What Drives Israel’s Startup Success?

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In October the business press reported that Israeli cybertech startup Sygnia was acquired by Singapore’s billion-dollar Temasek Holdings for an estimated $250 million. The return for the owners is over 50 times the initial investment, according to Israeli newspaper Haaretz. And last year, the Israeli company Mobileye, a pioneer in autonomous car technology, was purchased by Intel for a whopping $15.3 billion.

Tech startups may not be the first thing that comes to mind when many people think of Israel — the country’s political strife is what makes headlines. But Israel’s achievements in innovation and entrepreneurship are remarkable by any measure for a tiny, embattled nation of 8.8 million people that has only existed for 70 years.

At the recent Wharton Israel Conference, speakers and participants highlighted Israel’s contributions to technology, science, medicine and agriculture, as well as its entrepreneurial spirit which they said helps transform discoveries into real-world solutions.

The conference was kicked off with remarks from Ambassador Dani Dayan, consul general of Israel in New York and an Israeli-Argentine entrepreneur. Speaking via Skype, Dayan recalled how, when he was CEO of the Israeli startup Elad Systems in the 1990s, he noticed a news item about the company next door to his, Mirabilis. It had sold its invention ICQ, the world’s first instant messaging software, to AOL for $407 million.

“I remember that I couldn’t believe that an American corporation paid $400 million dollars for an Israeli company…. But they did because ICQ was really in those days a revolution in communicating: instant communications between people far apart over the globe,” said Dayan.

Today, an acquisition of that size for an Israeli company is more commonplace, said Dayan. He noted that a new “glass ceiling” was shattered last year with Intel’s aforementioned acquisition of Mobileye. “Believe me, Mobileye will revolutionize the world,” Dayan added.

Several participants cited Waze as an outstanding example of Israeli innovation. This GPS navigation software app, founded by an Israeli company in the mid-2000s and originally called FreeMap Israel, connects drivers with one another so they can contribute information — either passively or actively — about traffic, road construction and other hazards. Google bought Waze for $966 million in 2013 to add social data to its mapping business, and it is now used worldwide.

“I think that Israeli men and women really dream of being the next Bill Gates or to found the next Google or Microsoft.” –Ambassador Dani Dayan

Speaker Avner Mendelson, the president and CEO of Bank Leumi USA, introduced himself by stating that he isn’t personally an innovator: He joked that as a banker and former management consultant, he represented “the antithesis of innovation.” However, his bank’s clients include many tech firms: 30% of Israeli technology companies bank with Bank Leumi in New York. Mendelson also noted that Michael Dell, founder of Dell Technologies, owns a percentage of the bank. “That’s as close as I will get to running a unicorn,” he quipped.

How to Grow a Tree in the Desert

Mendelson then spoke about a much older, landmark Israeli innovation that he personally admires: drip irrigation. Currently used in several countries including Israel, the U.S., Australia and Egypt, the technology involves delivering precise amounts of water and nutrients directly to a plant’s root zone, drastically reducing water usage. Drip irrigation can reduce a farm’s water consumption by as much as 60% and increase crop yield by 90% compared with conventional irrigation methods, according to MIT News.

Mendelson told the story of how the Polish-Israeli engineer and inventor Simcha Blass had discovered, in the 1930s, a large, lone tree blooming in a desert settlement with no apparent source of water. Digging near the tree he discovered a broken water pipe that had been providing a slow, steady drip onto the tree’s roots. That gave Blass the idea for a completely new kind of irrigation system. In 1965, he became a founder of the Netafim Irrigation Company.

Netafim is still a household name in Israel, and “today in the world” for irrigation, said Mendelson. He also referenced last year’s $1.5 billion deal in which Netafim sold 80% of the company to Mexican industrial group Mexichem, which he cited as another successful Israeli exit. Netafim’s CEO said he expects the firm to profit from Mexichem’s presence in Latin America, while the Mexican company will be able to expand into markets like India where Netafim has a foothold, according to Reuters.

Mendelson commented that drip irrigation, which he called “really world-changing,” was an outstanding example of innovation “before the iPhone, before our modern ‘startup nation,’” referring to the bestselling 2011 book Startup Nation: The Story of Israel’s Economic Miracle.

Wharton professor of operations, information and decisions Morris Cohen agreed that drip irrigation is “an amazing, simple but brilliant technology.” He has personally visited Netafim’s facilities to observe their operations, and recalled that a manager there had predicted that one day the company would win a Nobel Prize for combating the world’s increasingly dire food and water shortages. “Fifty percent of all the water in the world is wasted, and drip irrigation solves that problem,” said Cohen.

Cohen will visit Netafim again, plus 10 other notable Israeli companies, this January accompanied by a group of Wharton students. The students will investigate how startups in Israel grow to become world-class competitive global companies, including how they manage their supply chains, processes and technologies.

“Fifty percent of all the water in the world is wasted, and drip irrigation solves that problem.” –Morris Cohen

One of Cohen’s stops will be ISCAR, which he called “one of the leading companies in the world” but one that is little known to the public. He explained that it makes components that go into automated manufacturing tools, and was a target for investment by Warren Buffett. (Berkshire Hathaway acquired ISCAR in 2006.) “If you go to their campus in Israel … you will not see more sophisticated automation for production anywhere in the world,” said Cohen.

SodaStream, a carbonated drink technology company, is another Israeli firm that Cohen feels his students will learn from by visiting. One reason is the ethnic diversity of the workforce: SodaStream employs Palestinians, Bedouins and Israelis. “One of the things we’ll do [on our tour] is have a panel of those workers, describing what it’s like to work together in one company,” Cohen said.

Building Israeli-Palestinian Partnerships

Attendee Yonatan Sela drew a parallel between SodaStream and his startup company SoCo — short for “Seeds of Collaboration” — which he said is an Israeli-Palestinian partnership. SoCo makes tahini — the sesame seed paste that is a staple of many Middle Eastern diets — and aims to popularize the food with American consumers. He noted that the company’s tahini was “perfected for five generations … by a Palestinian family.”

The “collaboration” element of SoCo’s name refers to the fact that the company supports MEET (Middle East Entrepreneurs of Tomorrow), a nonprofit that connects young Israeli and Palestinian students through business endeavors. Every 2,000 SoCo jars sold helps fund a startup at MEET, according to the company’s website.

“The more we can seed partnerships like this one, I think the more normalized they will become in a place where the level of cooperation is only going down,” Sela said. “The whole concept is to be nonpolitical and to just show that you can have people … collaborating for their own economic good.”

Some speakers and participants focused on Israel’s intellectual achievements. Adda Grimberg, a pediatric endocrinologist at Children’s Hospital of Philadelphia, said her favorite Israeli innovator is Zvi Laron, a Romanian-Israeli Holocaust survivor whom she described as “an icon” in the field of growth disorders, endocrinology and diabetes. The physician was the identifier of what is now termed Laron syndrome, a condition in which the patient has growth failure due to mutations in the growth hormone receptor. Laron uncovered the mechanism of the disease.

In a personal conversation with Laron about the course of his life, Grimberg learned that he had actually done his endocrine training in the U.S., at Massachusetts General Hospital, and had received many job offers but chose to return to Israel. He told Grimberg that he “wanted to show the world that good things can come from a little country.”

During Ambassador Dayan’s talk, he shared his views on why Israel has been so successful. He stated that Israeli society is pervaded by “an ingenuity, a sense of innovation,” but that alone is not sufficient. “Innovation by itself cannot explain the economic miracle, the revolution that Israel underwent,” he said. He contrasted Israel with the former Soviet Union, which he said also possessed great minds in mathematics, physics and many other areas, yet that country did not survive.

Israel reflects a powerful combination of innovation and entrepreneurship, in Dayan’s view. “I think that Israeli men and women really dream of being the next Bill Gates or to found the next Google or Microsoft.” As a result, a large number of entrepreneurial initiatives are continually underway. “Even when a small percentage of these initiatives succeed — and some of them succeed in a big way — that explains the economic miracle.”

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