded by enemies, and constantly hounded by bloody wars and threats of terrorism for many decades since its founding. In fact, 30 countries still refuse to recognize the existence of Israel as a state, including most of its neighbors. 

But how come Israel produces more start-up companies per capita than bigger, more peaceful and stable nations? You may want to find out Israel’s formula for its tech success here.

A culture of entrepreneurship and innovation

Entrepreneurship seems to be a natural thing among Israelis. Many Israelis also believe that innovation is another part of their culture. And since many people realize that several start-ups are being promoted and doing great on the market, it motivates them to create more start-ups.

Military experience

There’s an unlikely but otherwise significant factor contributing to Israel’s tech and economic success – the military.

Every young and able-bodied Israeli is subject to mandatory conscription to the Israel Defense Forces (IDF). Israel is only one of the few countries in the world that conscript women or deploy them in combat roles. 

According to the book, Start-Up Nation: The Story of Israel’s Economic Miracle (2009) the IDF service provides the opportunities to develop a wide range of skills and make lifelong friends and potential business partners. The authors of the book also believe that the IDF service provides Israelis the experience in a quite un-hierarchical environment where intelligence and creativity are given higher importance. As the book writes, the IDF soldiers “have minimal guidance from the top, and are expected to improvise, even if this means breaking some rules.” While in the army, Israeli soldiers learned to think quickly and find solutions for problems even if they didn’t have the means to solve them. As a result, they learned to think out of the box. 

In this very environment, they disregard age, rank, and status. The book writes: “If you’re a junior officer, you call your higher-ups by their first names, and if you see them doing something wrong, you say so.” Taxi drivers can also “command millionaires” and 23-year-olds “can train their uncles.” In addition, Israel forces regularly vote to get rid of their unit leaders.

Israeli soldiers also learn leadership, responsibility, and accountability, which are also valuable traits in business.

Immigrants

Israel also counts on its immigrants and their significant role in its economic growth. These immigrants come from different places in the world – from the Holocaust survivors to Jews fleeing from Soviet Russia to Ethiopian Jews. A nation of immigrants is a nation of entrepreneurs, and since Israel became a state, it has continued being a nation of immigrants.

In fact, 9 out of 10 Israelis are immigrants or descendants of immigrants from the first or second generation. Immigrants are essentially risk-takers. Like many immigrants in other countries, immigrants in Israel have no other choice but to try their luck, since they know they have nothing to lose.

Demographics

This factor is often overlooked, but just as important! It doesn’t just point out how big a country’s population is, but also what it’s like.

Take Japan, for example. It has 126 million people, but it takes an unfortunate shape – far too many old people for not enough young people. Japan’s rapidly aging population and the increasing number of younger Japanese not getting married or remaining childless have created several social issues. As a result, the Japanese workforce has been significantly decreasing while it has seen more increase in social security benefits.

The problem is not Japan lacking working-age people. Even as its population declines, there will still be millions of workers. But they’ll be busy taking care of their parents and grandparents instead of creating the next big thing.

On the other hand, Israel has a population of nine million. But it has enough people to care for the old and the young, while it still has a sizable working-age population group (20 to 64 years old).

Let’s mention immigration again, as it has lent extra help to the growth of Israel’s population. In fact, there’s the “law of return” in Israel that allows any Jew, their spouse, children, grandchildren, and even their non-Jewish spouse to come to Israel and receive citizenship. The Israeli government even offers scholarships to cover your expenses while you’re learning Hebrew.

The result of all this? There are now 140 scientists, engineers, and technicians for every 10,000 employees in Israel, compared to only 85 to 10,000 employees in the United States.

Capital and government support

Starting any business is no piece of cake, especially financially. If you are going to open a start-up, you need someone to write the checks.

Investors pour lots of money into companies whose only skill is improving the rate at which they can flush down hundred-dollar bills down the drain because they don’t want the feeling of having lost an opportunity.

Once word gets out that somewhere, like Israel, is good at producing high-value startups, finding investors become exponentially easier. The more checks are written, the more capital firms pay attention.

Silicon Wadi, Israel’s version of the American Silicon Valley, is no overnight success. Tax cuts during the 1980s led to a stagnant economy and imminent bankruptcy. But the software boom in the 1980s through the 1990s helped Israel’s emergence as a tech innovator.

During the early 1990s, Israel’s government took the initiative in innovation with a project called Yozma (“initiative” in Hebrew). The goal was to unleash the potential of the private sector by encouraging companies to take risks and experiment with new ideas. Yozma’s establishment was meant to kick-start innovative companies and industries by investing in new venture capital firms, aside from directly investing in small Israeli companies. Yozma also provides funding needed by such industries to bring new products and ideas into the market. It also offers big incentives for investors and entrepreneurs willing to invest in the country.

Today, 4.5% of Israel’s total GDP is spent on Research and Development, which is barely less than that of the leading country, South Korea.

Ultimately, Israel proves that there is no single formula to its economic success. It has an immense pool of talented and educated people who are also willing to take risks, investment, lots of government support, and – considering its geography and political situation – an impressive standard of living. A combination of all these things and other factors allows Israel to grow and prosper.