“Israel The Startup Nation” has been published by Seeking Alpha on Nov. 22, 2016. 

http://seekingalpha.com/article/4025597-israel-startup-nation

I have been investing in few very successful companies recently in fields such as clean energy, satellite technologies, biotechnology and medical applications. None of them is listed on the Tel Aviv main stock exchange, yet they all offer something in common: the management is Israeli with global footprints. I find the ability of the management to consistently deliver on promises and targets most impressive. Even more fascinating, most founders/CEOs served in the Israeli Defense Forces “IDF” and some were trained in the highly secretive Unit 8200.

The startup nation

Israel has just about eight million people (less than 0.1% of the world’s population) and resonates today as one of the most vibrant tech startup cluster, attracting more venture capital per inhabitant than anyone else in the world. The Israeli startup ecosystem raised as much as $3.6 billion last year with an average deal size of $11 million according to a report by Geektime. This is obviously nowhere near the $60 billion invested in the United States in 2015, however on a per capita basis, Israeli startups received more than twice as much as their US counterparts and more than 25 times the EU level the report says.

                              Credit: Zirra, 2015

Israeli and American venture vehicles have traditionally topped the rankings in funding Israeli tech projects. But more recently Chinese and Indian venture capitalists have interestingly started to invest significantly. The Chinese for instance invested about $500 million in the local scene in 2015. Hong Kong tycoon Li Ka-Shing’s VC Horizons Ventures fund was last year the largest source of foreign cash for a growing number of startup in Tel Aviv according to IVC Research Center.

Defense department/cyber security solutions will continue to dominate the landscape, but over the past years we have seen a kaleidoscope of applications emerging in sectors such as medical tech, automobile, cosmetics, software solutions for organizational management, web design and other consumer related themes such as Fiverr and Houzz (Private:HOUZ). Actually chances are high that last time you booked a flight you were using an Israeli product. The race between Facebook and Google to buy Waze (offering real-time traffic information and eventually bought by the latter for about $1bn), or the large IPO of the Jerusalem-based MobileEye (world’s leading supplier of driver-assisted technology) on the NYSE (NYSE:MBLY) set a path to success for other Israeli companies. General Motors (NYSE:GM) already has a research centre in the coastal city of Herzliya, whilst Volkwagen (OTCPK:VLKAY) and Ford (NYSE:F) this summer invested in Israeli companies focusing in autonomous cars / machine learning.

Israeli_startup

I recently came across Skytran, a company working on a concept based on magnetic levitation to transport people at more than 150miles an hour via bubbles elevated above the ground. This system just as futuristic as the Hyperloop could go online as early as late this year.

It is fair to say that the Silicon Valley will still dominate the tech space for the years to come, but why is a parallel so often drawn with Israel?

The natural resources conundrum

A World Bank mission to Israel after the 1967 War described Israel as an economic miracle” given the scarcity of natural resources / raw materials and hostile neighbours.

The Dead Sea may well be an important source of minerals such as potash (used for fertilisers for instance), but Israel remains very dependent on natural resources such as natural gas, oil, coal etc. Despite being in the otherwise oil-rich Middle East, Israel produces a tiny number of oil barrels a day. Energy dependency has started to shift recently with discoveries of natural gas reserves and significant developments in the Israeli solar industry but this quasi total reliance on energy imports has always been part of the landscape looking back at history.

As Golda Meir, one of the founders of the State of Israel put it not without humour, “Moses dragged us through the desert for 40 years to bring us to the one place in the Middle East where there was no oil”!

Israel also always has had a chronic water problem and has suffered from shortage for years (drought, population growth, rising standard of living). To face water scarcity and water quality degradation it became vital to invest considerably in conservation and efficiency tech. Today Israel is the world leader in desalination’s technologies and its expertise is becoming a significant export source, the Chinese in particular have started to demonstrate a high interest in securing strategic partnerships with companies involved in wastewater treatment solutions.

“Moses dragged us through the desert for 40 years to bring us to the one place in the Middle East where there was no oil”!

Golda Meir

Military service

Given this high dependency on natural resources, Israel has instead successfully invested in its most precious commodity i.e. human capital. Specific skill sets, determination, “energetic people who proved able to overcome the difficulties of economic development with great ingenuity” as described by the World Bank mission in the late 60’s.

Individuals are recruited in the IDF as early as 17. Obviously their Curriculum Vitae is still rather on the light side but the IDF is more interested in other skill sets such as creativity and out-of-the-box thinking. Young people are exposed as soon as enrolled to responsibility, are given a large degree of autonomy to solve technological challenges with limited resources. As put by Daniel Senor and Saul Singer in their book Start-up nation, “you have minimal guidance from the top and are expected to improvise, even if this means breaking some rules.”

Daniel Senor and Saul Singer stress out that for that very reason “mandatory military service is a strong proponent of entrepreneurship”. In particular, the once highly secretive Unit 8200 has engendered an unusual number of successful founders / CEOs in the tech space. Nowadays technology developed in this Unit of the IDF responsible for collecting signal intelligence and code decryption is often adopted and transposed by corporates.

Women have a full part to play in this. Merits prevail over gender and women serve in all positions equally.

“You have minimal guidance from the top and are expected to improvise, even if this means breaking some rules.”

Daniel Senor and Saul Singer

Omnipresent threat

Due to history, geographical considerations and hostile neighbours, Israel cannot rely on cross border trade, not to mention the ubiquitous danger of trade embargo. Much like the United States, the Israeli government helped over the years to foster creativity by investing as much 4% of GDP on R&D as per data from the OECD. It also takes also direct measures to boost the tech sector such as strong incentives in the 1990s in venture capital and incubators.

“It is indeed a question of survival. We must continue to innovate and we don’t have natural resources. This means that our number one commodity is the brain. Israelis have also understood that success is not served on a silver platter: you will only win if you are better”, said Moshe Hogeg, Managing Partner and Chairman of Singulariteam, the famous Israeli Venture Capital firm (which according to IVC Research Center has made the most investments into Israeli startups in 2015).

This is another stunning illustration of the development of a mechanism for self-preservation which is a fundamental aspect of military training but also deeply ingrained in the mind-set in the corporate world, thus driving constant innovation.

Get exposure to the theme

For investors seeking to get a broad exposure to Israeli tech companies, ETFs are available on U.S.-based exchanges. The BlueStar TA-BIGITech Israel Technology ETF (NASDAQ:ITEQ) tracks an index composed of more than 60 Israeli technology companies listed on global stock exchanges in Tel Aviv, New York, London and elsewhere. It is made up of stocks of Israeli companies in cyber security, big data hardware and analytics, autonomous driver assistance and safety, clean energy, biotechnology and medical devices. Top 5 holdings at the time of writing are Mobileye (NYSE:MBLY), Amdocs (NYSE:DOX), Check Point Software Technologies (NYSE:CHKP), Elbit Systems (NYSE:ESLT) and Opko Health (NYSE:OPKO).

The iShares MSCI Israel Capped ETF (NYSEARCA:EIS) tracks the investment results of a broad-based index composed of Israeli equities and is heavily tilted towards Information Technology and Health Care names with weights in the index of 28% and 20% respectively.

The VanEck Vectors Israel ETF (NYSEARCA:ISRA) seeks to replicate the performance of the BlueStar Israel Global Index and is also heavily invested in Healthcare (33%) and Information Technology (32%).

The Australian rich ecosystem also includes exciting Israeli tech companies. In the clean tech space for instance Emefcy Group (ASX:EMC) is pioneering the development and commercialization of energy-efficient and cost-efficient wastewater treatment solutions (the SABRE technology enables 90% savings in energy compared to conventional technologies).

Sky and Space Global (ASX:SAS) plans to deploy a fully autonomous network of Nano-Satellites constellations in orbit, thus creating a global communication system for voice, data and instant messaging as described by Meir Moalem, former fighter jet pilot and CEO of Sky and Space Global. The company has secured this year a binding launch services agreement to purchase four dedicated missions on the LauncherOne system from Virgin Galactic.