Thomas White Global Investing
Israel
Israel Stamp
November 20, 2009
A Postcard from the Middle East
Israel: Start-ups Spur Economy

Tel Aviv

In 2008, over $2 billion in capital was invested in over 480 Israeli high-tech companies, an increase of 18% year-on-year with 50% of the funds coming from investors in the U.S.

The Internet is a dazzling web of innovation. There are sites that emphasize collaborative processes, sites that promise intelligent mobile and video commerce platforms, and others that recommend movies, and provide peer-to-peer sharing. There are sites that offer virtual worlds to escape to and sites that offer social networking marketing solutions.

New sites such as these and more are flourishing on the Internet, surprising seasoned technology pros with their depth of innovation, creativity and promise. And these start-ups are not being launched in the heart of Silicon Valley, not in the U.S., and not from the IT boomcity of Bangalore, India or even the financial hub of Shanghai. These start-ups are coming from Israel – a country with a population of just around seven million, almost constantly at war, and with almost negligible natural resources. Israel has more companies listed on the NASDAQ than any other country outside the U.S. How did Israel manage to achieve such high-end expertise in a way that economic powerhouses like India, China or South Korea have not?

Israel is known for its R&D but it might well surprise Americans that the country has the largest number of high-tech startups in absolute terms after the U.S. The land of milk and honey is also the land of venture capital start-ups. It is estimated that there is one start-up for every 1,844 Israelis. At a time when the U.S. is grappling with a decade-high unemployment rate and a stuttering economic revival, Israel has shown that technological expertise and innovation can chart new paths. The country attracts twice as much venture capital investment than the U.S., and almost 30 times more than Europe. There are lessons to be learned in Israel’s success – entrepreunership has its place, despite a recession. How does Israel breed so many of these successes?

Truly, Israel is undergoing one of its worst financial challenges ever. In 2008, Israel looked as if its boat was steady enough to navigate the choppy waters of the financial crisis. Its GDP rose 4% last year after five years of unprecedented growth. But things changed in the fourth quarter when the economy screeched to a halt. Industrial production fell 1% in the last two months of 2008 while retail sales tumbled 2%. The once flourishing high-tech industry, which accounted for more than 40% of Israel’s $40.1 billion in export sales in 2008, has taken a beating. What’s more, unemployment has been rising continuously, standing at 6.8% in January and expected to top 8% by the end of this year.

The answers are varied. A new book hypothesizes that Israel’s culture is wired towards thinking anew, and to thinking for the future. A nation that is almost constantly battling political crises has bred a people who are aware of a shifting present, and of a need for improvement in the future. The country’s military regimen also inculcates Israeli youth with such values as teamwork, communication and improvisation, apart from imparting mental toughness.

And the country’s isolation – surrounded as it is by political enemies – has meant that industry has had to adapt despite these barriers. In place of large, manufacturing industries with attached high shipping costs, Israeli investors and entreprenuers have started to develop smaller components and products, especially software.

Being cut-off from its land boundaries, Israel developed instead one of the most extensive and penetrative Internet networks in the world. Adversity has meant that Tel Aviv is a buzz of ideas, offering a springboard to creativity. Israelis have exported their minds in the absence of natural resources – and today, the world is learning from these skilled innovators. Take for example, one of Israel’s most path-breaking ideas – to create a world of that runs without oil using electric cars that can be easily recharged. Amazing as that idea sounds, an Israeli start-up is actively researching and developing a viable idea that may help to eventually wean Israel off its dependence on oil in the next ten years. The project includes developing a national network of battery exchange stations – where customers with an electric car can drive in, replace their weakened battery, and drive off in minutes with a new one, thus eliminating the long hours of charging that remains a major drawback of electric car technology.

The next time one sees a cutting-edge website that creates new waves in this dynamic and competitive Internet industry, chances are the portal was launched in Israel. If there is a new idea that changes the way the world thinks, chances are that spark of innovation came from Israel. And chances are that the next start-up one encounters may likely be Israeli. America and the rest of the world may find some surprising answers in this remarkably resilient nation.

 

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