Israel going from ‘Start-Up Nation’ to Scale-Up Nation

Israeli tech executives and investors meet in New York to discuss industry reset.

Israel Start up (photo credit: INGIMAGE)
Israel Start up
(photo credit: INGIMAGE)

Tech executives and investors gathered in New York City on Tuesday and Wednesday for the Mind The Tech conference and related events, featuring two busy days of business meetings, panels and lectures by the top names in the industry. And there was a recurring theme: The Israeli startup scene has gone from one that values a quick exit and quick buck to one that places emphasis on growth and ownership.

“I believe that the community grows and has evolved over the years. It was kind of a common understanding that Israeli startups are looking for a quick exit. But once Israeli companies started to form better processes and talk about not just exit strategy, but growth strategy, going back to the value to their customers and when several Israelicompanies kind of bought into becoming huge companies – not to say unicorns – I think that the appetite to build big companies that keep generating value and not just getting sold for the highest bidder grew with that culture,” Tsiki Naftaly, co-founder of Copilot, told The Media Line.

Naftaly, whose company helps consumer electronics manufacturers to communicate with customers, was speaking from an Israel-New York Unicorn Party, hosted by Israeli entrepreneur Erel Margalit, to celebrate the more than 20 Israeli-owned, New York-based companies that have achieved unicorn status, or a privately held startup companyvalued at over $1 billion. Ten of those entities have surpassed that milestone in the past year, in the midst of a pandemic.

“The reason is that so many new entrepreneurs and new companies don't want to sell early. They want to build a real business, which means that if you're an inventor, a scientist, a technology person, you need to partner with people who are building sales and marketing organizations,” Margalit told The Media Line.

“I think that one of the things that we're seeing in Israelis is that they have a little bit more patience. They're a little bit more modest. They know that they can’t do everything themselves. They’re second- and third-time entrepreneurs, so they already made a little bit of money, they brought it home and now they're trying to build a real business,” said Margalit.

TODAY NEARLY 40% of Israeli start-ups are consumer-facing and more than 20% of Israel’s unicorns are B2C companies. In the photograph: Hi-tech development centTODAY NEARLY 40% of Israeli start-ups are consumer-facing and more than 20% of Israel’s unicorns are B2C companies. In the photograph: Hi-tec (credit: GILI YAARI/FLASH90)TODAY NEARLY 40% of Israeli start-ups are consumer-facing and more than 20% of Israel’s unicorns are B2C companies. In the photograph: Hi-tech development centTODAY NEARLY 40% of Israeli start-ups are consumer-facing and more than 20% of Israel’s unicorns are B2C companies. In the photograph: Hi-tec (credit: GILI YAARI/FLASH90)

Israeli tech has attracted over $20 billion in 2021, with 74 Israeli unicorns now operating. In the cybersecurity sector, Israel attracted 40% of total investment this year, despite accounting for 0.1% of the world’s population. The seven Israeli cybersecurity unicorns are one-third of the number of unicorns in the field worldwide.

“Over time, Israel will start to feel more like Silicon Valley,” said John Curtius, a partner at Tiger Global.

“It is a real ecosystem today. I was in Tel Aviv for a week recently and the stat that astounded me is the fact there are more than 70 unicorns, which is more than in all of Europe. And I think it is only going to accelerate. There are amazing founders, amazing engineering talent, and really global ambitions in a way we haven’t seen before,” saidCurtius, whose hedge fund specializes in technology and was one of the first investors in Facebook and LinkedIn. During the past two years, the fund became a particularly notable investor in Israeli startups, including prominent names like SentinelOne, Rapyd, Redis Labs, Papaya Global and Snyk.

The foundational change came during the COVID-19 pandemic and many of those speaking at conferences in New York this week marveled at how different Israeli tech looks today than it did in the time frame before the coronavirus struck.

“Actually, everything changed. That's amazing. Pre-COVID and now are like two different times for Israeli high-tech. Pre-COVID, Israeli startups were geared toward mergers and acquisition by large corporates, and were limited in scale. We're now growing mature companies. Now, there is so much money pouring into the industry, which enables a company to accelerate their innovation and accelerate their scale. Now, they aim to be independent,” Dr. Nimrod Kozlovski, partner and co-founder at cyber crisis management company Cytactic, told The Media Line.

“Israeli companies are going to NASDAQ. Israeli companies are staying as mature, independent companies. That changes the industry. We have now more than 70 Israeli companies that are unicorns and we have dozens of solid companies now that attract a lot of the activity and a lot of the attention in Israeli tech,” Kozlovski said.

Essentially, Israel is going from startup nation to scale-up nation, and is doing so at a magnitude reminiscent of Israel’s initial startup boom.

"When you are in the middle of a storm, you don’t always comprehend the impact of change. However, many market indicators point out that we are at the midst of an inflection point,” said LeumiTech CEO Timor Arbel-Sadras, speaking at Mind the Tech.

“What we are seeing today is a game changer. This is big. Just as the 1990's created the start-up entrepreneurs, COVID created the scale-up entrepreneurs. We can’t even begin to imagine the impact of this change. But what we do know is that the Israeli tech scene today is the place to be,” Arbel-Sadras said, noting the significance that the pandemic itself played.

“Companies like Global-e in international e-commerce, Riskified in e-commerce fraud prevention, Playtika and Moon Active in online casual gaming all rocketed. We also worked from home, and so companies such as for online collaborations, SentinelOne for cybersecurity and Bizzabo for virtual conferences flourished. We foundthe right way for remote work, and so companies like Papaya boomed,” he said, rattling off a list of Israeli startups that seized upon the changes the pandemic brought.

The conference’s speaker list was overwhelmingly Israeli, but the event keeps returning to New York City, which is becoming more of a hub for Israeli startups, and not simply because of the city’s central business or media role, or its hospitable environment for Israeli expats. It is because it is primarily US funding that fuels the Israel tech scene.According to the IVC Research Center, 73% of investment deals in the mid-late rounds this year were done by US-based investors. A new trend emerged this year, with US private-equity investors assuming a more significant role, as nearly 30% of the first investment deals were made by private-equity investors. Margalit shared that there areapproximately 650 Israeli startups in the Big Apple, 35 of which get assistance from his Margalit Startup City, based in Manhattan’s SoHo neighborhood.

“It is about creating a community. All of us are working together in order to put New York on the map and to give the West Coast a run for its money, but also to put Israel in the international arena in a big way,” Margalit told conference attendees.

The big question, as always, is what comes next? With the acceleration of digital transformation during the pandemic, Israeli startups are now positioned at the core of some of the most central activities worldwide, from digital health to public safety to finance and e-commerce. Some of the sectors that may have been slow before inadapting to digital have adapted now, with Israeli companies leading the way.

“Digital transformation in some industries is now a reality. If we estimated the digital transformation in the health sector would take years, so, now it's a reality. They already have invented digital technologies as the core of their business, which enables you to have a lot of innovation that builds on top of this infrastructure. So, we see more and more innovation in the health sector, innovation in education. I think commerce is notgoing to be the same,” said Kozlovski.

“I think that now we'll see companies scaling. We see companies going big in specific industries. We certainly see a lot of mergers between competitors or complimenting services and will certainly see, I think, faster adaptation of technologies, because when you have the infrastructure ready, you can build on top. Just like when we built the GPSinfrastructure, many services from navigation, logistics and commerce competed on top of this,” said Kozlovski.

There were a few words of warning this week amidst the excitement and collective congratulations. One speaker warned that as Israeli tech grew up, a reminder was in

order to act like adults, with a proper governance structure, security infrastructure and regulatory compliance mechanisms prioritized, even in start-up atmospheres. Another admonition was to make sure that as Israeli companies continued to do well, they also do good.

"The tech sector does not exist in a bubble. We have to pay attention to the world around us and address the painful issues, the big issues, of humanity and planet Earth – from the state of democracy to the climate crisis, because we cannot just leave it in the hands of politicians," said Calcalist publisher Yoel Esteron, speaking at the opening of Mind The Tech.

"If we wish to use technology to make the world better, we cannot focus on technology and leave politics to politicians. This is not just a noble, generous thought. Bad politics is bad for business, and crippled democracy is bad for the economy. Inequality is bad for growth, and the tech sector needs the world around its hubs to grow and flourish," said Esteron.

Margalit, meanwhile, told The Media Line that he is planning to open another facility in New York dedicated to the social causes of the day.

“We're probably going to have another building around sustainability, mobility and climate change. It's a big theme. It needs technology. And there's so many good ideas, but it needs good investors and good managers to help create companies that are scalable and we want to see the next unicorns that are changing the planet,” said Margalit.