Why Israel Is A Startup Nation

Opinion Startups May 18th, 2014 by Eran Galperin

Israel has a population of 8.1 million and yet has more companies listed on the NASDAQ than any country outside the U.S.A, except China. A book released a couple of years ago called Startup Nation, has raised awareness to it being a hotbed for high-growth companies.

Being from Israel and in the tech scene in Silicon Valley now, I get asked often about why does Israel produce so many startups. Here's my take on it:

Israelis are masters of survival. Successful startups are those that survived

Let's start with the 2nd statement. Common industry position on VC funded startups is that 3 out of 4 will fail. Since most startups fail to raise venture capital, estimating that around 90% of startups (at least) fail, sounds reasonable. Note that I'm talking about startups as in growth companies, not new small businesses. In that definition, most will need to raise VC money to sustain significant growth.

Most startups fail. Out of those that succeed, very few experience meteoric growth from day one until a liquidation event or becoming a huge market leader. Most do just enough to survive for a long time, before they become an "overnight success". Those are the survivors.

Back to the case of Israel, here's a short recap of its brief history:

  • Formally established in 1948, with a majority being from survivors of the holocaust.
  • Immediately following its declaration, Israel was attacked by 4 different countries simultaneously (Egypt, Syria, Jordan, which were neighboring countries, and additional forces from Iraq). At the time, Israeli population counted at 600,000 with military trained people counting at 14,000, while the total population of the attacking countries was around 30 million, with regular armies. Israel won that war.
  • For the next 4 decades, Israel has fought a major war at least once per decade, defending its borders. Israel has never lost a war defending its borders (or it would've ceased to exist).
  • Most Arabic countries formally deny Israel's legitimacy to exist, and often invoke trade and other sanctions directly or through the U.N. Some have consistently declared they will "exterminate the Zionist regime".

The point of those is not a political one - It's just to paint the background to the evolution of Israeli mentality. Many previously hostile countries now have good relations with Israel, including Egypt and Jordan.

Living in Israel, since its inception, meant always having an existential threat in the back of your mind. At any time, any number of hostile countries who have previously attacked you and maintain vastly larger armies, could initiate a war to eliminate you. Israel has a law for mandatory enlistment to maintain an army capable of defending it with such a small population, so most Israelis have served at least 3 years in the army (2 for women). I have.

The history of its wars being taught at school, coupled with the reality of a new one starting in any given year, make most Israelis used to being in a survival mode. This translates to Israeli culture in Israelis being much more concerned about short term solutions than long term plans, basically "How do I improve my current situation with the minimal resources that I have" kind of thinking.

This type of thinking translates very well into startup culture. Most startups fail because they didn't survive long enough to get to product-market fit. Of course, sometimes your core idea may simply suck, but I see many companies failing within a year or two just by running out of money or failing to get users / customers and giving up.

Israelis are experts in finding ways to survive, and have a "refuse to die" mentality. The combination of the two is a huge part of why so many Israeli startups (comparatively) succeed to a certain degree.

Serving in the army

As mentioned earlier, most Israelis serve in the army. Everyone is required by law to enlist at the age of 18, when most Americans go to college. Note: in practice, only about 50% of 18 year olds actually enlist (though that percentage used to be higher). If you really don't want to serve, or have any other circumstances, you can find a way to avoid it.

In America and Europe, 18 year olds go to college to find their way in life and discover what they want to do in a very safe environment. In Israel, people are instead put in a very stressful environment, where they learn how the "real-world" works.

Many of the skills needed to start a business, such as dealing with the authorities and bureaucracy, working with a big system from inside and outside of it, managing people and resources, are acquired while serving in the army. I'm sure any veterans of other armies reading this will readily agree.

I often hear the technological units of the army, such as 8200, being credited with the huge technological boom in Israel. I have to respectfully disagree. Though it's true that people who served in those units often integrate later in the technology sector, I have not seen any evidence that there are more starting companies than their relative number would indicate.

As a side note, those army units have been using a Microsoft stack (and even worse, ASP) last time I checked. Not the technologies typically associated with startups. Many startups in Israel have developer recruiting problems not unlike the valley, due to the prevalence of Microsoft technologies stemming from those army units and some of the CS college curriculums.

At the age of 21-22, when most people finish their military service, starting a business seems like a minor thing even though it's actually quite involved and risky. Serving in the army provides not only relevant skills, but a resourceful approach to problem solving.

Technologically oriented

For some reason, Jewish people and Israelis in particular, have always had an affinity for research and technology. Some fun facts:

  • 20% of noble prize winners so far have been Jewish or of Jewish descent. This despite Jews comprising less than 0.2% of the world's population (around 14 million total Jewish population worldwide). Of specific note are the stronger topics - economics (41% of total), medicine (28% of total) and physics (26% of total). All technological or business related fields. Not surprisingly, the worst topic was peace (9% of total).
  • A surprising number of successful known tech founders are of Jewish origin. Most people are not aware that Sergey Brin and Michael Dell are of Jewish origin, or that WhatsApp founder Jan Koum is as well. Of course, most people know that Mark Zuckerberg is.
  • The amount of GDP spent on R&D in Israel, is the highest in the world. (Sort by % GDP)

If you live in Israel, you're basically living in a country of early adopters and technophiles. Kind of similar to living in silicon valley, and funny enough, they are comparable population wise (Israel 8.1 million, SV 4 million). Imagine the entire United States had the same composition as the valley - how many startups would it had then?

Lots of successful startups, but few very big companies

Going back to the opening paragraph, as of now Israel has 68 companies on the NASDAQ. However, only 2 are in the top-100 (Check Point Software and Perrigo). Why is that?

Well, as it turns out, Israelis are not particularity good at long term growth and large scale. Being a small country, where even the biggest companies are tiny compared to world giants such as Apple or Google, Israelis don't have the background or experience in running a tech company at that scale, and in what it takes to get there. The same mentality that prioritizes short term gains over long term goals for the sake of survival, also contributes to that.

There is no concept of customer service and appeasement in Israel. Everyone in Israel knows the horror of trying to change mobile carriers or Internet providers and going through a chain of long phone calls over a period of two weeks to get it done - Something that in the U.S is typically a 2 minute call.

The customer is always right until the customer wants something that affects your company's bottom line. Considerations of things such as brand and reputation are marginalized compared to the immediate profit you can extract from someone. As I said - prioritizing short-term gains over long term goals. That is why there are so few trusted brands in Israel, and Israeli companies in general are very bad at customer loyalty.

Note: I make a lot generalizations in this post, and naturally they do not apply to every single instance. I'm talking about the common cases here.

Startup Nation Forever

To sum it up - Israelis are exceptionally good at technological innovation and at (business) survival. On the flip side, they are not very good at scaling and are pretty bad at brand and reputation building (with exceptions, of course). It all ties to our country's history and culture, which shapes its people's mentality.

If you have anything to add, I would love to discuss it in the comments below. Please keep it civil and on-topic, and avoid any political debate.

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  • G.T. Vinig

    Interesting post. However you cover only the recent history of the Jewish people (from the establishment of Israel in 1948) – the same limitation StartUp Nation has. The interesting fact most Israeli are not aware of is the entrepreneurship and innovation has always been an important part of Jewish economic history. Entrepreneurs of Jewish origin are the founders or co-founders of some of the world most successful iconic brands like Shell, Unilever, Dassault, Estee Lauder, Levi Strauus, AEG, Olivetti, Citroen, Saatchi & Saatchi, Calvin Klein … and the list goes on and on to these days with Google, Facebook and the like which I cover in my book on Jewish Entrepreneurs published now in China. Its not a startup nation because of mandatory military service its the startup people because of Jewish history including Jewish tradition, culture, value- system and religion.

  • http://www.binpress.com/ Eran Galperin

    Hi G.T,

    Thanks for reading. I cover the history of modern Israeli culture, since that is what’s driving todays Israeli startup scene. Most Israelis are very aware that there are a lot of successful non-Israeli Jewish people, and I do mention it briefly – but that is not the focus of the post. The question was – why is Israel specifically a startup nation – and being a nation of Jewish people might have some bearing (which is why I mentioned it), but the other factors I mention – including military service – certainly affect it to a large extent. While I appreciate your interest in our heritage, I think you are a bit misguided in your conclusion regarding that, and it’s something you can’t feel just from research – you have to live the culture and understand its nuances.

  • G.T. Vinig

    In the same way (as you write) that — 8200 is not the engine of startup Israel, Israel is just a concentration of the startup people and not the source. And, I think I do feel the nuances, I have the qualification (… did 8200, Milu’im, Hebrew U…). One needs to study, know the history in order to understand the present.

  • http://www.binpress.com/ Eran Galperin

    I apologize if I assumed incorrectly – from your name, I didn’t think you were an Israeli. On a side note – have you founded a startup yourself? are you familiar
    (first hand) with the hardships of startup life and the mentality needed
    to do it successfully? Aside from recounting my own experience from the last 10 years of running multiple ventures in Israel, I ran this post through several Israeli founders before publishing, and they all agreed with all of the points I made. Why do you think you see it differently?

    I completely agree that Israel is a concentration of startup people. However, the current personalities and culture you’ll find in Israel are distinctly Israeli, and something that evolved over the last few decades. If you did live in Israel, you’ll know that Israelis are distinctly different from American Jewish people, for example as far as temperament and culture. People mostly assimilate to the culture of the country they’re in, in order to fit in. And Israeli culture in general is very well suited to startups compared to the rest of the world (Jewish or not), for the reasons I bring up in the post.

  • G.T. Vinig

    Eran, your post is interesting, relevant and points out to essential elements. Take ‘masters of survivals’ for example — my take on this, and u can agree or not, is that in our long history ‘masters of survival’ applies to the long Jewish history and not only recent decades in Israel. Will be happy to continue discussion via email.

  • http://www.binpress.com/ Eran Galperin

    I think we hashed our respective viewpoints, and I thank you for the friendly debate :) I think it boils down to whether you believe that environment or genetics / history (nurture vs nature) is more responsible for shaping people’s personality. I subscribe to the first viewpoint, while you to the second.