Israel Is Pumping Out Billion-Dollar Software Companies: How It Transformed From Startup Nation Into Scale-Up Nation

I recently took my first business trip since the pandemic began. Like anyone, I don’t take traveling lightly these days, so I wanted to make sure getting on a plane would make sense from a business, personal, and public health standpoint. The only place that seemed worth visiting was Israel, where a seismic shift in company creation and growth is taking place. Israel has long been known as “Startup Nation” due to founding the most tech companies per capita. Israel’s entrepreneurially-minded and highly-technical workforce, the vast majority of whom learn software, leadership, and communications skills in the military, are natural entrepreneurs. But after witnessing the palpable excitement on the streets of Tel Aviv, and seeing firsthand a frenzied investment pace far eclipsing that of even the dot-com boom, I can honestly say Israel has transformed into “Scale-Up Nation.”

Today, Israeli entrepreneurs are starting their second or third startups. Engineers, operators, and executives who spent the last decade working at global tech companies are leaving the corporate fold to become founders themselves. Venture capitalists from around the world are opening Tel Aviv offices or raising funds dedicated to Israel. The first half of 2021 registered a record capital amount raised by Israeli high-tech companies – $11.9 billion which exceeded the total capital raised in 2020 of $10.3 billion.  Thirty eight deals of over $100 million each accounted for 50% of the total capital raised during this period and only 9.5% of the total number of deals according to a report by IVC Research Center and Meitar Law Offices. 

And Israeli tech companies are becoming massive global companies in record numbers; today there are 71 Israeli-founded unicorns, including private companies Gong, Orca Security, Rapyd and Snyk, while other Israel-born tech companies have gone public at multibillion-dollar valuations, including Hippo, JFrog, Lemonade and Monday.com. Israel is no longer just the birthplace of tech companies that open US headquarters and seek to quickly be acquired, but has become a crucible where mutlibillion-dollar global companies are created and grown. 

Of course, Israel is not alone in creating hugely successful software companies. As I’ve highlighted in the past, global software powerhouses will emerge in many countries. The world is becoming flatter, smart founders can be found everywhere, and software can be created and used by anyone, no matter their location. But Israel stands apart in the sheer number of technology companies created per capita; it’s the worldwide leader in that regard. And most of those startups are enterprise software companies, built by founders who learned coding skills in the military in disciplines such as security, networking, fintech, and communications. As an investor, I’ve never been more excited to invest in Israel than I am today and here are a few reasons why.

Ever-increasing talent pool

Over the last 20 years, Israel has been a center of entrepreneurship, so the country now has a huge cohort of operators, engineers, and executives who have worked at high-growth startups and helped shepherd them from seed to exit. Not only does this growing talent pool help startups hire the experienced employees they need to grow into global companies, it has recently created a whole new crop of founders. First-time founders in Israel are coming from companies such as ironSource, Monte Carlo, and AppsFlyer. 

A flood of capital

It’s no secret Israel is a great place to invest in startups, and has been for two decades. Many US VCs have offices there, and many others invest in Israeli startups from afar. It’s difficult to pinpoint exactly how many VCs invest in Israel, but some estimates put the number at about 200 homegrown firms, 60 corporate VC firms, and 70 foreign firms. Since 2015, an average of 23 VC firms have set up shop in Israel each year. Of course, there are also dozens of angels, accelerators, and private investors. When I was recently in Israel, I met with many local VCs who told me they’ve never seen so much foreign venture capital chasing Israeli startups. Even more than in the US, investors said competition for deals is fierce and valuations are rising quickly. We also met with several US VCs scouting for deals who told us the same thing. All this capital is not just going to Seed and Series A deals, but also toward later-stage term sheets, allowing already-established Israeli startups to grow quickly and sustainably. With more money in the bank, later-stage startups can hire great talent, expand globally, and chase customers worldwide.

At the crossroads of global tech trends

As I’ve discussed at length, it doesn’t matter today where you start a software company, especially a developer-focused one. Today, every company is transforming into a software company, thus the developers responsible for writing the billions of lines of code to digitize their companies, are in the driver’s seat. They dictate which tools they want to use to do their jobs. And developers want to use community-driven, open source, API-driven, and freemium platforms. They want to collaborate with their peers worldwide to co-create new tools and platforms that make their lives easier. They don’t care whether a tool they use was built in Monte Carlo, Mexico City or Menlo Park. So software companies can be built anywhere, and Israel is arguably a fantastic choice. As we’ve discussed, Israel has a combination of tech talent, entrepreneurial zeal, and access to capital that is common in tech hubs like Silicon Valley, but it also has a unique geographic position. Being a very young and small country, Israel has always been outward-looking; Israeli founders must think about going global from day one. And now that the pandemic has changed the game in how enterprise companies sell their software—gone are the huge developer conferences, urban briefing centers for high-value prospects, and other in-person schmoozing—Israeli companies are well placed to lead in the bottoms-up software sales model that was already gaining steam before the pandemic. 

Israel has led the world in a science-driven pandemic response, vaccinating more of its population faster than any other country. Though every country is facing a continued threat from the pandemic, Israel feels today like a beacon of innovation, hope, and excitement. My firm is betting big on Israeli software companies and we’re certainly not alone.

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