Israel is not nicknamed the “Startup Nation” only for the absolute number of startups formed and operating out of Israel.
The label is also due to the impressive list of leading innovations being developed for users across multiple fields of life and work from the Israeli startup ecosystem. Today, Israel is recognized globally as having the highest concentration of startups per capita and has birthed more than double the number of unicorns (98) as that of the United Kingdom (47) in the last decade. Israel boasts of a startup ecosystem driven by a culture of innovation in areas of artificial intelligence, cybersecurity, biotech, agriculture, and financial technologies, among others. This remarkable feat has positioned Israel as the blueprint for any attempt at building a startup ecosystem that supports innovations and sustainable startup operations.
And as we are beginning to experience similar and varied entrepreneurial pursuits across Africa being led by young people and startups, there is an urgent need to understand the enablers of Israeli’s effective and efficient startup ecosystem and ensure Africa’s innovation ecosystem is developed on the lessons of Israel’s tried and tested system.
Therefore, this article intends to identify the initiatives and strategies that have helped Israel build an enviable startup ecosystem and to discuss the lessons for Africa as we strive to develop innovative startups across the continent.
ISRAEL IN THE 70’s
Israel’s pride as a global model for fostering innovation and entrepreneurship did not happen overnight. It has been the result of conscious and deliberate efforts that transitioned an agriculture-based economy to an innovation and knowledge-based one over time. The initiatives aimed at diversifying an agrarian society in the 1970s following economic turmoil due to rising oil prices and increased competition in the agriculture sector laid the foundation for the development of a new industrial state focused on the use of technology as the mean of creating new business models, jobs and driving economic growth.
One significant initiative during this time was the establishment of the now-defunct Office of the Chief Scientist (OCS) in 1975, which was responsible for promoting industrial research and development (R&D) in the private sector. The OCS provided funding for R&D projects, as well as tax incentives and other benefits for companies that invested in R&D.
Another critical historical factor that contributed significantly to the exponential growth of Israel's startup ecosystem was the involvement of the military. The Israeli startup ecosystem started to form in the late 1980s and early 1990s, with the groundwork for the high-tech industry being laid by individuals who had previously served in national military intelligence units, particularly Unit 8200, an Intelligence Corps unit of the Israel Defense Force (IDF). This unit was responsible for developing advanced technology solutions for the military, and many of its members later became entrepreneurs and startup founders. They brought with them a culture of innovation and problem-solving that was critical to the success of the high-tech industry in Israel.
The success of these early startups inspired others to follow in their footsteps, and soon, a vibrant startup culture emerged in Israel. Today, Israel is home to thousands of startups in a wide range of industries, including cybersecurity, healthcare, and fintech.
SOME INITIATIVES THAT FUELED THE GROWTH
We cannot make an exhaustive list of all enablers of the growth of Israel’s startup ecosystem, but we are confident the following strategies and initiatives played dominant roles in building a thriving startup ecosystem and are worthy of emulation by African countries seeking to promote innovations and a vibrant startup ecosystem.
- Governmental Support: The Israeli government's response has been multi-faceted and aimed for a holistic impact. One focus area was the need to create an environment that encourages innovation. The government having recognized the importance of innovation and technology as drivers of economic growth, then implemented various policies and initiatives to support startups and entrepreneurs.
Firstly, the government made significant investments in research and development, which has allowed for the growth of world-class academic institutions such as Ben Gurion University, Tel-Aviv University, and Hebrew University among others. Over time, these institutions became the hotbeds of innovation, fostering the development of new technologies and ideas.
Also, the government provided direct financial support for startups. Support in the form of grants, loans, tax breaks, etc. helped startups get off the ground and grow. The Israeli government in the process has established over 30 grants and tax incentive programs which include conditional grants, reduced tax rates, and tax exemptions. These incentives were designed to encourage innovation and investment in the country's startup ecosystem.
Further, the Israeli government through the Israeli Innovation Authority (which is the successor of the now defunct Office of the Chief Scientist) runs the Technology Incubator program which has over time been expanded to include over 25 incubators nationwide, all of which have been privatized. These incubators with financial support from the Israeli government, cover up to 85% of the initial expenses for early-stage projects over a two-year period. Their focus has remained on assisting companies from the seed stage to the early stage, thereby reducing the risks for private investors. To date, over 1,100 projects have completed the incubation program, with over 45% of them successfully attracting additional investments from various investors. - Research and Development (R&D) Centers: Research and Development (R&D) centers in Israel have played a critical role in the country's growth as a leader in the global startup ecosystem. These centers are responsible for conducting research, designing new technologies, and developing innovative products that have helped to drive economic growth and attract foreign investment to Israel.
Israel is known for its impressive investment in research and development, with the country allocating approximately 4.1% of its GDP towards R&D. This is double the average expenditure of the Organization for Economic Co-operation and Development (OECD) and ranks second globally in terms of R&D expenditure per capita. The trend of multinational corporations investing in R&D centers in Israel has also been on the rise over the past few decades, with over 300 corporations setting up centers in the country. These multinational corporations account for 50% of business enterprise R&D expenditure. Among these corporations are Volkswagen, Anheuser-Busch, Apple, Citibank, and over 130 others, which have established innovation centers in Tel Aviv.
The success of R&D centers in Israel can be seen in the many breakthroughs and innovations that have originated from the country, such as the development of the USB flash drive, the technology behind Waze, the subsidiary company of Google which provides satellite navigation software on devices that support Global Positioning System (GPS) and the creation of the first pill-sized camera for medical use. Such innovations not only contribute to the country's economic growth but also have a global impact, thus making Israel an attractive destination for investors and entrepreneurs from around the world. - Skilled workforce: Israel's highly educated and skilled workforce has played a crucial role in the growth of the country's startup ecosystem. With a population of just over 9 million people, Israel boasts the highest concentration of engineers and scientists per capita in the world, with a strong focus on research and development. Israel's education system is renowned for its excellence and innovation. The country has a strong emphasis on science, technology, engineering, and mathematics (STEM) education, with a high percentage of the population holding advanced degrees in these fields. In addition, Israel has experienced several immigration waves of academics from all over the world.
Also, Israeli entrepreneurs and innovators are known for their creativity, problem-solving skills, and ability to think outside the box. They are adept at turning complex technical challenges into successful business opportunities, leveraging their education and expertise to create cutting-edge solutions. - Strong foreign investment support and a vibrant venture capital industry: The role of foreign investment and venture capitalists (VCs) in Israel's startup ecosystem cannot be overstated. They have played significant roles in helping to create a thriving startup culture and propelling the country to become a leader in the global startup ecosystem. Foreign direct investment in Israel's startup ecosystem has been on the rise for several years, with investors from all over the world pouring billions of dollars into Israeli startups. The Israeli government's support through less-bureaucratic processes, policies, and funding has led to significant private investment activity in the country. According to Dealroom, in 2022, there were 572 funding rounds amounting to €7.4 billion in Israel. Foreign investors contributed about 70% of the total funds, with 27% coming from the US and 25% from Europe. Out of the total funding, €4.6 billion was in the form of venture capital. Despite a 24% decrease in VC funding in 2022 compared to 2021, it still remained 64% higher than in 2020.
The high concentration of VC firms has helped in nurturing startups from their early stages and providing them with the necessary capital to grow and succeed. - A deeply rooted entrepreneurial culture: Israel's innovative and entrepreneurial spirit can be traced back to the early days of its formation as a nation. Due to the lack of natural resources and its dicey geopolitical situation in the region, Israel was forced to become self-sufficient and find creative solutions to its problems. This mindset of innovation and resourcefulness has been deeply ingrained in Israeli culture and has contributed significantly to the growth of its startup ecosystem. Israel's startup success is rooted in its ability to identify problems and create innovative solutions that are often disruptive to traditional industries. The country's startup culture is characterized by a willingness to take risks and think outside the box, and this approach has helped it become a leader in many technology sectors.
LESSONS FOR AFRICA
Africa's startup ecosystem is rapidly developing and becoming increasingly vibrant with the potential to become a leader in innovation and technology. However, should Africa truly desire to become a global leader in innovation, it must learn from the successes of Israel. However, the lessons must be tailored to Africa’s distinctive context, needs, and challenges. To achieve this, the following must be prioritized.
Firstly, there is an urgent need for African governments to provide regulatory backing for startup support. Some countries have taken the initiative to enact Startup Acts to provide a structured recognition for startups and establish identifiable support programs for them. This laudable initiative needs to be fast-tracked on the continent and institutional arrangements established to provide real support to startups. By their nature, startups are typically high-risk ventures which require a lot of support at the early stages to grow and governments must strategically put in place these support systems to help drive startups’ full potential.
The need for this special-purpose support arrangement for startups cannot be overemphasized. Startups are not necessarily Small and Medium Scale Enterprises (SMEs) and required tailored support and funding models that recognize their unique growth trajectory, high-risk nature, and potential for rapid scaling. Without this tailored support, startups may struggle to access the resources and funding needed to realize their full potential and achieve the same level of success seen in countries like Israel.
Again, to achieve the same level of success as Israel in the startup ecosystem, African governments need to prioritize investments in Research and Development (R&D). R&D is the cornerstone of any successful startup ecosystem, as it is through research that innovative ideas are born and developed. Currently, the R&D spending of most African countries is relatively low compared to other developed countries. For instance, Ghana allocates just 0.4% of its GDP for R&D, compared to Israel's 4.3%. This highlights the urgent need for African countries to prioritize R&D as a key driver of their startup ecosystem.
Further, maintaining strong connections to the diaspora will be critical for Africa’s startup ecosystem development. The diaspora stands in a position to provide mentorship, investment, and knowledge transfer for many startups operating in Africa and assist them to grow. They can also help bridge the gap by opening up opportunities for international partnerships and collaborations. Diaspora members who have gained experience in the startup ecosystem abroad can bring back their expertise and use it to help grow Africa’s ecosystem. Also, to maintain strong connections with the diaspora, African governments must prioritize diaspora engagement activities in the forms of roadshows, homecomings, project showcases, networking events, and conferences among others as ways of creating linkages for startup founders and their diaspora brothers and sisters.
Finally, it is imperative to understand that collaboration and partnership are crucial elements for the success of any startup ecosystem. Israel's thriving startup ecosystem owes much of its success to the culture of collaboration and partnership that exists within the country. This helps to create a platform where startups, investors, and government agencies can work together to promote innovation and entrepreneurship. This is a low-hanging fruit on the lessons from Israel that African countries can pursue immediately by working with investors, startups, and ecosystem enablers like hubs, and accelerators to fashion out the best environment that encourages innovation and entrepreneurship. The goal of such collaborations should be to facilitate the exchange of ideas, resources, and funding in order to support startups.
CONCLUSION
The notoriety Israel has gained for the development of innovations and having a thriving, vibrant, and robust startup ecosystem is a result of long-term deliberate and coordinated initiatives to spur entrepreneurship and develop an ecosystem that supports innovations. And the lessons, some of which have been discussed in this article are crucial for Africa’s quest in developing a similar ecosystem where startups are not only formed but are supported to grow and expand.
ABOUT THE AUTHORS
RICHARD NUNEKPEKU is a Fintech Consultant and the Managing Partner of SUSTINERI ATTORNEYS PRUC (www.sustineriattorneys.com) a client-centric law firm specializing in transactions, corporate legal services, dispute resolutions, and tax. He also heads the firm’s Start-ups, Fintech, and Innovations Practice divisions. He welcomes views on this article and is reachable at richard@sustineriattorneys.com.
HAROLD KWABENA FEARON is a Trainee Associate at SUSTINERI ATTORNEYS PRUC with its Corporate, Governance, and Transactions Practice Group, specializing in legal service provision for Startups/SMEs, Fintechs, and Innovations. He welcomes views on this article via harold@sustineriattorneys.com