Israel: The cradle of Tech entrepreneurship

Israel is a nation and country in the Middle East with a very different culture and history. It is striking how small it is, geographically speaking, in terms of its population, which does not exceed nine million inhabitants, and its area, which is similar to that of New Jersey in the US. The above contrasts with some statistical data and concrete facts about what this country has achieved only regarding innovation and the development of new ventures.

Warren Buffett, the most prominent fundamental investor in history, has said that Israel has been shown to have a disproportionate amount of brains and energy.

Israel pioneered creating a fund with public resources aimed at business development when it established the YOZMA group in 1993, which used public resources to leverage financing in the country from foreign institutions and corporations. The program included collateral, creating links between Israeli companies with Angel investors, and listing Israeli companies on foreign equity markets. YOZMA invested in start-ups and created several public-private funds. In 2000, it managed to get private financing to surpass the public stream, which meant the take-off without turning back of Venture Capital in the country. YOZMA's success is a model to be studied and followed in other countries that are interested in achieving these results.

With all these successes, history does not completely favor Israel. Despite being an unparalleled generator of technology-based companies and having attracted large corporations to develop R&D centers in the country, in addition to investing in new companies in this ecosystem, it seems that part of the success has attracted the negative part of this case.

The issue is that Israel has not been able to develop practically any of the large number of technological ventures it manages to produce at scale and for the benefit of its own country. Only two companies have achieved this category: Teva Pharmaceuticals and Check Point Software Technologies. This lack of industrial maturity has become both a mystery and a challenge. However, Israel is the third most represented country in the NASDAQ index in terms of the number of companies listed.

This modern private sector has brought large corporations into the country that tend to absorb a full of small and advanced technology-based companies and the country's talented personnel, which may ultimately generate a long-term economic problem for the national economy. The government is exporting its know-how through companies and people while punishing the development of large companies in the country. This affects the collection of taxes necessary to face challenges in education, health, infrastructure, and security in the country, only benefiting a few.

A good part of the solution to this problem can be derived from how the sector's financing is done. Today, much of this financing is oriented to the first phases of the development of start-ups and not to their growth and maturation until they are established as global corporations. The need for short-term returns from Venture Capital firms reinforces this. Israel needs multibillion-dollar funds to invest in a company that achieves commercial success of a product on a global scale, into a large corporation with thousands of employees.

Again, as it happened with YOZMA, mobilizing public resources, not only in cash but also in regulations, could initiate this change. Pension funds could have this capacity if they can modernize their risk assessment and direct only a small fraction of their portfolio to this purpose. This would already be a breakthrough. Modify a little the action of the renowned Israel Innovation Authority for the Incubation Program, which manages to mobilize significant resources for financing the early stages of the companies but leaves unsatisfactory results in long-term developments.

Specifically, four possible solutions have been proposed so that Israel can overcome all these challenges:

1-Promote an environment in which creative and innovative entrepreneurs do not find incentives to work with a multinational company or sell their ideas to it. For that, public-private partnerships would be necessary to offer entrepreneurs financial stability so they take risks and persist in their efforts. Meanwhile, promote an environment where these companies collaborate or integrate.

2-Encourage multinational corporations to invest money and knowledge in external R&D centers to benefit the local ecosystem and all its members, in which they support the growth and maturation of new companies.

3-Create opportunities that attract talents and experts based on a sound and coherent strategy.

4-Strengthen the Israeli stock market so it increases its exposure to innovation. Mechanisms to achieve this have already been seen in other countries. Large institutional investors must play a more prominent role, and for that, some changes in the regulation would be necessary.

(The above is an appreciation made from the publication of the 2020 Innovation Report of the World Intellectual Property Organization "Israel's challenging transformation from start-up nation to scale-up nation" by Yaron Daniely)

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