Tel Aviv’s tech sector is booming. Despite the pandemic, start-ups in Israel raised record amounts of investment and produced 19 initial public offerings in 2020.

But this growth has not happened overnight. “Israel’s exports in the 80s and early 90s were pretty much all agriculture,” says Eze Vidra, a managing partner at Remagine Ventures, a venture capital (VC) fund focused on early-stage Israeli start-ups. 

Today, Israel boasts the largest number of start-ups and VC per capita. Tel Aviv is home to tech ‘unicorns’ including cyber security company Wiz and games developer Moon Active.

But these companies are not alone. ‘Silicon Wadi’ — the name given to the country’s high-tech clusters mostly found around Tel Aviv — has birthed more than 50 tech unicorns in the past few years. 

Job seeker’s market 

Unlike other ecosystems struggling with access to funding, Israel is grappling with an entirely different issue. 

In recent years, hundreds of multinationals have set up research and development (R&D) centres in Israel. This mass arrival has caused a growing shortage — and surging costs — of labour.

“For so long, Tel Aviv was suffering from a shortage of funding; now it’s dealing with a shortage of local talent,” adds Mr Vidra. 

According to a 2020 report by Startup Nation Central, the number of open positions rose to 18,500 in mid-2019 — up by 8% on the previous year. The report also noted that rising demand was outpacing the inflow of new recruits. 

Doron Myersdorf, chief executive of StoreDot, a lithium-ion battery company based in Herzliya, a city in the northern part of the Tel Aviv District, echoes this. “We continuously seek talent outside of Israel as there is limited availability of top researchers — especially in chemistry, electrochemistry, materials and the scale-up of battery manufacturing,” he notes. 

Israel announced a unique visa programme that made it easier for foreign nationals to work there in 2015. However, despite the country’s best efforts to lure in labour from overseas, attracting international talent is not easy. 

“If the candidate has some affiliation to Israel it helps with the process. However, Israel is not the main relocation target for top talent due to the geopolitical climate and language barrier,” adds Mr Myersdorf.

Be in Tel Aviv (Beta), a tech talent relocation programme founded by several Israeli tech companies, is trying to plug the gap by offering generous relocation packages to prospective employees. As part of its offering, Beta pledges to provide up to $20,000 as a relocation bonus, an annual round trip flight home, and housing for the first six weeks. 

Tech giants — which have contributed to the shortage of local talent — are also getting creative. US chipmaker Intel has leveraged the power of the internet of things to keep existing employees happy and attract new hires. Its development centre houses a smart gym and is fitted with 14,000 sensors to monitor light, movement and air quality. 

Government and military intervention 

Although the entire global tech industry is tied to military innovation, the links are slightly more pronounced in Israel.

“In the 2000 tech boom, we were all focused on telecom equipment because the military was so focused on developing infrastructure. Fast-forward to today and we are all focused on data and artificial intelligence, since that has become essential for Israel’s security,” says Mr Barak Rabinowitz, a managing partner at F2, another early-stage VC fund.  

The government has played a pivotal role in the maturation of the ecosystem. VC has benefited greatly from government initiatives offering tax cuts to tech companies, and reduced bureaucracy for mergers and acquisitions.

The Yozma programme, now known as the Israel Innovation Authority, has boosted VC activity in the country and supported thousands of innovation projects.

Additionally, PitchBook’s ‘Israel Private Capital Breakdown 2020’ report notes the country consistently invests a significant percentage of gross domestic product and R&D every year.

The funding landscape

Funding is on the rise, too. VC money hovered around the $1bn mark from 2010 until 2015, hitting $2bn in 2016, and peaking at $4.1bn in 2019. 

Private equity volume rose to $6bn in 2016 and remained well below that in subsequent years. 

Activity remained resilient in the first half of 2020, posting its best H1 deal and volume figures in over a decade — 24 transactions worth a collective $2.9bn — representing year-on-year increases of 48.3% and 16.2% respectively.  

The steady supply of funding means Tel Aviv’s entrepreneurs are able to gain more of an equal footing and, internally, is a massive confidence boost for the sector.

“The founder’s mindset has evolved. They are no longer aiming for a quick exit, [instead they are] aiming to build not just billion-dollar-companies, but $10bn companies and beyond,” adds Mr Rabinowitz.

However, Mr Vidra pointed out that much of the growth is happening at the late-stage rounds. “Seed funding has been in decline. Anecdotally, serial entrepreneurs can raise more easily, and for first time founders, it depends on their prior experience and what vertical they are in.”

Mr Myersdorf says some investors are also changing their targets: “I see much more strategic investors and CVC [corporate venture capital] seeking innovative technologies.”

While there is an understanding that innovation is coming out of Israel, the ecosystem needs to foster strategic partnerships to commercialise and scale-up the technology in the global arena, adds Mr Myersdorf.

Key verticals 

Unsurprisingly, and given the ecosystem’s ties with the defence industry, cyber security remains the most popular vertical, followed closely by fintech, mobility and digital health. Mr Vidra says the ecosystem is home to more than 430 cyber start-ups, accounting for $2bn in investment in 2020 alone. 

“Another trend in Israeli start-ups that is less documented is the rise of successful consumer tech and gaming,” he notes. Indeed, Google’s 2013 acquisition of Waze for a reported $1.1bn helped cement faith and confidence in the potential of start-ups in this space.

Ravit Warsha Dor, a partner at Kamet Ventures, and the former head of innovation at the Israeli Ministry of Health, agrees that Tel Aviv has “a vibrant ecosystem that is a fertile breeding ground for digital health start-ups”. 

“In recent years we have seen an increase in collaboration between healthcare institutions, providers and professionals with the tech sector. They are actively looking for new technologies to help with their daily challenges. 

“In parallel, experienced entrepreneurs and leaders from the strong Israeli cyber and fintech industries are looking for more meaningful ways to ‘give back’ to their communities, and sometimes even to solve or improve their personal and/or families’ health conditions, which has encouraged a move to the healthtech space,” adds Ms Warsha Dor.

The future of Tel Aviv’s ecosystem is promising. Mr Vidra believes business-to-consumer start-ups will continue to prosper. “Consumers have changed the way they spend their time and money, and Israeli entrepreneurs are becoming aware of the big market opportunities in food, education and personal finance,” he adds. 

To fulfil its true potential, Tel Aviv needs to become a more attractive destination for international talent, find ways of nurturing its own, and strengthen ties with the global market to commercialise innovation. If it does this well, it will certainly give its counterparts a run for their money.

Yessi Bello-Perez is the co-host of the Rising Ecosystems podcast on fdiintelligence.com

This article first appeared in the April/May print edition of fDi Intelligence.