STARTUP SPECIAL .....STARTUP NATION

STARTUP NATION





How Israel with a population of just 8 million and bang in the middle of a conflict zone emerged as a global top 5 startup hub

At times, serendipity can be planned. Tel Aviv based Smadar Landau, founder of Israeli startup Feelter, knows what that means. Founded in 2013, her online retail review startup moved to Sosa in Tel Aviv last summer. Set up by pioneers of the Israeli hi-tech industry, Sosa calls itself a town square for global innovators. Going beyond accelerators and incubators, the Sosa ecosystem brings together startups, investors, and MNCs all under one roof to nurture and scale up innovation. Global delegations from countries and MNCs come calling to look up Israeli startups.

Eight months back, Feelter played host to a delegation from the UK, which led to enquires from a leading UK etailer. Now, Feelter is working on pilots that will soon go live for testing. “We were all focused on the US market. The UK just happened, thanks to Sosa,“ says Landau. She credits Sosa not just for customers, but for the funding ($4.5 million so far) and a slew of global startup awards that Feelter has bagged. It was this serendipity that lured Enel, an Italian energy giant, to the Sosa fold last August. It had landed in Israel two years back, scouting for startups doing innovative work in cybersecurity, drones, smartphones and the internet of things. “Israel has the world's highest concentration of innovative startups and smart engi neers,“ says Iran Levy, the Israel based manag ing director of Enel Innovation Lab.

Enel's lab -its only such overseas facility -collabo rates closely with Sosa to screen and shortlist Israeli startups it wants to work with. So far, it has met “hundreds“ of startups, held four boot camps for delegations from Italy, is working closely with around 20 startups, has made a few investments and is exploring many more.

Once Enel zeroes in on a startup, it sponsors a project that could take three to six months to de velop the relevant technology applications. “But commercialisation and integration of the startup technology with a large MNC like Enel takes time,“ says Levy.

The Sosa network today has 2,500 startups, 450 partners, 45 investors and has received over 150 global delegations. For example, the Australian government has launched a landing pad for market-ready startups in Tel Aviv, tapping into Sosa's innovation highway.

Sosa is now expanding its footprint. Soon it will have a seven-storey facility in Manhattan, New York. With a capacity to house 100 startups, it will also be equipped with the requisite after-hours trappings like pubs and restaurants. It will have a floor for boardrooms and meeting rooms and another with spas. “This place will be so selfsufficient that people can just fly in and not need to hop out. We want to connect local innovation with global demand and work like a lighthouse,“ says Rami Beracha, managing general partner, Pitango Venture Capital, and a cofounder of Sosa. From one facility in Israel, Sosa hopes to expand rapidly and set up six to seven in Europe, the US and Asia in the near future.

Hi-Tech Grip

The roller-coaster ride in the startup world isn't for the fainthearted. Volatile and shaky, it's a world that swings between meteoric highs and abysmal lows. Israel -the Startup Nation -has perfected the art of not just surviving but flourishing in it.

A small country of over 8 million people -mostly immigrants -with no natural resources, no local market and surrounded by enemies, Israel is a political startup where survival instinct is part of the DNA.Israel has tapped into that to build one of the most robust startup ecosystems in the world, considered second only to Silicon Valley. It has 6,000 active startups, 350 MNC R&D centres, has seen exits worth $9.2 billion and venture funding worth $4.8 billion in 2016. Perhaps more impressive is that in this volatile, fickle world, Israel's hitech industry has charted a steady upward journey.

How does Israel do it? Lessons from the tiny, closely networked country may not be directly relevant for India. Yet, in a year when India's startup world is on a rough ride, both the NDA government and the industry stakeholders would do well to look for some inspiration there. In India, the hype around fancy valuations and me-too unicorns has made way for shutdowns and consolidation. According to a recent survey, about 65% of the leaders in the startup world feel the sector is in a tech bubble.Hitherto bullish investors like SoftBank have mellowed even as their investments in firms like Ola and Snapdeal are hurting. The government's much hyped Startup India campaign, which was to give wind to the startup wave, has barely taken off.

In contrast, Israel is a great example of the role the government can play in nurturing the startup ecosystem. And Israeli success tells you that, if done well, it can have great upsides for the macroeconomic health of the country.

Inflection Point

Even though the foundations were laid much earlier, the build-up for Israeli hi-tech industry began in the 1990s. “Around 2005, the world changed. Things we were good at became important and we managed to take advantage of the tech revolution,“ says Avio Simhon, head, National Economic Council, Israel.

The numbers reveal what Simhon means.Formed in 1948, in the middle of the desert with virtually nothing, Israel's GDP today stands at $311 billion (as against India's $2.3 trillion economy), GDP per capita income is $34,800 (India's is $6,700) and exports are worth $80 billion.

But here's the revealing part. Israel's debt-to-GDP ratio, which stood at 93% in 2004 has been steadily declining and stands at 62.1% even as the OECD average (117% now) rose sharply. Thanks to the private sector, government ex penditure as a percentage of GDP has come down from 51% in 2002 to 39.3% in 2016. The current account balance (as a percentage of GDP), which s i g n a l s a n e c o n o my 's health, has risen from around -1% in 2002 to 4.2% in 2016. The economy's net as sets too have grown from -$51.2 billion in 2000 to $95.6 billion in 2016. “We (Israel) are an accidental combi nation of a hi-tech revolution and govern ment policies,“ says Simhon.

The unemployment rate in Israel is now at a historical low of 4.8%. Bear in mind that the biggest growth push, including exports, has come from the private sector, especial ly in the hi-tech space, which contributes 12.5% of the GDP. The country's R&D ex penditure (minus defence expenditure which is not public) stands at 4.3% of GDP, the world's highest. “Private sector is criti cal: 95% of our R&D expenditure comes from them,“ says Avi Hasson, chief scien tist, ministry of economy & industry.

Meet the Chief Scientist

Behind Israel's startup machine is what is often called its killer app -OCS or the office of the chief scientist, which is part of the ministry of economy and headed by Hasson. With two decades of experience in the corporate sector, his mandate is to set policy framework and push innovation and entrepreneurship in knowledge-based science and technology industries. “One of the biggest roles that the government can play is to connect networks. For a robust startup ecosystem, this interconnectivity is critical. And we must celebrate entrepreneurs,“ says Hasson.

Hasson's office advises the government on many issues like how to tax MNCs or offer incentives to angel investors, or regulate clinical trials. He oversees a $500 million plus R&D fund called Tmura, which plays anchor investor in emerging technologies.It also has an incubator programme. This domestic R&D thrust gets amplified with global partnerships. Its Magnet programme manages partnerships between academic and commercial R&D programmes globally and has already signed bilateral agreements with 70 countries. It has given a grant to a startup that is now developing Israel's first human tissue bank. “Our philosophy is that the government should embrace failures and bet on the riskiest of ventures where the private sector will hesitate to go,“ says Hasson.

Helped by the government and nudged by investors -and also thanks to being deeply networked with the US -Israel's startup ecosystem is dynamic and constantly betting on new emerging sectors, ahead of the curve. “The challenge for us is not just to identify new sectors but also abandon the old ones that are past their peak,“ says Beracha. Take, for example, the automobile sector. There are over 50 startups in Israel focused on a range of areas like autonomous cars, ride sharing, electric vehicles, navigation, in-car monitoring and the like. There are a lot of startups in agri-tech, insure-tech, cybersecurity, ecommerce, artificial intelligence, virtual reality and augmented reality -areas where big MNCs are actively scouting for new technologies.

Government as Catalyst

“Our biggest job is to not stand in the way of the hi-tech private sector,“ says Simhon. For example, he says, a lot of Israeli startups focus on defence-related technologies. And there was a view in the government that a committee should vet which countries can buy these Israeli companies and which cannot. “Re striction in itself wasn't bad but it would have unnecessarily created hurdles for the startups. Let's just say that as of now we have no such committee,“ says Simhon with a smile. Some of Israel's most successful entrepreneurs are ex-army men like Adam Neumann, cofounder of WeWork, and Uri Levine, cofounder of Waze, which got sold to Google for $1.03 billion (army service is mandatory for Israeli citizens).

The government for its part does it bit to solve problems. Take for example talent shortage which, the government has constantly been told, is the biggest constrain for the hi-tech industry. It is now responding by rolling out a five-year programme which will see the number of seats in electrical and computer science departments in Israeli universities go up by 40% in five years. Further, to boost the student pipeline in science and engineering streams, it is offering incentives to high school stu dents who study maths.

From reaching out to untapped population segments like Arabs, ultra-orthodox Jews and women, to liberalising the visa regime, the government is now exploring options to increase the talent pipeline.

Of course, like India, Israel too faces challenges that most democracies do. But executives here admit that there is political maturity. “Irrespective of the political party in power, and despite being a vibrant democracy with all its challenges, science and technology has got constant support with policy stability,“ says Hasson.

A few other factors help. Israel is fortunate to have a rich and prosperous diaspora that is often closely networked and connected to the Jewish land. Forbes' billionaire list of 2016 had 17 from Israel, including new entrant Neumann. Jews who normally have strong Israeli ties have a disproportionate presence on the billionaire list -in the 2015 list, there were 10 among the top 50.

Their wealth sometimes finds its way to Israel. For example, last year, Ben-Gurion University of the Negev in Israel received a $400 million legacy gift from a Jewish couple in California. Thanks to the gift, the university has ambitious plans to expand capacity and introduce new disci plines. City mayors in Israel too play a critical role in craft ing policies to attract and grow the hi-tech industry.

Simon Elfassy, mayor of Yoqneam since 1989, has converted an almost bank rupt, struggling city into a hotbed of hi-tech innovation.Today it hosts over 100 hi-tech companies like Intel and Panason ic Avionics, with exports worth $5 billion.“What I have learnt is to think long term and work hard to remain current in my knowledge and focus. And then you have to believe in yourself and take those chances,“ says Elfassy.

The India Connect

Despite being a hotbed of innovation, Israel has produced few unicorns. Most entrepreneurs have exited far before their peak, selling out to MNCs from Cisco to Google. With a small domestic market, most Israeli startups think global from day one but also face scale-up constraints.

That may be changing. “Majority of Israeli entrepreneurs wake up and think of the US. Historically that's how it has been.But that is changing. Both investors and startups are looking at Asia Pacific more and more,“ says Chemi Peres, cofounder, Pitango Venture Capital. This is where India -with a huge domestic market -should get some attention.Many Israeli startups are now developing a risk appetite to physically expand and roll out their products and services in new territories. Feelter's Landau says she would be keen to tap the Indian market.“India is a huge opportunity for Israeli startups. We are keen to see the Sosa model replicated in India,“ says Tel Aviv-based Uzi Scheffer, general manager of Sosa. He has initiated talks with Sakal Media's Delivering Change Foundation, a not-for-profit that aspires to make positive changes in the communities.

Israeli government too is keen on boosting bilateral cooperation. In the 1990s, the two governments signed their first agreement but nothing much happened. Israel has set up a $40 million India-Israel fund to invest in Indian companies but it has made little progress. “There has been a lot of bureaucracy (in India),“ says Hasson.

In a year when India and Israel are celebrating 25 years of diplomatic ties and Prime Minister Narendra Modi is likely to visit Israel, the mood is one of hope and optimism. “We (India and Israel) have a very special relationship. There is a growing meeting of minds. The strategic relationship between the two nations has never been better,“ says deputy director-general Mark Sofer, head of Asia Pacific in the ministry of foreign affairs, Israel.

Startup India could finally get wings.

Malini Goyal

The writer was in Israel at the invitation of Israeli government

ETM19FEB17