What makes Israel with just eight million people, an innovation hubBy Peerzada Abrar, Economic Times, November 8, 2013
The presence of thousands of startups, and more engineers per capita than anywhere else in the world, makes Israel a natural hub for innovation.
Best known for defence- and - military-inspired technologies, entrepreneurs across the nation are now focussed on building the next generation of healthcare applications. Helped by government support, societal acceptance and the presence of large numbers of multinationals eager to buy innovative technology from startups, Israeli companies are building a wide range of products and services.
Using artificial intelligence and digital technology, they are creating applications for diagnostics, tools for the visually, physically and mentally challenged as well as products that can improve farm output. "Many visually disabled people are old people who don't care about smartphones," said Yonatan Wexler, vice president for research and development at OrCam, a startup launched in 2010 by Amnon Shashua, a computer science professor at Hebrew University.
Using technology developed by Shashua, Wexler and another faculty member, Shai Shalev-Shwartz, they have created a device that can be clipped onto spectacles, making it possible for a blind person to read, find an item, catch a bus or cross the road. "For us the issue of innovation is not a hobby. It is basically about who we are and what our economy is built on," said Avi Hasson, chief scientist at the ministry of economy. "This was a country selling oranges to the world and not high tech. We have now decided to build our economy around the knowledge industries." Currently half of all Israeli exports come from the technology industry.
So, what is Israel's "secret sauce" that has made it a global startup hub? Experts said the "bottom up" approach of the government to fund innovative projects is unique in the world of early-stage research and development funding. For India's nascent startup ecosystem, the Israeli experience offers several valuable lessons.
Israel's research and development expenditure account for approximately 5% of the country's $260 billion (Rs16 lakh crore) GDP, higher than any other western country. This excludes the spending on defence R&D. The office of the chief scientist has a budget of $450 million (Rs2,800 crore)annually and always co-invests along with the private sector. "We do not try to replace the private sector, but rather complement it; we like risky projects," said Hasson, who worked as general partner at Gemini Israel Funds. Typical grants are in the range of $30,000 to $6 million (Rs18 lakh to Rs37 crore).
There are also around 300 multinational companies in the country which are a big part of the ecosystem. Many of them, including Apple, Google, Intel, Microsoft, General Motors, and GE, have set up research and development facilities to use the local talent and come up with breakthroughs.
"You have 20-year-old kids here; their education is not to follow instructions, but to lead and solve problems," said Yossi Matias, managing director of Google's Israel R&D centre and a top computer scientist. In June, Google bought Israeli mapping startup Waze for over $1 billion (about Rs6,200 crore).
In 2012, M&A deals involving Israeli and Israel-related companies were valued at $9.74 billion (Rs60,700 crore), an 88% increase from $5.2 billion (Rs 32,000 crore) in 2011, according to Israel's IVC Research Center database. Besides acquisitions, many of these multinationals provide space for entrepreneurs to meet and help them to bootstrap their ideas. In 2012, six of the 10 largest acquisitions involved venturebacked targets.
Per capita, Israel has attracted over twice as much venture capital investment as the United States and 30 times more than all the members of the European Union combined. An example of Israel's farsightedness is the fact that it set up a seed fund called Yozma more than two decades ago. Today, there are about 70 active venture capital funds in Israel, of which 14 are international.
Around 575 Israeli high-tech companies raised $1.92 billion (Rs12,000 crore) in 2012, a 10 % decrease from 2011 levels, but up 52% from 2010, according to IVC. The country's emphasis on education is manifested in its 57 colleges and eight universities which over the last 10 years have produced six Nobel Prize winners. Israel has 135 engineers, scientists and PhDs per 10,000 people in the work force, the highest in the world.
"All Israeli kids know that their mother will tell them, 'After all that we've done for you, is asking for one Nobel Prize really too much?'," said Yossi Vardi a serial entrepreneur who is most famous for being the first investor in ICQ—the first internet-wide instant messaging system which AOL acquired in 1998 for $400 million (Rs2,500 crore).
Seventy-one-year-old Vardi, who is regarded as the godfather of Israel's hi-tech industry is of the view that Israel's success as an innovation hub is not about technology alone. "This is a cultural phenomenon and the value system that kids learn," said Vardi, who has invested in 80 startups, of which 27 have failed. "In a society which does not tolerate failure, entrepreneurship cannot thrive there," said Vardi. "In Israel, if you have not failed, that is a sign of shame," said Amir Shevat, Google's developer relations program manager in Israel.
Community spaces are also made available for startups. One public library in Tel Aviv has been converted into a coworking space for startups. Instead of hotels, an old train station on the Jaffa-Jerusalem line has been restored by the municipality and hosts startup conferences.
Startups constantly network with top entrepreneurs, industry leaders and investors at coffee shops for advice, money and mentorship. "They are so open that you can just walk up to them and talk. I find this missing back at home," said Ronak Kumar Samantray cofounder of Hyderabad-based technology startup NowFloats, one of the finalists at a Tel Aviv startup competition.
"It is useful to be part of community and learn from the mistakes of other entrepreneurs," said Avner Warner, director of global economic development at Tel Aviv Municipality. "As a society, we respect people who work in a startup."
(The writer was in Israel recently at the invitation of the Israeli Ministry of Foreign Affairs)