Israel is one of the major startup nations of the world. It has the highest number of startups per-capita in the world. In the past 10 years, more than 2000 startups have been established around the world. In Israel the total startups founded in the past decade has been more than 6000. Much of the investment to found these companies came from outside of Israel.
Many ask why the Israeli startup climate is so attractive for foreign investors. We spoke with David Kezerashvili, owner of the venture capital firm Infinity VC, to get a deeper understanding of the investment climate. First of all, Israel is a nation of can-do courage, and this attitude has inspired many foreigners to invest in Israeli startups.
Israel also has a number of other assets that are very appealing to investors. For example, Israel has a large pool of highly skilled multilingual workers. Additionally, Israel has an incredibly strong research and development sector. The World bank rates Israel’s R&D investment to GDP ratio as the highest in the world at 4.95%. Kezerashvili also notes that Israel has a history of democratic political stability as well as strong private markets.
Israeli startups also benefit from direct support from the central government. As early as the 1990’s the Israeli government had already established technology incubator programs. These incubators offered early stage funding for startups and projects. In some cases the initial investment totaled up to 85% of the company value for up to two years. This system minimizes risks for investors. More than 1000 projects have graduated from these incubator programs, with over 45% having attracted additional external investment. Much of this additional funding has come from abroad.
Kezerashvili also points out that Israel’s rules for foreign investors are very simple when compared with other countries.
Rules for foreign investments
Israel’s rules for foreign investment are very simple. These rules allow investors from abroad to invest in startups and established companies quite easily.
• Israel, unlike many other countries, has few restrictions on what fields foreign investors may fund projects. The exceptions are mostly related to defense and telecommunications which are considered vital for national security.
• Israel does not have different rules for foreigners concerning mergers, acquisitions or takeovers.
• Foreign investors are not obligated to receive any authorization prior to investing. There are notable exceptions for more highly regulated markets such as banking and insurance.
Israel's tech sector keeps producing unicorns
Foreign investors have seen how the Israeli startup climate is growing as the numbers speak for themselves. More than a dozen privately held Israeli startups have reached a valuation of $1 billion or more in 2021. In total, Israel has 61 privately held companies that have a value of at least $1 billion or more. That number continues to grow month by month.
Many of these unicorns are in the fields of cybersecurity, cloud data, fintech, e-commerce, artificial intelligence, and analytics. According to Kezerashvili, many of the investors from abroad are in related industries and often have past experience investing in Israeli companies. In 2018 alone Israel attracted a record of €19.6 billion in foreign investments. Not all the investments were made to fund startups, but a significant portion were.
Investors with prior experiences have seen how easy it is to invest in Israel and are now seeking additional opportunities to invest in. The investments vary from seed capital to second or even third funding rounds. Kezerashvili explains that many foreign investors are expecting these companies to quickly enter the IPO stages. This is the most important way for these foreign investors to see a significant return on their investment. Another strategy, Kezerashvili mentions, is investing in companies that are believed to eventually be sold to larger players within the market. Waze and Moovit are the two most famous examples of this strategy.
The Encouragement of Capital Investments law
The startup climate is not the only part of the Israeli economy that attracts foreigners to invest. Many multinational companies have also decided to invest in Israel over the years. The Encouragement of Capital Investments law is a large reason why. The law provides grants and tax breaks to companies that invest in Israel. The intent of this law is to create an encouraging environment for companies that wish to invest in Israel. This also has the effect of creating a pipeline of capital investment that appears to be uninterrupted even when funding new or groundbreaking industries.
Conclusion - Why The Israeli Startup Climate Attracts Foreign Investors?
As explained by David Kezerashvili, there are many reasons why the Israeli startup climate attracts foreign investors. Many investors are attracted to the culture that produces Israel's can-do courage. Kezerashvili also mentioned that the openness of Israel’s rules for foreign investment makes it simple for foreigners. Foreigners are able to invest in nearly any field with few exceptions such as defense and telecommunications. In addition to investing in startups, it is also easy for foreign companies to establish themselves in Israel thanks to the Encouragement of Capital Investments law.