How to Attract Billions in Investments Despite War

Israel — A startup country that has been at war for over 70 years. How does it do it?

Israel is in a permanent state of military readiness and has limited natural resources: more than 50% of the country is desert.

Despite this, it has the highest concentration of startups per inhabitant: Israel has 9.2 million people and more than 7,000. of such businesses. And in 2021, the country had 33 new «unicorn» — companies with more than $1 billion in capitalization.

Analyzed how Israel managed to build a successful startup ecosystem and become a Silicon Valley competitor despite the war.

Desert, war and innovation: a portrait of the country

Israel — a state that appeared on the map in the twentieth century, although it has an ancient history. Most of the country is desert, but it finds a way to support itself with agricultural products and even exports vegetables, melons, citrus crops.

Israel’s internal political situation is not easy either. Nevertheless, it is one of the most developed countries, including in terms of technology:

  • Israel’s GDP increased 15-fold in 36 years — From $33 billion in 1986 to $501 billion by 2021.
  • Israel — leader in spending on R&D. Research and development takes up 4.95% of GDP, while most developed countries — such as the U.S., Germany, or the U.K — allocate 2.4–2.5% OF GDP.
  • Bloomberg Innovation Index ranking For 2019 Israel — in 7th place. Evaluation «innovation»‎ States is based on metrics such as spending on R&D, the concentration of high-tech companies, the level of education and the number of patents.
  • The country is home to R&D-Centers Apple, Microsoft, Intel, Google, Facebook, Cisco, Oracle.

A brief history of Israel after World War II

At the end of World War II, the UN passed a resolution to withdraw British troops. Two independent states were created on the site of the occupation in 1948 — Israel and Palestine.

peace did not come: Arab-Jewish military clashes broke out a few days later, and quickly escalated into the 1947 Arab-Israeli war–1949. Armed conflicts and terrorist attacks in the region still occur today.

Israel has been at war with all of its neighbors in its history of independence: Lebanon, Jordan, Egypt, Syria and Palestine. Diplomatic relations were established with Egypt and Jordan. Syria wants to take back territories lost to Israel in 1967 war. Iran and the Palestinian resistance movement Hamas, with support in the Gaza Strip, regularly try to destroy the country.

The threat of war and the harsh climate have hardened Israel: it is now a startup nation. Over 7,000. Registered companies, 765 private investors, about 5.8 ths. foreign, over 413 gas pedals and incubators — This is what the country’s startup ecosystem looks like in 2022.

Israel has managed to build a traditional cluster structure: concentrating research universities, corporations and startups, a pool of talent from around the world, an ecosystem of venture capital, civilian and military R&D. The same structure is characteristic of Silicon Valley.

How challenging conditions spurred innovation

The authors of a book about business development in Israel «‎Land of start-ups» note: the country’s natural conditions, political situation, compulsory military service, immigration and peculiarities of the mentality have been the main factors in the success of local companies.

Oleg Zubchenok
15 years of experience in business development, operations and sales

«How to attract business investment»

Victoria Tigipko
Founder and Managing Partner of TA Ventures

#1. Natural conditions

Israel — a pioneer in solar energy, and also here they staked on the technology of generating water from the air and drip irrigation systems.

— Water scarcity problem. Israel’s territories are not generous with moisture: in 2021, only 22.8 mm of precipitation fell — for comparison, in Ukraine this figure reached more than 12,600. mm. The country desalts seawater and reuses 70% of it. Over the last 30 years, agricultural production in the country has increased by more than 5 times, while water consumption has remained almost at the same level.

Israeli company Watergen — one of those who found a solution to the problem of water scarcity: the organization has developed technology to extract water from the air. A generator extracts moisture with special blades that filter out the warm, moist air. It is cooled inside the generator, and the moisture is converted into condensate, which passes through a filtration system. Founders claim that the cost of electricity to synthesize 4.5 liters of water is less than 10 cents.

And Simha Blass, a local hydraulic engineer, invented the drip irrigation system in order to rationalize water use in the agricultural industry in desert climates. How it works: water is applied in small portions to or near the root system.

This irrigation results in less evaporation of moisture from the surface, reduces water use and allows a 300 percent increase in crop yields–500%. To industrialize drip irrigation systems, Netafim has established a plant in Israel. Today the company has 30% of the world market in its field.

— The search for alternative energy sources. Palestinians, Iraqis, Syrians, Jordanians, Egyptians and Saudis have emigrated to Israel since independence. Fuel shortages emerged, power outages became commonplace.

The government began the search for a reliable and cheap source of energy. Other Middle Eastern nations have large oil reserves, but Israel didn’t even have hard coal and a steady source of water. But the country does get enough sunny days: for example, in Tel Aviv there are about 300 sunny days a year.

The most obvious example of solar energy in Israel — Boilers that consist of an insulated water tank and a flat solar panel. In 1955, local physicist Harry Zvi Camp designed and placed the first device of this type on the roof.

This mechanism was massively used after the energy crisis of 1973, and later the Israeli government legally obliged to install solar panels and boilers on the roofs of buildings built after 1980. Today you can see the development of Camp on 90% of homes.

— Desert Climate — no verdict. About 60% of Israel is desert. Of the remaining 40%, more than half — rocky mountain soil. Despite this, Israeli farmers grow up to 3 million roses and about 300 tons of tomatoes per hectare of greenhouse per season. It’s four times larger than an open-air.

Cultivation of plants in the country has become an art based on the use of hybrid seeds, drip irrigation and greenhouses with climate control systems. The greenhouses are equipped with sunblinds and special coverings which regulate the spectrum of light and influence plant growth. It filters and converts UV light into infrared, enhancing photosynthesis.

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#2. Mandatory military service

In Israel, military service is a must for citizens over 18. Deferment is possible for students of religious schools, and for Arabs and Bedouins — service at will.

Most of the Israelis who have managed to launch successful businesses in the IT sphere, as well as top managers of high-tech companies, are united by a common line in CV — They served in the intelligence service, most often in the elite unit 8200. This pumps up technological and soft-skills. All because intelligence programs are written within the unit, and the unit itself is like an IT corporation.

The Special Forces culture is set up like this: command gives officers a task and gives them the freedom to do it. After working on 5–20 such projects, the military can generate ideas that form the basis of future companies. The numbers confirm this: ex-members of the 8200 intelligence unit founded more than 1,000. startups. Several thousand soldiers in total in the special unit.

As a rule, special forces get people with strong leadership skills and knowledge of mathematics, computer science, physics. The selection process has 12 steps and takes 4–12 months. Tests start at 8 a.m. and end at 10 p.m., this includes tests and interviews. All assignments and questions are classified.

#3. Iron Dome

The Iron Dome protects Israeli territory from enemy missiles. Technology is equipped with ultramodern radar and software that calculates the estimated trajectory and target of the missile, shooting down the object in flight. The high speed of the system is critical: missiles reach the target in no more than 90 seconds.

The first air defense batteries were deployed in early 2011, and as early as 2014 they were defending major Israeli cities. In every block of the system — 3–4 units that fire up to 20 missiles. And they are triggered only if the system calculates that an enemy object is aimed at a residential area.

The price of one unit is $50–170 million, success in hitting targets — 90%. The air defense system helps Israel save lives and money by eliminating the need to deploy military units to the areas most at risk of attack.

Unsere Gedanken sind bei den Menschen in #Israel. Sie sind einem erbarmungslosen Terror durch die Hamas ausgesetzt. Der Raketenhagel auf Israel muss aufhören. Wir stehen fest an der Seite Israels! 🇮 #standwithisrael

— Zentralrat der Juden in Deutschland (@ZentralratJuden) May 11, 2021

#4. Immigration

Israel’s population doubled in the first 3 years after independence, and increased 9-fold in just 74 years. Today immigrants make up more than a third of the population.

The main surge of immigration was in 1990–2000s: then more than 800,000. Jews moved to Israel from the territories of the former Soviet Union. About 30% of them were doctors, and 20% — by engineers. The Israeli government continues to attract highly qualified specialists to develop the R&D and entrepreneurship.

#5. Hutzpah and the approach to mistakes

Huzzpah — is one explanation for how Israel became a country of startups. The word means bravery and courage. Israelis are convinced: persistence — is the norm, and modesty — the risk of being left behind. Also, when everyone is not afraid to broadcast their position and question accepted norms — An optimal environment for the generation of ideas.

Principle «khutzpah» Israelis are actively using it in everyday life and business. Clerks may question the minister’s actions, and soldiers — Discuss with officer. Ronnie Friedman, an engineer at Intel in Israel, has even persuaded the company to start producing chips with low power consumption, thanks to his assertiveness. At the time, this approach did not fit the organization’s strategy, but eventually revolutionized the computer industry.

In addition, from childhood Israelis are inculcated with a tolerant attitude toward mistakes. They are taught that every failure is a failure — is an experience, and a miscalculation — opportunity to test the hypothesis. Harvard University research confirms this: business people who have experienced failure are more likely to create a successful startup compared to «newcomers».