Why Israel Is Letting Its Tech Startups Go
The Silicon Wadi, as Israel's tech sector is known, has a penchant for creating innovative new companies. But rather than grow to maturity, they're often sold off early to larger, foreign firms.
TEL AVIV — "Who will be the next Waze?" Israeli newspapers asked in 2013 as soon as the startup, founded just five years earlier in a Tel Aviv suburb, was sold to Google for $1 billion. "Who will be the next Mobileye?" they asked four years later, when the vehicular anti-collision software, developed in Jerusalem starting in 1999, was sold for $15 billion to Intel, another U.S. giant.
Announced some years apart, these two "mega-deals' were relayed by the media and public officials in this nation of 8 million people as cause for national celebration, and as further proof that in Israel, there's nothing taboo about selling startups to foreign companies.
Quite the contrary. In the Silicon Wadi, as the country's high-tech sector is known, startups practically beg from the outset to be absorbed by industry leaders. Adept in the so-called "culture of the exit," Israeli tech startups are simply designed this way. As a result, in 2017, for example, approximately $6 billion worth of startups were sold — not counting Mobileye, which is listed on the Nasdaq. During that same period, Israeli firms saw their value increase by roughly $5 billion, more than twice as much as their French counterparts.
The goal isn't to create an enterprise that will last, but rather something that will go up in value very quickly.
Why the discrepancy? For Jérémie Kletzkine, the Franco-Israeli vice-president of business development at Start-Up Nation Central, a business that helps large international groups find local tech solutions, the explanation is simple. "In Israel, a company worthy of the startup name tries first and foremost to increase its value. That, and not job creation, is its chief goal," he says.*
A second reason Israeli companies are so often and easily absorbed by foreign companies is that even before the purchase, they "don't belong to Israel," says Kletzkine, 41, who began several of his own companies, one of which — PrimeSense — was sold to Apple. They are financed by Israeli venture capitalists, he explains. But the money itself mostly comes from abroad.
The kind of business model that high-tech Israeli companies follow is typical of the venture capital world. These startups were designed from the beginning to be sold. They're set up in the domestic market, but with a global niche in mind. The goal isn't to create an enterprise that will last, but rather something that will go up in value very quickly.
Another thing that sets Israeli and French tech companies apart is the emphasis in Israel on innovation and risk taking. In France, large investment groups try to minimize risk among startups. But doing so dampens innovation. Such was the case of the Aldebaran school, a French robotics specialist who sold in 2012 to the Japanese company SoftBank, much to the chagrin of French officials.
Startup conference in Tel Aviv, Israel's Silicon Vadi — Photo: Athos Capriotti/Instagram
Other factors that set Israel apart are its full-employment economy and relatively high level of R&D spending: 4.5% of GDP compared to 2.23% in France. Approximately 85% of that money, furthermore, comes from private sources. And even when ambitious projects fizzle out, they have a tendency to spawn a cluster of new startups.
Still, things are far from perfect in the Silicon Wadi. There's the brain-drain phenomenon, for one thing. And with the high-paying web giants now opening international R&D centers in Israel, local startups are losing even more talented engineers. Analysts also agree that the Israeli economy cannot rely on startups alone. Other sectors also need to thrive to keep the job market healthy.
Even so, Israel's dynamic tech industry is worthy of praise, especially for the fluid links that exist between the research and business sectors, and the role the Israeli army's technological units play as catalysts for innovation. And while some might fault Israeli entrepreneurs for being too eager to sell their startups, those voices are few and far between, especially in wake of the recent move by Mobileye, which waited 18 years to sell, and did so just as the driverless car industry is taking off. A sign, perhaps, that the sector is maturing.
*Correction: In an earlier version, due to a translation error, Jérémie Kletzkine was misquoted about the priority of company value over job creation.