Over the past decade, Israel has earned its stellar reputation as the Startup Nation with more startups per capita than anywhere in the world. As one of the most important tech ecosystems, Israel has become an outstanding hub for entrepreneurs and a magnet for investors from across the globe looking to tap into the country’s unique business culture and innovation mindset. In cybersecurity, life sciences, medical cannabis research, and artificial intelligence – to name a few – Israel has been a source of ideas for groundbreaking products and services.
But Israel’s exceptional tech sector comes with a downside that is mostly felt by Israeli citizens themselves. As Israel celebrates its 71st Independence Day, it’s important to note that some of the best innovations are not even available in Israel, or make it to the Israeli market much later than abroad. Houzz, Puls, Bringg, Verbit, and Honeybooks are just a few examples. And in many areas of the high-tech superpower’s economy, it’s low-tech all the way.
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The Israeli market is small and regional trade is negligent, which inevitably forces emerging startups to think globally and aim for much larger, better-established markets in the US, Europe, and Asia.
The Israel Innovation Authority (IIA), the support arm of the Israeli government charged with driving innovation-focused initiatives, is well aware of this shortcoming (and others).
In a recent report on the challenges and opportunities posed by future technologies, the IIA noted that for all of Israel’s advanced high-tech industry, it is lagging behind other Western countries in areas such as local transportation, commerce, construction, education, and public services.
“Most people in Israel do not feel that they are living in a ‘technological’ country when they are on their way to work, when dealing with bureaucracy, or when shopping at chain stores. This is more than just a feeling…,” the IAA wrote.
The IIA tells NoCamels in a written statement that its role is “focused on supporting Israeli entrepreneurs, companies and market sectors so they can compete in an increasingly globalized world. Israel is a small market for many startups and their products, and they look to go global from the outset.”
“That said, there are a number of very successful Israeli companies that either started pilot tests of their technology in Israel such as Waze (acquired by Google in 2013), or quickly brought their technology to Israel’s market even if they launched elsewhere in the world first, such as Tyto Care,” the IIA adds. Founded in 2012, the medical device company specializes in telehealth, connecting people to clinicians to provide remote home examinations and diagnosis solutions. Tyto Care first launched its products in the US, and in early 2018 signed an agreement with Israeli HMO Clalit Health Services.
According to Start-Up Nation Central (SNC), an Israeli non-profit organization that tracks Israel’s tech ecosystem and publishes comprehensive reports on its industries, an additional challenge is that the majority of Israeli startups are B2B (business-to-business) ventures for which the Israeli market simply does not provide enough opportunities.
Israel’s regulatory environment
Israeli government policies – and an infamous bureaucracy – also play a key role. According to the World Bank’s latest “Doing Business” report, which measures business-friendly regulatory processes of 190 economies, Israel ranks 113 – way behind the average of OECD high-income countries. Among these, Israel ranks seventh from last in best regulatory practice, and performs low on processes such as enforcing contracts, ease of paying taxes, and registering property.
According to the World Economic Forum Global Competitiveness Report for 2018-2019, Israel ranks first in R&D expenditures as a percentage of GDP, 2nd out of 140 countries in “venture capital availability” and “ease of finding skilled employees” due to its highly educated workforce, and 3rd worldwide with “companies embracing disruptive ideas” and “multi-stakeholder collaboration.” But it also comes in low in a number of business-related categories including “budget transparency” (90th), “ease of hiring foreign labor” (125th), credit gap (86th), complexity of tariffs (81st), and fiber internet subscriptions (93rd).
Israel’s private sector is hailed for its vibrancy but it clearly hits some hurdles in the country’s political-regulatory environment.
Start-Up Nation Central says the transportation and finance sectors are the most problematic when it comes to implementing innovation due to over-regulation.
“We need to make sure the regulation does not only protect the stability of the current system, that is, taxi drivers, banks etc, but is focused also on the consumers and what they have to gain from disruptive innovation,” Gabriel Levy, professional advisor to SNC CEO Prof. Eugene Kandel, tells NoCamels via email. Government policies should “help Israeli businesses become more innovative – otherwise they won’t be able to compete with the global challengers. This should be done mainly through giving incentives to innovative Israeli companies to work with [more traditional] Israeli companies in sectors experiencing disruption,” Levy adds.
Take Lemonade, for example, the Israeli-founded insurance startup that has been disrupting the traditional US insurance market. The platform’s automatic risk assessment is based on the detailed available data and statistics of a specific area. Because of these factors, not offering its services in Israel was not a deliberate choice, but inevitable, the company says. “In Israel, in order to obtain information about a home, you need to stand in line and get an original document that’s 40 years old, photocopy it and give it back. Every hole in the United States has data that’s 1,000 times better than that of any apartment in central Tel Aviv,” Lemonade co-founder Shai Winninger told Haaretz earlier this year.
Ridesharing service Via is another interesting example. Founded by Israeli entrepreneurs in 2012, the company developed an algorithm that matches multiple passengers traveling in the same direction in real time, with vehicles picking up customers at a pre-arranged collection point set according to traffic conditions and demand. Via has been operating successfully in the US and in Europe, and just recently made its debut in Tel Aviv – with some caveats. Under the name “Bubble,” the service operates as part of a collaboration with public transport company Dan and has to stick to regulations: no service on weekends (Friday sundown to Saturday) or between 10 p.m. and 6 a.m. on workdays.
Israel’s tiny market and its unique political-regulatory environment have led emerging Israeli startups and companies to seek exits sooner rather than later. In 2018, Israeli companies exited for $12.63 billion in 103 deals. A majority (78 percent) of buyers were American, up from 43 percent in 2017. Acquisitions from Israeli buyers decreased sharply from 38 transactions in 2017 to 21 in 2018.
Whether the exit strategy is a good or a bad thing is often heavily debated, and Levy from Startup Nation Central sees both the pros and cons of this development.
“As often – it’s complicated,” he says. “Alongside ‘exits,’ we would like to see more Israeli companies grow in Israel as independent, Israeli-based companies. This is happening gradually as the local ecosystem matures, and multinationals are now coming to Israel not only as investors but also as customers of Israeli startups. Multinationals with open innovation activities in Israel are critical for the growth of Israeli startups,” he tells NoCamels.
For a long time, Israel’s economy has remained relatively isolated from global supply chains and competition. But since products and services worldwide are being digitized and automized, Israel is no longer a so-called island, the Israel Innovation Authority said in its report. In addition, the supply of products from distant locations is becoming more inexpensive and efficient with the transformation of logistics and delivery systems, which makes local businesses and retailers increasingly vulnerable to global competitors. (As seen in the local reaction to the news that Amazon was making its first move into the Israeli market).
The IIA’s report also highlights that “the penetration of innovative technologies in highly regulated, ‘local’ fields, such as transportation and finance, is changing the rules of their usage. In particular, innovative, fast-moving startups are quickly becoming potential contenders for banks, credit card companies, and public transportation providers worldwide. Ultimately, it will become impossible, and undesirable, to halt their penetration to local operations in Israel.”
The Israel Innovation Authority has warned of long-term consequences if Israel does not advance at a quicker pace from a “startup nation to a smart-up nation.”
“Israel is facing a significant challenge on its way to becoming a smart technology economy: the gap must be bridged quickly in order to secure Israel’s future standing among the advanced economies of the world. The duality that has existed thus far between the innovative high-tech sector and the rest of the economy, which has been slow to adopt new technologies, is not sustainable,” the IIA report read.
Start-Up Nation Central seems to have a clear plan of action in mind. It is advocating for (1) friendlier regulation where relevant, (2) helping to connect between startups and customers in Israel first and (3) the government being a facilitator of innovation, for instance in making public databases more accessible.
Levy says SNC it would like to see “more car-sharing rental solutions (Via is a good start), e-commerce (Amazon is a good start) and customer service solutions in banking and insurance (Lemonade is another example of an Israeli scale-up with no commercial activity in Israel).”
The Israel Innovation Authority, meanwhile, believes change will come from the Israeli public and its increased exposure to new standards in other developed countries. This “will increase pressure on regulators to adapt the rules to a new era,” the IIA said in its report.