Our Thesis on Israeli Innovation
Melio. Papaya. Williot. There are nine million people living in Israel. Yet there are more billion dollar startups founded in Israel than in all European countries combined.1
The “Startup Nation”. We have heard the adage before. It’s not a new concept. But there has been a fundamental change in this generation of the Startup Nation that is unlike anything before.
Systematic Talent Production
Vintage, one of the largest fund of funds in Israel, conducted a survey of 65 successful Israeli entrepreneurs in March and found that 88% experienced a defining trauma as a child, which helped foster emotional independence and self-reliance.2
531 startups have become unicorns in the United States between 1997 and 2019. 52 of the founders of these companies are from Israel.3 Israel’s unique society and culture has made its innovation ecosystem one of the most successful in the world. Due to mandatory military service, the adolescent population receives advanced technical training and acquires a high sense of accountability, leadership, teamwork, strategic thinking, and work ethic (see: The history and impact of Unit 8200 on Israeli hi-tech).
Military service and several immigration waves of academics from all over the world have bequeathed Israel with one of the most highly educated and entrepreneurial workforces in the world, producing technologies, innovations, and products adopted around the globe and across sectors.
Startup Nation 2.0
Israel has always been at the forefront of technological innovation. But Israeli startups have not. The typical Israeli startup success story was a modest acquisition by an American big tech company. The best ones fended off acquisitions, but moved to Silicon Valley.4
In a generational shift, Israeli startups have grown from stereotypical Microsoft and Oracle R&D tuck-in technology acquisitions to publicly traded companies in their own right. And this is not just in the traditional cybersecurity and biotech verticals, but cloud, eCommerce, HR, fintech, and more. The NASDAQ now hosts Global-e, JFrog, Monday.com, Pagaya, and Wix, to name a few. These five companies represent a collective $28 billion in enterprise value as of August.
These companies have birthed a new crop of Israeli entrepreneurs, who are no longer just engineers and product experts, but high-growth startup employees with a business-building playbook of finance, operations, and sales and marketing that are dedicated to building larger, standalone companies based in Israel. Today, over 50% of Israeli unicorn CEOs are based in Israel, a departure from the preconception that in order to succeed the company has to be based in the United States.5 Counting just the companies headquartered locally, Israel now has the most unicorns per capita in the world.6 On an absolute number basis relative to global unicorns, Israel's output is a complete statistical anomaly.
A wide spectrum of verticals, M&A-defiant, and domestically headquartered. This is the “Startup Nation 2.0”. And the cherry on top: unlike other emerging markets, Israeli startups predominantly service American-based customers. In the American venture capitalist’s eyes, Israel has become the 51st state.
Funding for Chutzpah
In 2018, Israeli companies raised a record setting $6 billion in funding.7 Just three years later, Israeli startups raised $25 billion in funding in 2021.8 Between January and June this year, 20 Israeli unicorns were minted.9 In July, Israeli cloud security startup Wiz broke into the headlines as the fastest company ever to reach $100 million in annual recurring revenue, scaling from zero in February 2021.10 In a 48-hour period this August, four Israeli companies announced fundraising of over $700 million collectively.11
Today there are over 90 private tech companies founded by Israelis valued at over $1 billion, with a total enterprise value of $250 billion (against $41 billion in funding).12, 13 The champions of the Israeli venture boom over the last decade have been the domestic funds: both the veterans Entrée, Genesis, JVP, Pitango, Viola, Vertex and the new guard Aleph, Cyberstarts, F2, Ground Up, Hetz, Team8, and TLV. While Bessemer, which backed breakouts like DriveNets and Yotpo, is the original U.S. dominant in the region, this new gold rush has brought deeper institutional interest from U.S. growth firms like Insight Partners and General Atlantic, who have shown their conviction through billions of dollars in collective funding last year into high-growth startups Bob, Unit, any many more.14, 15, 16 At the early stage, Index, Lightspeed and Vine have all hired Israel-focused investors and opened offices in Tel Aviv.17, 18, 19
Almost every week this year the media reports new woes in the global venture market. But we have only heard a handful of struggles from Israel.20, 21 Of course the Israeli venture market is impacted by macro venture activity, but there seems to be a difference in outcome currently. Domestic investors explain the disconnect in two ways: (1) sufficient cash reserves not requiring access to the capital markets right now and (2) “chutzpah”, or the tendency to persevere due to extreme self-confidence, whether rationally or irrationally.22
“Israelis just improvise and break the rules, and breaking the rules means you don’t follow protocol. If the standards and norms are blocking your growth you invent new ones. “Chutzpah”, I think, really characterizes Israeli entrepreneurs. They never take ‘no’ for an answer. If something seems impossible, they just find a loophole and solve it that way.” - Gilad Japhet.23
Conclusion
While the competition is abundant, the founders, fundamentals, and exit opportunities in Israel are completely unprecedented and we believe there is an exceptional opportunity to invest in the next generation of Sarona founders building billion dollar companies at the early stage.