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From Start-Up to Scale-Up: The evolution from building start-ups to building ecosystems in Israel

Blog article

From Start-Up to Scale-Up: The evolution from building start-ups to building ecosystems in Israel

The country strategy that has made Israeli entrepreneurship an international success has been the topic of the latest online event organized by the Northeast Regional Development Agency, under ROStartup program, which aims at facilitating the implementation of a national strategy for startups.

The support for advanced technology entrepreneurship by the Israeli authorities was showcased by Anya Eldan, Vice President of Innovation Authority of Israel, (the Israeli public organization that supports start-ups), together with Esther Barak Landes, General Partner of Japan Israel Partners and Tamar Raz, CEO of Hadasit (technology transfer company that turns medical and biotechnology research into business). Oana Craioveanu, advisor in the Ministry of Research, Innovation and Digitalization, was also present, on behalf of the Romanian authorities.

Over 50 years of targeted policies

The success of Israel in promoting start-ups has more than 50 years of targeted government policies behind it. Initially, their purpose was to attract foreign investments that bring know-how in advanced technologies, while later the public programs have been oriented towards financing local start-ups and facilitating the use of the acquired know-how in developing successful businesses.

Israel has nothing special and this is what one can really learn from our country, because it has no natural resources, the security is tough, we don’t have a large domestic market and English is not the mother tongue. We really have to work hard.

Esther Barak Landes, General Partner of Japan Israel Partners

It all started in the 60s and 70s, when large multinationals opened the first research and development centers in Israel, encouraged by the human capital specialized in technical fields, but also by the facilities offered by the government.

Israel thus managed to bring know-how from the latest technologies, which helped them develop – in the 1980s – a pool of highly trained specialists in areas such as IT and telecommunications, some of whom chose later open start-ups.

Raising venture capital

The time was ripe for public authorities to move to the next level. Thus, in the early 90s, the Yozma program laid the foundations of Israel’s venture capital industry. Through Yozma, the government provided expertise in high-risk areas for investors and began funding start-ups that promote state-of-the-art technologies. In order to receive money from the government, eligible companies had to attract at least an equal amount of private investment.

Israel’s success is acknowledged by the large number of successful start-ups created in the last 25 years, many of whom have since been sold to major multinationals.

If we were called the start-up nation, in the last 5-7 years the industry has matured, so now we have become the scale-up nation, given that we have many unicorns and many businesses that have grown. An example is Mobileye, the most valuable exit of an Israeli start-up, for which Intel paid almost 16 billion dollars. However, the industry is changing very fast and the public sector needs to be more flexible and react faster.

Anya Eldan, Vice President of the Israeli Innovation Authority

An entire ecosystem dedicated to start-ups

The success of the Yozma program was not only determined by government funding for ambitious businesses at the beginning of the road, but also by the creation of an entire ecosystem to encourage businesses that promote state-of-the-art technologies in areas where investment risk is higher.

It’s not just money but also how you invest the money. There is also the issue of investment in early stages of the start-up which is very risky and the money is missing. This is where the government steps in. However, the Innovation Government Agency in Israel does not do anything on its own it. Both the private and the public sector need to collaborate and have a partnership in order for the start-ups to succeed.

Anya Eldan

However, partnerships are easier to achieve if there is a whole system that facilitates and encourages collaboration.

If I have to say in one sentence why Israel is so successful, it’s not because of the Government and it’s also not just because of the start-ups and it’s not because of the very successful and advance scientific research. It’s because all of these components are working together, which I call the ecosystem approach, which is more important than anything else. You need great academic research. You need successful tech transfer policy, as well as strong intellectual property.  You really have to have all the components working together, although it is quite tough because most of these components want to work on their own.

Anya Eldan

The government’s need to invest in innovation

The annual budget of the Israeli Innovation Authority is 500 million US dollars. The reason Israel has such an innovative culture is that the national expenditure on civilian R&D is 4,5% of the GDP, which is second highest rate in the world after South Korea. This is a very good marker for innovation.

In order to bring economic prosperity through innovation, the government created the Israel Innovation Authority. To achieve this goal, the authority follows three main roles: to prevent market failures that can potentially affect start-ups, to eliminate regulatory barriers and create new growth engines, even if it might seem strange that the government is involved in that field.

Government support is mostly needed in sectors that private investors consider too risky in order to avoid market failures. “The government supports programs in certain areas that are too risky. We always try to invest where government money is more needed. If a sector like software attracts a lot of private money, the government doesn’t invest, but if start-ups in a certain area, like biotechnology, are underfunded by the private sector, we try to invest there.”

The Israeli business incubators

It may seem unexpected, but multinationals had and continue to have an important role to the success of Israeli entrepreneurship. Many international companies are investing in research and development in Israel, which hosts around 380 R&D centers. If they first came because of the skilled workforce, now Israel’s main advantages are the business environment that supports innovation, the start-ups and the experienced researchers.

We have around 2,500 people working in big tech companies in Israel. Still, a lot of these employees leave and start their own companies. First of all, working for large companies, they learn about the market needs more than they could learn anywhere else. When you have a bright idea, you just leave everything and follow your dream. The first rule of being a successful entrepreneur is to believe in your dream and give up everything for that. They give up salary, position, sleep, social life and go after your dream.

Anya Eldan

The multinationals play an important role in the development of start-ups in Israel, as owners of incubators.

In building incubators, we have two goals – to provide seed funding and to provide partners who can help the start-ups to succeed. We also bring multinationals to work with start-ups in the incubator programs. In most of the incubators we run, we have either multinationals or venture capital funds as owners. Sometime universities or hospitals are also partnering in incubators specialised in healthcare and biotechnology.

Esther Barak Landes

The owner of the incubator always needs to be professionals and have the know-how to invest in start-ups, especially in the very early stage. When he gets the license for an incubator, he actually establishes a place where all the companies that he invests in can actually sit together with him he owner also has to provide everything the start-ups need – finance operations, tech support, space etc.

Why start-ups need mentoring

In addition to the funding opportunity, incubators have an important role in advising and mentoring entrepreneurs at the beginning of the road. A lot of start-ups failed because they created a product, they raised money and when they brought the product to the market nobody wanted it. Therefore, one of the most important reasons Israeli authorities carry out this program for young start-ups is to bring managers and investors who can help the start-ups by evaluating their ideas and bringing them to customers.

One of our main tasks are to look at the idea and to define if there is a market and there is a real need for the new technology. Many times, if you think out of the box and take the idea to another direction and try to address another market you can do the right thing. However, it is very hard to convince the inventors who fall in love with their ideas. We need to be in contact with the market all the time.

Tamar Raz, CEO of Hadasit

One of the most common methods in the world of entrepreneurship to adapt to market requirements is pivoting. It refers to the case when you start with one idea and after a while you decide than it doesn’t have the right market and you cannot develop it and try to change itIt differs from one company to another.

I think most of the companies will expect a pivot, weather it is a dramatic change or a small one.  When you build a company, people are the most important thing to begin with, before the technology and the market, because you need their help if you need to make changes. The period from creating a start-up until making a successful exit has increased from 5 years to 10 years. During this time, the technology can change, the market can change, so a lot of things can happen in 10 years. Therefore, any entrepreneur should consider a pivot in his business.

Esther Barak Landes

The impact of the pandemic and the importance of digital transformation

Asked by Oana Craioveanu how the pandemic influenced the financing of start-ups by the Israeli government, Anya Eldan stated that the response of the institution she coordinates was a quick one and it involved reducing the evaluation period of the files and granting funds to start-ups faster.

“In terms of funding in Israel, what we see is an increase for anything that is digital as well as healthcare. There is a lot of interest in AI in every area and in every sector”, she added.

To reduce the impact of future crises, such as the one triggered by the coronavirus pandemic, the Vice President of the Israeli Innovation Authority believes that the digitalisation of the health system is needed to increase the speed of the authorities’ response.

What we have seen during this pandemic is that the new technologies really allowed us to cut us cycles dramatically, especially in the healthcare sector – to identify the virus, to find a vaccine, to produce it. Not to mention the Federal Drug Association (FDA) response – it usually takes 6 months to get a response from them; now they answer in a week. What we also learnt is that having a strong digital healthcare system gives you tremendous advantage. You probably all heard that Israel is the most highly vaccinated country and the reason for that is we have almost 100% digital healthcare system. Most of the population have electronic records for over 10 to 20 years, which allowed us to generate very fast analysis.

Anya Eldan

Consequently, the lesson of this pandemic – in addition to the importance of sustainability – is that the digital transformation will have to be considered by all organizations, either public or private.

I think every country and every sector has to speed up its digitalisation because it’s a very big advantage. There will be a tremendous change because digital transformation is not bringing IT into your business. Digital transformation changes the business model completely – the relations with customers, with suppliers. This also creates a lot of new opportunities for start-ups because all the big organisations probably won’t be able to change from within, therefore they are looking for technology.

Anya Eldan

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