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The Israeli Start-Up Ecosystem: Advanced Technology, Chutzpah, and the Military

Hardly any country yields as many exciting medtech start-ups as Israel. We explore the ‘Start-Up Nation’s’ success formula.

Thomas Klein

After an accident in 1997 left him a quadriplegic, scientist Amit Goffer refused to accept the fact that, at the end of the 20th century, there were no alternative solutions to a wheelchair available. Driven by that personal and potential patient demand, the Israeli engineer began working on a robotic exoskeleton with powered leg attachments designed to help paralysed patients to stand upright and walk again. He founded the start-up Re-Walk to bring his device to market, and in June 2014, the company obtained FDA clearance for the device; in September, the company went public on NASDAQ, raising $36 million. 

The origin of Re-Walk is one of many success stories illustrating how Israeli start-up companies have applied cutting-edge technologies to medical problems. But there are many more: The Technion Institute of Technology developed the nanotechnology device NaNose to detect different types of cancer from a patient’s breath with up to 95% accuracy, for example. The start-up IceCure, on the other hand, devised a method for freezing small tumors that eliminates the need for surgery. And Real View’s technology projects 3-D ultrasound holograms above patients in the surgical theater to guide physicians during operations. The list goes on.

Over the last few decades, Israel has earned the title of ‘start-up nation,’ thanks to its staggering statistic of spawning one new company for every 1800 people—by far the highest rate in the world. According to the consultancy Deloitte, almost 1000 start-ups are launched every year in the country.

At first glance, it is not easy to understand how a country with a tiny market is able to establish such a vivacious start-up ecosystem. The business intelligence company Business Monitor International (BMI) estimates the Israeli medical device market at $1,077.4 million in 2013, for instance. “The market is expected to grow at a CAGR of 9.5%, which should see it reach a value of US$1,692.8 million in 2018,” Glen Peters, medical devices market analyst at BMI told EMDT. “Broken down by product area, performance is expected to range from 7.2% for diagnostic imaging to 16.8% for orthopaedics and prosthetics.” Because the country is politically isolated from neighboring Arab countries, the EU, China and the United States serve as vital trade partners for Israel.

Entrepreneurship Requires Chutzpah
For Gilad Peleg Lorberbaum, COO of the Israeli medtech investment firm Rainbow Medical, the disadvantage of a small domestic market has actually also proved to be an advantage. “All companies in Israel need to be able to target larger external markets in Europe, the United States, and East Asia,” he said. “So, there is a constant drive to innovate to reach those marketplaces. Otherwise, companies cannot survive just by tapping into the local markets.” Perhaps more so than companies from larger countries, Israeli firms are forced to think globally from the beginning and need to develop technologies that are suitable for different kinds of markets.

For Lorberbaum, the ability for problem-oriented, out-of the box thinking is a trait of the Israeli culture that has historical roots. “This comes out of necessity; even before there was an Israeli country, people always needed to improvise and adapt to different environments and different cultures,” he said. “In comparison, Europe is a very calm and supporting environment, which has a lot of benefits, but doesn’t force people to innovate. Individuals do not necessarily need to think different.”

Authors Dan Senor and Saul Singer, who coined the label ‘start-up nation,’ see another cultural trait that perhaps explains why Israelis have the guts to establish their own companies: The Yiddish word chutzpah that was taken over in many European languages stands for audacity to take the risks associated with entrepreneurship and question everything. “An outsider would see chutzpah everywhere in Israel—in the way university students speak with their professors, employees challenge their bosses, sergeants question their generals, and clerks second-guess government ministers,” they wrote.

Role of the Israeli State
Perhaps even more important for the impressive Israeli record of successful start-ups than the widespread willingness to take risks is the role of the state. In the 1970s, Israel’s economy suffered from a restrictive, corporatist economic policy and the ramifications of the Yom Kippur war with an enormous public debt. The economic miracle with yearly growth rates of 4% and more started in the early 1990s, after the country had adopted a number of measures to foster growth of the local high-tech industry.

Armed with an annual budget of $450 million to invest in start-ups and research projects, the Office of the Chief Scientist plays an important part in awarding research grants to companies covering up to 90% of R&D costs. The Chief Scientist’s “Tnufa” fund supported Amit Goffer with a five-figure sum in the early days of Re-Walk, for example. “In our office, we like risk. When one of our evaluators presents a project and says, ‘This is a really risky project’, it gets us excited,” current Chief Scientist Avi Hasson told The Financial Times.

According to World Bank, Israel spent 3.9% of its GDP for R&D in 2012—by far more than any other country in the world. In comparison, only two other countries—Finland and Sweden—invested more than 3%.

In 1993, the Israeli government created the Yozma programme to jump-start the country’s venture capital industry. The initiative gave risk guaranties to private funds that invested in start-ups and founded its own venture capital funds. Today, entrepreneurs find it easier to raise funds in Israel than in most other regions, as the country has the highest level of venture capital as share of GDP worldwide, according to the OECD. In 2011, half a percent of the country’s GDP was available as venture capital, much more than that of the second-place United States with 0.2% of GDP. In total numbers, companies raised $867 million in Israel in that year compared with $706.2 million in Germany.

In addition to the agencies supporting research and providing funds for young high-tech companies, the Israeli military is a major contributing factor to the start-up nation. During the mandatory military service of three years (two for women), young citizens form networks that help them in their future careers and gain experience with high-tech devices.

“Broad education and exposure to complex high-tech systems in one’s early years opens one’s mind to various possibilities for tackling issues,” Ra’anan Gefen, managing director of the start-up AdOM Optical Technologies told EMDT. “Within this experience, the Israel Defense Forces plays an important role, as every man and woman gets to know and operate sophisticated systems even in their late teens. This exposure triggers interest, probably at the right time, and directs people with interest in the right direction.”

Partly as a result of the central meaning of the military for the country, Israel’s companies are especially strong in the IT and telecom sectors. Some of the world’s biggest IT companies, such as Microsoft, Google and IBM launched start-up incubators and accelerator programmes in the country. This high-tech presence has, in turn, benefitted the medtech sector, as many of the cutting-edge start-ups are at the nexus of IT and healthcare, such as OrCam, which develops smart glasses capable of identifying objects for visually impaired patients.

Fast In, Fast Out
The Israeli start-up success story has a few shortcomings, however. While the country seems to be an excellent breeding ground for innovative ideas and young companies, the start-ups hardly ever grow to be big internationals. “Out of the total 465 medical device companies in the country, the majority, 295 or 63.4% of the total, are small, with just between 1 to 10 employees,” according to Glen Peters of BMI. “Only 54 of these companies employ over 50 employees or more.” According to Dow Jones VentureSource, Israeli startups get acquired within 3.95 years on average, far earlier than companies in other countries. While this speaks for the attractiveness of the companies, there are significant downsides for the country.

 “Many Israeli start-ups are sold to the U.S. market and get absorbed into global firms, never really expanding in Israel,” noted Mario Cervantes, OECD senior economist. “This is expected given the small size of the internal market, but it does raise questions about how much of the returns from innovation end up back in the economy in terms of jobs created.” Israeli companies that decide to go public usually do so on the United States or the UK. 

“The forte of Israel is early R&D and clinical validation. The local market is small and the international markets are far away,” Lorberbaum added. “As it requires resources to actually build an international operation, many entrepreneurs prefer to pass the start-up on or sell it out to larger business, often stay with the multinationals for a limited period and then come back and start a second or a third company.”

This entrepreneurial spirit combined with an excellent technical education and the ubiquitous chutzpah make it likely that Israel’s start-ups will stays at the forefront of medical innovation for quite a while.

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