May 2014 Issue
Israel is quickly developing a reputation for excellence in innovation and technological development. Over the last 12 months or so, internet and technology giants such as Apple, Facebook, Google and Samsung have taken note of the country’s status as an up-and-coming hub for tech startups, completing deals for Israeli companies to complement their existing offerings, particularly in Big Data and analytics. Due to the emphasis on these areas, Israel has developed into a heavyweight player in innovation over a relatively short timeframe.
Given the size and reputation of other, more renowned global technology hubs – areas such as Silicon Valley, London and Berlin – Israel draws its workforce from a comparatively small catchment area. Yet despite this hindrance, the country has become a hotbed for tech startups; it is currently the birthplace of around 400 a year, earning it the nickname of the Silicon Valley of the Middle East.
However, it is not only acquiring companies that have taken note of the strength of the Israeli tech sector: a number of venture capital groups have also begun to show an interest in the region. Based on the popularity of its nascent tech sector, Israel now attracts more venture capital investment per person than any country in the world.
One of the main catalysts for this trend is the amount of time and money that Israeli firms and the government have invested in research and development (R&D) techniques. It can be argued that this focus on R&D was born out of military necessity – Israel’s very existence in the troubled Middle East region has meant fighting on a number of fronts since its founding in 1948. Israel’s ongoing geopolitical and military situation has led to more money spent on R&D as a percentage of its GDP than any other nation among 39 countries surveyed between 2001 and 2009 by the Organisation for Economic Cooperation and Development (OECD).
“Israel has developed into a heavyweight player in innovation
over a relatively short timeframe.”
The R&D techniques developed by the Israeli government have not just been restricted to the military sector, however. There have been numerous civilian applications as well. In many respects the R&D arm of the Israeli military has directly fed into the country’s developing technology sector. A large number of entrepreneurs and inventors in the Israeli tech sector have military backgrounds, as military service is compulsory. Many young people apply to join the computer training academy of the Israel Defence Force (IDF), known as ‘Mamram’, and once their military service has ended a large portion of veterans emerge from the popular Unit 8200, which manages army signals intelligence and provides analysis of electronic data.
As a result of this work, many Israeli veterans emerging from the unit create tech startups, giving them a considerable advantage over their Western and Asian counterparts. Extensive knowledge around subjects such as cyber-security, data storage, mobile communications, Big Data and analytics have become key areas for the Israeli tech industry, to the extent that IBM, Google, Microsoft, EMC, Intel, General Electric, eBay, Cisco and a number of other technology heavyweights have all invested in establishing major research facilities in the country, as well as in startups themselves.
Despite the success of Israel as a tech startup hotbed, a large number of companies are beginning to migrate away from the country once they have become established. Traditionally, technology hubs in the US can offer more opportunities and funding to established startups than is currently available in Israel. In 2013 high tech Israeli startups fled the country to sell shares abroad at the fastest pace in over six years.
Due to this flight, it has been recommended to the Israeli Securities authorities that tech firms be offered tax breaks and less bureaucracy in order to keep hold of them. Under the recommendations, those companies valued at more than $56m will be offered incentives as encouragement to raise money on the Tel Aviv stock exchange, rather than elsewhere. The recommendations call for tax benefits for investors and startup founders, exemption from Israeli ‘Sarbanes-Oxley’ requirements, the adoption of financial reporting in English, and the use of US GAAP accounting standards. The government committee which provided the report to the securities authorities also recommended that the Israeli bourse establish two new indexes and find a company to provide investment analysis. It is hoped that these recommendations will be passed into law in the coming months.
Tel Aviv, which hosts one of Israel’s biggest technology clusters, is also in negotiation with the Israeli Economy Ministry to review the country’s visa policy. The hope is that the country will introduce a startup visa regime which would make it easier for skilled foreigners to come and work in Israel. Not only would this diversify the workforce in the Israeli tech sector, it would also help the sector develop from a mere startup hub into true centre for technological innovation. Should the Israeli tech landscape be allowed to mature it could provide a multitude of opportunities for investors and entrepreneurs for years to come.
© Financier Worldwide
BY
Richard Summerfield