Startup in israel and singapore outlook, stimulating factors, evaluation and recommendation for vietnam

BỘ NGOẠI GIAO HỌC VIỆN NGOẠI GIAO KHOA KINH TẾ QUỐC TẾ KHÓA LUẬN TỐT NGHIỆP BỘ NGOẠI GIAO HỌC VIỆN NGOẠI GIAO KHOA KINH TẾ QUỐC TẾ KHÓA LUẬN TỐT NGHIỆP Startup in Israel and Singapore outlook, stimula[.]

BỘ NGOẠI GIAO

HỌC VIỆN NGOẠI GIAO

KHOA KINH TẾ QUỐC TẾ

KHÓA LUẬN TỐT NGHIỆP

BỘ NGOẠI GIAO

HỌC VIỆN NGOẠI GIAO

KHOA KINH TẾ QUỐC TẾ

-KHÓA LUẬN TỐT NGHIỆP

STARTUP IN ISRAEL AND SINGAPORE: OUTLOOK, STIMULATING FACTORS,

EVALUATION AND RECOMMENDATION

FOR VIETNAM

Giáo viên hướng dẫn : PGS TS Đặng Hoàng Linh

After four years of pursuing a bachelor degree majoring in InternationalEconomics at the Diplomatic Academy of Vietnam, I have chosen to base myresearch dissertation on the topic: “Startup in Israel and Singapore: Outlook,stimulating factors, evaluation and recommendation for Vietnam.”

I would like to thank all of the professors and lecturers in the Faculty ofInternational Economics, especially Dr Ngô Duy Ngọ and Dr Nguyễn VănLịch, who have guided me through the four years of my university journey It istheir expertise on international economics as well as foreign affairs that haveinspired and encouraged me to finish university with good results Therefore,this graduation thesis is not only an accomplishment achieved after years ofobtaining valuable knowledge from all of my mentors, but it is also an indication

of my gratitude towards them

I would like to give my special thanks to Associate Professor, Dr ĐặngHoàng Linh for directly guiding me during this journey Thank you for yourtime, dedication as well as careful attention to details and persistent support andguidance throughout the process All of your feedback and discussions havetruly enlightened and inspired me This thesis would never take form or befinished if it was not for your help Therefore, I would like to dedicate thisresearch to you, as the biggest token of gratitude for all of your hard works andcommitments

Lastly, I would like to thank every lecturer in the Diplomatic Academy ofVietnam, the Student Affairs Department as well as my classmates who havesupported me on all fronts during study and research process All of theirdedications and contributions have helped me tremendously from the very firstday until now

Even at my best attempts, I believe this dissertation remains inevitablydefective Thereby, I hope readers, whether it be lectures, colleagues, family,and friends or people concerned, would continue to help me complete theresearch

Once again, I would like to express my sincere gratitude to everyone thathas helped me as well as all of the readers

TABLE OF CONTENT

INTRODUCTION

CHAPTER 1: THEORETIC BASIS 1

1.1 Theoretic definition of startup 1

1.2 Regulated definition 5

1.3 Stages of startups 6

1.4 Funding for startups 8

CHAPTER 2: THE STARTUP OUTLOOK AND POLICIES IN ISRAEL AND SINGAPORE 13

2.1 Israel 13

2.1.1 Startup outlook in Israel 13

2.1.2 Stimulating factors 19

2.1.2.1 Government policies 19

2.1.2.2 Favorable conditions created by the private sector 25

2.1.3 Evaluation 29

2.2 Singapore 33

2.1.1 Startup outlook in Singapore 33

2.1.2 Stimulating factors 38

2.1.3.1 Government policies 38

2.1.3.2 Favorable conditions created by the private sector 45

2.1.3 Evaluation 48

CHAPTER 3: RECOMMENDATION FOR VIETNAM 53

3.1 The current situation in Vietnam 53

3.1.1 Vietnam’s outlook 53

3.1.2 Startup outlook 55

3.1.3 Stimulating factors 58

3.1.3.1 Government policies 58

3.1.3.2 Actions of the private sector 63

3.1.4 Existing problems 67

3.2 Recommendation for Vietnam 71 FINAL CONCLUSION

REFERENCE

INTRODUCTION

There are approximately 305 million out of 472 million entrepreneurs inthe world that are labeled “startups”.1 This is a significant sign indicating thefact that the world has been swamped with startup companies Thus, startupshave become the focal point of global economic development and each andevery country is striving to build a more dynamic startup ecosystem for theirown Among these, there is Israel and Singapore, said to be the two of the bestfast-growing startup hubs in the world Knowing that Vietnam isunexceptionally participating in the startup race raged globally, it is important tounderstand the critical components to the success of leading nations in this field.Accordingly, this thesis aims at enhancing its audience’s knowledge of startups

in general as well as specific contributing factors to the success seen in Israeland Singapore In addition, the results and lessons helpful for policy-makers inVietnam so as to further stimulate the startup environment in the country

There are three main chapters in this thesis In chapter 1, we will zoom in

on theoretic bases of “startup” as well as other related concepts so as to clarifythe general idea of the main subject that is to be mentioned in the thesis Inchapter 2, the thesis will attempt to study the cases of Israel and Singapore, two

of the strongest representatives of startup creators in the world, to understand thecore reasons behind the success of these nations, whether it be stimulatingmeasures from the public or the private sector In chapter 3, the center point will

be the close examination of Vietnam in regards to its general economic outlookand startup scene, as well as directed measures to further nourish the startupecosystem Possible suggestions will be deduced from given factual information,either from exemplified countries or from problems existed within the nation, so

as to enhance and improve the startup environment in Vietnam

1

InnMind (2016), How many startups are there in the world? (infographic) ,

https://innmind.com/articles/262

The span of the research will be mainly placed in the last five years whenstartups became more popular worldwide However, earlier data may beprovided so as to offer a comprehensive look at the general term as well as thestartup scenes in the three examined countries: Israel, Singapore, and Vietnam.

CHAPTER 1: THEORETIC BASIS

1.1 Theoretic definition of startup

Thanks to the booming economy, the internet, and the media, “startup”has become an increasingly ubiquitous term in the past years However, therehas not a single flawless definition to be recognized universally for this over-used term In this sector, we are looking back at how the word was first used,what it meant during each period and see it from different aspects and angles inorder to understand the term more specifically

The origin of the phrase rooted back four decades, when the term simplymeant “building a new company” The term was first found in Forbes (1976):

“The unfashionable business of investing in startups in the electronic dataprocessing field” It was again included in an article in Business Week (1977):

“An incubator for startup companies, especially in the fast-growth, technology fields” Although the phrase appeared without much context orfurther indication of its meaning, nor was anyone sure if it was invented purely

high-to avoid repetition of words, these early references high-to the word under the sametopic, technology, has virtually made “startup” a signature phrase whendepicting technology-driven businesses.2

“Startup” was put into use more in the late 1990s when the phrase wasused frequently to describe companies in the dot-com bubble Also known as

“the dot-com boom”, this is a speculation bubble occurred in the late 1990s,early 2000s and was given the significant title thanks to the wide-spread usage

of internet Essentially, several new Internet-based businesses were established

to capture the new-found market These “dot-com” companies, submerged inlarge speculative investments, were said to be the first batch of recognizedstartups.3

The usage of “startup” reached a peak around 2002, shortly after theinternet bubble and apparently died out from then until 2008 By this time, the

2

Quora (2011), What is the origin of the term "startup", and when did this word start to appear? ,

to-appear

https://www.quora.com/What-is-the-origin-of-the-term-startup-and-when-did-this-word-start-3

Growly (2017), What is a startup? The historical background ,

https://www.growly.io/what-is-a-startup-the-historical-background/

term was used to reference the second generation of internet-based enterprises,with Facebook being the most outstanding one Since the end of the 2008 globalfinancial crisis until now, startup once again finds itself to become a commonterm, nonetheless, mostly branded to technology firms.

This brings the question, what is the true definition of “startup”? Thereare many aspects to define a startup on, in which there are two traditionalstreams While some define “startup” as a phase, others see it as the financialstatus of the company We will look into both of these points of view, as well asconsidering other aspects of startups

On one hand, “startup” can be defined as the very first stage in thebusiness process While the American Heritage Dictionary and Merriam-Webster do not consider startups anything more than a freshly operatedbusiness, the business dictionary stated startup is the early stage in the life cycle

of an enterprise in which “the entrepreneur moves from the idea stage tosecuring financing, laying down the basic structure of the business, andinitiating operations or trading”.This explanation would usually be accompaniedother signs to indicate a “graduation” from the startup phase, such as anacquisition by a bigger company, having more than one office, gaining over $20million in revenues, having over 80 employees, being led by a board with overfive members, and, selling shares and so on Basically, when companies showsigns of scaling and become more profitable, they are no longer consideredstartups. 4

However, there exists a point of confusion in this theory Taking intoaccount the “undergraduate” conditions, doesn’t it mean many companies can be

a startup for years, while others only take months to be called otherwise Also,the definition fails to address why startups can’t be profitable, as any sign ofscaling could take away the title The lack of details attached to this definition ispart of why Uber and Airbnb, founded a decade ago, are still miscalled Inregards to the additional conditions, many startup founders disapproved of the

4

http://www.businessdictionary.com/definition/startup.html

idea that a startup is outlined by metrics, as it takes any form, stage, and size.Therefore, although the definition gives us a general picture of startup, itremains flaw-some.

On the other hand, “startup” may also be defined based on its financialstatus, most of which see the small self-fund as the main criteria Startupbusinesses are said to have “low bootstrapping costs”, meaning that it operates

on self-investment that are low in value and without utilizing external capitals.Investopedia (2017), a well-known economic-and-business-driven website, alsoidentify startup based on its monetary state during the first stage of itsoperations “These companies are often initially bankrolled by theirentrepreneurial founders as they attempt to capitalize on developing a product orservice for which they believe there is a demand Due to limited revenue or highcosts, most of these small-scale operations are not sustainable in the long termwithout additional funding from venture capitalists” 5

Another financial theory bases startup on the “50-100-500 rule”.Accordingly, these are specific guidelines that once a company surpass them,they are no longer considered startups Specifically, startups are companieswhich earn less than $50 million in annual revenue run rate, employ less than

100 staffs and being valued under $500 million Exceeding these numbers, theyare just regular companies hunting for or actively avoiding an IPO Under thistheory, there is also an in-between state, post-startup, and pre-public, in whichfirms are called “unicorns” The theory states unicorns are private tech companyfounded after 2010 Despite being valued over one billion or more on paper,they have yet to issue an IPO If startups are considered children, then unicornsare adolescences and after the IPO, companies mature into an adult Based onthis financial model, companies such as Xiaomi, Uber, and Airbnb, all of whichworth over $30 billion, are no longer startups They are fast-growing, highlyvalued unicorns, regardless of the public misconception However, this isagainst the common perception of considering unicorns as successful startups 6

There also exists another point of view which zooms in on the uniqueness

of startups While startups can be jokingly described as a company “working to

solve a problem where the solution is not obvious and success is notguaranteed”, it is indeed referring to an innovative and rather risky business tosolve current pain points existing among customers This idea is also shared byEric Ries, which depicted a startup as “a human institution designed to deliver anew product or service under conditions of extreme uncertainty.” 7 8

However, one thing that is rarely highlighted in these definitions but areseen in multiple examples of startups is their abilities to grow Amongadvocators of this explanation, there is Silicon Valley’s most well-knownentrepreneurial educators, Steve Blank He described startup as “a temporaryorganization designed to search for a repeatable and scalable business model”.Paul Graham, an investor also agrees that a startup signifies “a companydesigned to scale very quickly” and indicate that it is the development beyondthe borders that separate startups from regular small businesses Though haven’tbeen proven wrong, purely defining startup on this aspect appears to beincomplete.9

Since considering startup on separate aspects is insufficient, the mostcomprehensive definition of “startup” should be a combination of all of theabove, accompanied with its purpose and development process Thereby, astartup firstly should be identified as a business which is newly formed Second,

it aims at a rapid growth by “developing or offering an innovative product,process or service” that addresses a particular market gap Third, regarding size,startup usually starts with a small budget, the same as the majority ofentrepreneurs, but it should be built with a “scalable business model” Detailsregarding the specific development which involves validation and research fortarget markets will be discuss in a later section Again, this is not the single mostaccurate definition of “startup” but rather a blend of the most general features allstartups share However, it is definitely one of the more completed explanations

Aside from attempting to define what defines startup correctly, it is alsoimportant to understand what is purely a misapprehension Since the early days,startups have usually been associated with technology-related firms Theprevalent use of the term after the dot-com bubble in the late 1990s, in which agreat number of Internet-based companies were established, and the popularity

of commercial technology, primarily smartphones, tablets, and laptop in the2010s, has further strengthened this unproven concept Voluminous technical-based companies were not only the quickest and most successful businesses butalso had the most visible victories Hence, the misconception that startup onlybelongs in the technology realm has persisted for so long It is true that thetechnology industry has produced numerous startups thanks to its innovativenature, and because investors constantly seek for ground-breaking advances tobenefit their investments in a technology-driven society, increasing capital forthis field encourages more tech startups to launch Regardless, defining startupusing its technical foundation has been proven wrong Startups are made easier

to kick-start by technology, as it helps to mitigate the initial capital andunnecessary costs during the foundation process Technology has a

“democratizing effect”, which enable a larger audience to start business, but itdoes not cover or contain “startup” by any mean Startup companies can befound in every other sector, just not in the same size, number, and variety as thetechnology sector This is a fact that all analysists have seen eye to eye on.11 12 13

In conclusion, startup remains a vague term that has yet to be welldefined, and there are more approaches to the term that has yet to be discovered.Thereby, no definition has been specified as the only correct description for

“startup” universally Therefore, despite many theories exist to explain the term,the concept remains confusing and ambiguous In this thesis, we would rely onthe combined definition to identify the main subject of the thesis

As mentioned above, “startup” is a common word found in books, themedia, daily conversations and even in public speeches made by state leaders inhigh-level summits all around the world The startup phenomenon is openlywelcomed and supported by all governments, as it benefits the economy in manyways However, almost no country in the world has taken the time and effort todefine this positive wave of emerging business The term “startup” has not beenofficially addressed anywhere else in the world, not even Israel or Singapore -the prime startup nations mentioned as poster children in this thesis, aside fromIndia

In order to facilitate the emerging startup ecosystem in the nation, India’sauthority came up with the “Startup India” initiative along with tax benefits onlystartup firms are able to claim Following this spirit, India’s Ministry ofCommerce and Industry released an official statement mentioning the threecriteria that would identify new-found companies as startups The rule regulated:

“An entity will be identified as a startup.

1 Till up to five years from the date of incorporation.

2 If its turnover does not exceed 25 crores in the last five financial years.

3 It is working towards innovation, development, deployment, and commercialisation of new products, processes, or services driven by technology or intellectual property.”

In further explanation for the last criterion, the authority elaborated it caneither be a brand-new product, service or process that has not been served to thepublic or “a significantly improved existing product or service or process, thatwill create or add value for customers or workflow”

An additional note states that any unit bears the resemblance to allaforementioned characteristics but are formed by “splitting up or reconstruction

of a business already in existence” will not be considered a ‘startup’ 14

This definition, despite giving clear details, is nowhere near the completeversion Some parts of it are even inaccurate if compared to all other theorieslisted in the previous section, especially the technology-based aspect However,this is the only official document in the world that has recognized startup as a

14

http://egazette.nic.in/WriteReadData/2016/168185.pdf

specific business unit Instead of seeing this as a reference, it should beunderstood as the particular way India’s government is trying to shape its ownstartup ecosystem – towards a more technology-driven one – and how startups inthis sense are based on India’s economy alone Therefore, in this thesis, wewould not rely on this definition, instead remain with the definition given in thefirst part

For this stage, the main focus is to develop the product and scale thecompany, not making a profit Therefore, the early startup period is usuallymarked with the monetary imbalance As much finance is spent on developing,testing and perfecting their ideas, expenditures tend to always exceed revenues

As a result, startups in the early stage usually find themselves “unable to pay allemployees, including founders, a competitive salary” On the contrary,companies that are able to obtain money from either revenues or additional

15

Quora (2015), What is the proper definition of a startup? ,

https://www.quora.com/What-is-the-proper-definition-of-a-startup

investments to offer a compensation at market value to its employees are usuallynot considered early-stage startups.16 17

After the early stage comes the growth stage By this stage, startups startexperiencing an improvement in the revenue, though slow but steady, and it isattracting new customers progressively However, the increased sales andcustomers come along with more competition and internal management issues.Therefore, the company is likely to grow in size and labor, especially onesworking in the accounting department and the management system, will beemployed to deal with emerging problems

For the establishment phase, a startup has been successfully transformedinto a thriving company with steady revenue, a solid grounding in the marketand a loyal customer base The focus in this phase would be on improvingproductivity in order to be able to compete in an established market Moredisciplined business culture, extra automation, and outsourcing are popularmeans of improving productivity that is usually applied by startups during thisphase

Rapid growth in cash flow is usually the symptom of startups entering theexpansion stage In this phase, startups would seek to gain a larger market share,step into new markets and distribution channels, all in the hope of generatingmore profits When the increasing competition eventually pushes revenue todecline, it is time for startups to mature and contemplate possible exits

At this point, startups face the dilemma of having to choose betweenwhether to continue expansion phase or to make an exit In most cases, theywould opt for an exit Years of hard work put into the company would becarefully calculated and evaluated by third parties to put out the company’s realvalue to the current market Hence, startup leaders are expected to carefullyexamine business operations, management, and competitive barriers prior to theevaluation so as to maximize the company’s worth to the acquiring parties By

the time startups have been merged, acquired or establish its initial publicofferings, a startup ends its entire life cycle.18 19

Conclusively, for startups, the most important and significant part is theearly stage, because it is crucial in defining a small business a “startup” Otherthan that, the rest of the cycle is fairly similar to a typical entrepreneur businesscycle However, it should be noted that not all startups follow this chronologicalorder exactly In fact, it is not rare for potential startups to experience rapidscaling and reach an exit immediately after the growth stage Therefore,although true in most cases, this is not the timeline that all startups arecompelled to follow.20

1.4 Funding for startups

For the majority of founders, bootstrapping is the primary financial optionfor startups Bootstrapping is a situation in which either founders use their ownfinancial assets, owned or borrowed, or use revenues generate upon the unit’soperation, to fund the operation of the new-found company Because of thesefeatures, bootstrapping only provides a small amount of capital, which furtheremphasize the stated fact of monetary imbalance issue and financial risks duringthe early stage

Most of the time, bootstrapping is not an option because it is the onlychoice for startups As most of the early stage is made up of ideas, testing andlearnings, raising funds for this and out of this, although not impossible, isgenerally out of the question Bootstrapping, however, carries a large financialrisk since founders are required to manage their income and outcome whilefocusing on research, which usually to result in a significant imbalance Inaddition, without large sums of money from externals, some startups might not

be able to develop as rapidly as possible, as they are occupied with the massloads of work both technically and financially issues Another shortcoming ofthis economic method could the damage to credibility Not being invested in by

outsiders, whether unintentional or unable, can make startups appear to be tooinexperienced and infeasible to attract speculations, hence hurting the company'sreliability In contrast, being sponsored by well-respected investors can gain themarket’s trust and hence benefit a startup in the long run On the bright side,since their ownership is not shared with outsider investors, founders are able tomaintain control over all decisions This allows business owners to experimentwith their brand more and continue the feedback loop until they are satisfiedwith the outcomes of their venture.21

If startups show significant potential but are yet to be eligible for the firstofficial financial round, the seed round, they might obtain pre-seed funding fromfriends, family, business angels, and institutions such as accelerators andincubators Pre-seed investments are typically less than $1 million and aremainly granted by the same investors who are preparing startups for theirinvestments in the seed round.22

When reaching the growth stage, startup owners are offered a widervariety of options, including borrowing specialized loans and obtaining venturecapitals through angel investors and crowdfunding A line should be drawnclearly between these two sources of input: debt, the capital that requiresrepayment, and equity, the capital that is sold in exchange for the company’sshare

For debt capital, a small business loan could be obtained from a variety ofbanks or credit unions, including “government-sponsored small businessadministration loans from local banks and grants from nonprofit organizationsand state governments” Banks and other economic bodies typically offer anumber of specialized options available for small businesses, including micro-loans with low interest in short-term designed specifically for startups However,this source of capital is not as popular as the latter 23

https://medium.com/the-saas-growth-blog/from-pre-seed-to-series-c-startup-funding-rounds-23

https://www.fundable.com/learn/resources/guides/startup-guide/funding-your-startup

For equity capital, if a startup is able to showcase its potential, they mayattain investments, in exchange for a share of the company’s ownership Fornew startups with little operating history, raising venture capital funding isbecoming increasingly popular Capital provided at this stage brings with it theinvestor’s the hope of gaining massive returns from their later success Thebiggest difference between the two primary types of investors, angel investors,and venture capital firms, is their resource input and intention Angel investorsare mostly individuals utilizing their own wealth, accumulated through diversesources, to provide a small amount with favorable terms and help startupsthrough the difficulties in the first stages of their business Venture capital firmspool money from several investors and strategically decides where the fundgoes, which explains why they consider the profit aspect more seriously, hencelooking for ways to influence the board and its company Despite thedifferences, venture capitalists, in general, are exposed to major economic losses

as they could risk losing all of their investments if a startup fails This is whychances to obtain investments from these sources in the early days are slim, andonly when companies are able to showcase their innovative ideas accompanied

by a capable management team can they persuade outsiders to take risks forthem.24 25 26 27

Investments during this period are granted in the form of financial rounds.Normally, the first financial round is the seed round, in which angel investorscontribute around $150,000 while venture capitalists contribute up to $1.5million, averagely After that, startups can raise Series A financial round whentheir revenue begins growing, primarily from venture capital funds At themedian rate of $10.5 million, only a few super angels invest at this point Whilenext two funding series are raised during the expansion phase, Series B grantsare often set at around $30 million, whereas large-scale expansion from Series

C, usually involves entering new markets, financial grants are $50 million on

average From then on, since there is no limit to the number of financial rounds,startups can raise as many rounds as they wish before reaching the later stages.28

If the company survives and success, in later stages, startup founders,investors and other leaders within startups can regain their investments by eitherselling their startups to bigger and more established companies or going public.Hence, mergers and acquisitions and initial public offerings are two principalexit strategies

For the first option, startups can be merged or acquired Since a merger isdefined as an occurrence in which “2 separate entities (usually of comparablesize) combine forces to create a new, joint organization”, and startups arerelatively small in size and weak in finance, they are unlikely to become “equalpartners” with their investors Hence, they are predominantly acquired Anacquisition is “the purchase of one entity by another (usually, a smaller firm by alarger one)”, in which a new economic entity is not the result, but rather makethe acquired company “consumed and ceases to exist”, as its assets then belong

to the acquiring company The payment offered to acquire startups willcompensate and benefit founders and any party that has invested in the companyprior to the acquisition.29

For the second option, companies can issue their initial public offerings(IPO) An initial public offering is the first stock sale issued by an enterprise tothe public Preceding this, the company is regarded as private, with only arelatively small group of people considered as shareholders On the contrary, thepublic comprises of “any individual or institutional investor” that is interested inbuying shares from the company Only after the initial public offering are thecompany’s stocks available for sale on the stock market, and the public is able tohave access to them Once recognized as a public company, startup ownersought to trade a portion of their shares to the public in exchange for valuableresources that will be used for further development of the enterprise.30

28

The SAAS Growth (2017), From pre-seed to series C: Startup funding rounds explained ,

explained-f6647156e28b

In conclusion, funding for startups at different stages vary, and the grantmay either come from personal assets or from outside investors Typical startups

go from bootstrapping to being invested by angel investors, venture capitalfunds or accelerators and incubations, and lastly be acquired or go public Itshould be noted that like startup stages, not all startups follow these exactfinancial stages However, the number of special cases is insignificant, thereforethis roadmap remains factual

CHAPTER 2: THE STARTUP OUTLOOK AND POLICIES IN ISRAEL AND SINGAPORE

2.1 Israel

2.1.1 Startup outlook in Israel

Israel is a small country located in the Middle East area Following thelaw of nature, a nation that constantly struggles with wars and conflicts withneighboring countries since its formation only 70 years ago should be far behindthe rest of the world on all fronts Yet, Israel is the living proof of the opposite.Home to only over 8.8 million people, this country has produced an astonishingnumber of startup companies and stimulate a strong venture flow that even morepeaceful and stable countries like Japan, Japan, China, India, Korea, Canada,and the UK yearn for Israel is also home to three of the best technologyinventions, including the USB flash drive, the first Intel PC processor andGoogle’s Suggest function Moreover, the country is 3rd to only the UnitedStates and China with the number of companies listed the NASDAQ.Repeatedly mentioned as one of the world’s most vibrant hubs, Israel has beengiven the title “the startup nation” 31

Data recorded by IVC and Reversexit (2015) showed that 10,185 startupswere founded in Israel between 1999 and 2004 This means 637 startups areestablished annually on average Despite many of them were shut down due tomultiple reasons, a staggering 52.5% of them, equal to 5347 companies, are stillrunning today It has also been reported that 2.6% of all startups in Israelgenerate an annual revenue of over $100 million, and a countless number havebecome unicorns with billion-dollar businesses, namely WeWork, Waze,ironSource, Infinidat, OrCam Technologies, ForeScout, Houzz, Gusto, and so

World Economic Forum (2017), Israel is a tech titan These 5 charts explain its startup

https://www.weforum.org/agenda/2017/05/tiny-israel-is-a-tech-titan-these-5-charts-explain-its-startup-success/

34

Chart 2.1 Israel startup companies by year 1999-2004

700 708

820

1005 879

as much as that of the United States and 30 times more than that of Europe This

is truly a remarkable achievement. 35 36

In 2017, Israeli high-tech companies raised $5.24 billion in 620transactions It is a significant leap from the average of around $2 billion worth

of venture capital annually in the 2006-2012 phase The total capital raised byIsraeli high-tech companies has been consistently rising since 2013, reaching

$4.4 billion in 2015 and $4.8 billion in 2016 The number of deals has also gone

up by 40%, from averagely 490 deals per year in 2006-2012 to averagely over

680 per year in 2013-2015.37

Haaretz (2016), The Israelis Behind Six of the Biggest Unicorns in the U.S ,

unicorns-in-the-u-s-1.5420373

https://www.weforum.org/agenda/2015/07/which-countries-have-the-most-venture-capital-37

IVC Research Center (2018), IVC Research Center and ZAG S&W report: Five-year consecutive growth - During 2017 Israeli high-tech companies raised $5.24 billion in 620

Chart 2.2 Total capital and deals raised by Israeli high-tech

in 2017 Significantly, there were four large deals worth of over $100 millioneach, amounted to 12% of the total amount raised (Cybereason, Via, Lemonadeand Skybox)

Concerning capital by stages, in 2017, companies in mid and late stagesattract $2.1 billion and $1.8 billion respectively, making up the lion share oftotal capital Seed and early-stage companies raised $1.36 billion in overall.Funding is concentrated more in firms going through the growth stage.38 39

http://www.globes.co.il/en/article-higher-investment-reflects-new-israeli-startup-mindset-39

IVC Research Center (2018), Summary of Israeli high-tech company capital raising – 2017 ,

Final.pdf

http://www.ivc-online.com/Portals/0/RC/Survey/IVC_Q4-17%20Capital%20Raising_Survey-Chart 2.3 Total capital raised by Israeli high-tech companies by stage

2016-2017 ($ million)

Late-stage Mid-stage Seed and early stage

1.80 2.10 1.36

1.60 1.80 1.43

Chart 2.4 Total capital raised by Israeli high-tech clusters by year

2013-2017 ($ million)

in deep technology, it is found that 95 new AI startups are established annually

in Israel on average, adding around 300 startups in 2014-2016 Currently, 430 ofthem are offering AI technology as the key product The major expansion in thepast five years has helped this industry grow and attract a bounty full of venturecapital.40

The automotive industry is the 2nd most invested high-tech industry in

2017 with $810 million Although the auto industry does not exist in Israel, newtechnology used to generate and assist the engines are mainly produced byIsraelis startups One of Israel’s most prominent auto invention in recent times isthe collision alert system created by the company “Mobileye” The system is soinnovative that it is being used by automotive giants such as General Motors andHonda, and the company issued the biggest IPO in Israel’s history, gaining $890million at the company’s value estimation of $7.5 billion 41

The CEO of CyberArk, one of Israel’s most successful cybersecuritycompanies once said, “Everybody understands that you buy Swiss watches fromSwitzerland and information security from Israel” Indeed Placed in anunfriendly neighborhood, security on all aspects is a large concern in Israel

Cybersecurity is not an exception In fact, in the age of digital where people,companies and governments almost entirely shift to using online databases,information are more vulnerable to cyber-attacks Having been nurturing thegrowth of cybersecurity technology for over two decades now, there is no doubtcybersecurity is another of Israel’s strength.42

Israel’s cybersecurity industry is more mature and diverse than that ofmany other countries In 2017, investment poured into cybersecurity startups inIsrael is only second only to the United States The number of cybersecuritystartups and financial rounds have slowed down, however, the averageinvestment has increased by 23% overall, meaning that already establishedcybersecurity firms are benefiting more Data also pointed out this Israeliindustry is maturing, as most funding are shifted towards companies at laterstages Therefore, despite witnessing a dramatic comparative decline in recentyears and placed 3rd, the absolute amount increased by 28% from 2016 andaccounted for 16% of the total investment in the world’s cybersecurity industry.The shift only illustrated how industry 4.0 has affected the startup outlook inIsrael.43 44

Chart 2.5 Total capital raised by Israeli cybersecurity startups by

http://www.ivc-online.com/Portals/0/RC/Survey/IVC_Q4-17%20Capital%20Raising_Survey-44

https://techcrunch.com/2018/01/14/the-state-of-israels-cybersecurity-market/

Chart 2.6 Total capital raised by Israeli cybersecurity startup by

138.00 72.30

229.00

121.00

255.00 84.05

up with the Internet of Things era Israel also has potential startups such asSiSense and BigPanda to focuses online data-strong platforms Finally, financialtechnology companies like BillGuard and FeeX, are breaching the barriers of theinternet economy, helping to diminish frauds, facilitate payment processes andsave customers’ money These are some of Israel’s up-coming sectors that arelikely to attract more startups and draws more venture capital in the years tocome 45

Conclusively, with all the given data, there is no doubt why the nation hasbeen given the title “The Startup Nation” Understanding that Israel’s strongestpoint is the technology sector, which is also a thriving force in the world, it isreasonable that the country utilizes its existing advantage to further enhancingits startup environment

and substantial initiatives that lead to Israel’s startup outlook in the 2000s wereactually launched in the early 90s.

Israel’s first Technological Incubator Program, set up in 1991 with theaim of providing grants and knowledge to skilled immigrants so they canbecome successful businesspersons, has taken the lead role in funding early-stage ideas that are said to be too risky to attract private investors The Office ofthe Chief Scientist, whose core mission is to finance potential entrepreneurs,was addressed to run the program Startups under the program are incubated fortwo years and granted $500,000 to $800,000, 85% of which aided by thegovernment for no equity Repayment will take the form of 3-5% of royaltiesonly when startups begin to generate incomes By being financed during themost vulnerable stage of the innovation route, the program has helped multiplestartups survive and further grow Since the first batch of firms graduated fromthe incubator program in 1993, 61% of them have secured follow-on capital of

$3.5 billion and 40% are still active hitherto Thanks to the success of theprogram, the government of Israel has also profited nearly six times the initialamount of around $650 million. 46

The next initiative introduced to boost the startup spirit is the ChiefScientist’s Matching Grants program Under this, the chief scientist wouldconsider submitted R&D proposals from each firm, compare and chose to grantthe most probable ideas Specifically, proposals are assessed for “their technicaland commercial feasibility, risks and the potential for projects to generateexpertise” Financial support varies, covering from 66 to 90% of the researchcosts However, these are not non-refund grants but rather high-risk loans.Successful projects must deduct a fraction of their annual revenue to repay theOffice of the Chief Scientist. 47

In spite of the success of the aforesaid initiatives, Yozma, a governmentalprogram established in 1993, has been given the credit for forming Israel’sdynamic venture capital outlook Started with the initial budget of $100 million,Yozma founded ten venture capital funds and contributed up to 40% of the total

46

http://oecdobserver.org/news/fullstory.php/aid/3546/Startup_nation:_An_innovation_story.html 47

Forbes (2017), What makes Israel's innovation ecosystem so successful,

so-successful/3/#5c8a945e1262

https://www.forbes.com/sites/davidyin/2017/01/09/what-makes-israels-innovation-ecosystem-capital investment In order to generate more foreign investments, the programoffered an 80% insurance cover in the case of business failures and an extraoption to purchase the government’s share in startups at a discounted rate withinfive years Noticeably, at the time of its establishment, 50% of the initiative’sfund comes from the public budget Yozma also established a $20-million fund

to directly back in small businesses As a result, nine out of fifteen firms thatfirst received grants from the Yozma fund either went public or were acquired.Venture capitals in the decade rocketed by 60 times from $58 million to $3.3billion, soaring the number of portfolio companies from 100 to 800 By 1999,Israel was the country with the second-highest rate of private equity capital onGDP, after the United States, and 70% of this development were boosted byhigh-tech ventures The initiative also brought over 30 foreign venture capitalfunds to set up shops in Israel Hitherto, the program is still considered “themost successful and original program in Israel’s relatively long history ofinnovation policy”.48

Aside from early stimulations in the world of startups, Israel is alsofamous for its generous R&D expenditures According to OECD data, Israel isthe country to spend the most money on research and development (R&D) in theworld Israel’s R&D expenditure on GDP rate has been maintained at a muchhigher level than the rest of the world for years, especially those that are on parwith them in terms of GDP At 4.25%, R&D expenditure on GDP rate in Israelconstantly doubles that of OECD countries 49

Chart 2.7 Gross domestic spending on R&D on GDP 2006-2016 (%)

48

Apolitical (2017), The government venture capital fund that boosted Israel’s startup economy ,

economy/

https://apolitical.co/solution_article/government-venture-capital-fund-boosted-israels-start-49

, 5 0 CafeF (2017), Đây là cách Israel đứng đầu thế giới về khởi nghiệp sáng tạo: Mời người tài

từ DN tư nhân vào lãnh đạo cơ quan nhà nước, gioi-ve-khoi-nghiep-sang-tao-moi-nguoi-tai-tu-dn-tu-nhan-vao-lanh-dao-co-quan-nha-nuoc- 20170803143624672.chn

According to Israel Innovation Authority, the aforementioned budget ismainly used by the government to share financial risks with startup firms Thegovernment pay for the riskiest investments and pave the way for privateinvestments to follow By co-financing new technology invention, the Israelgovernment has lifted the burden off of the private sector as well as nourishing amodern high-tech ecosystem that allows more startup to grow upon Until April

2015, Israel’s Ministry of Economy has supported twenty startups by investing

$7 billion for each $1 billion venture capital mobilized from the private sector.Thereby, the private sector only contributes 15% of the total venture capitalinvestment Despite paying less for the initial stages, the private sector plays avital role in the mid and late stages of Israeli startups.50

Another critical governmental body to the startup community in Israel isthe Office of the Chief Scientist, headed by Mr Avi Hasson Its signaturelending program is a loan for new ventures and technologies, deemed promisingbut highly risky Under this program, credits can be granted without equityrequirements The only repayment the program demands is a royalty on relevantsale revenue if the business succeeds In order to support R&D projects andnewfound companies during the seed stage, the Office of the Chief Scientist alsoutilizes its yearly budget of $450 million and contribute up to 85% of seedsubsidies for nearly 200 newfound companies and substantial R&D projects.The program is similar, if not the continuation to the Technological IncubatorProgram in the 90s 51

50

51

Though occasionally being criticized as a deterring agent for the startupindustry, the Office of the Chief Scientist is recognized for addressing anexisting market failure, involving the neglect of companies and projects that arenot profitable short term but are beneficial to the economy in the long term.Furthermore, since a recent research found that each one million shekels lent bythe government generated two to three times more R&D the amount granted, theOffice of the Chief Scientist and other governmental bodies are not likely toshut-down risk-taking funds and programs 52

Aside from lending and setting framework to boost innovation andentrepreneurship in science and technology industries, Mr Hasson believe it isthe authorities’ responsibility to connect networks: “For a robust startupecosystem, this interconnectivity is critical" Thereby, the office has anincubator program, the Magnet program, which is enhanced with 70 signedbilateral agreements with global partnerships, will continue to bridgeconnections between academic and commercial R&D programs in the world.53

In addition to financial support, tax and favorable policies for startupinvestors are also deemed critical startup strategies that this government hasrolled out Accordingly, private investors to purchase shares of Israelis researchand development firms can benefit from a 3-years tax exemption, reducing tothe extent of five million shekels from their total taxable income Due to this taxslash, Israel’s government lost 45% of state tax revenues Additionally, sharepurchasers of young high-tech firms are also able to acquire startups’ shares at adiscounted price and reduce the cost of capital investments, the difference ofwhich will be subsidized by the Israeli government These are said to haveproduced unprecedentedly profitable opportunities for angel investors andventure capital funds to invest in startups in Israel.54

Geektime (2015), In Israel, behind every successful entrepreneur stands a lot of government

https://economictimes.indiatimes.com/small-biz/startups/israel-a-startup-oasis-in-the-middle-54

Lior Pick & Co (2018), Tax privileges for long-term investments in Israeli startup companies,

http://pick-law.co.il/tax-privileges-for-long-term-investments-in-israeli-startup-companies/

In the attempt to create a high-skilled workforce for the nation, the Israeligovernment has also put in effort to shape startup ecosystem through theeducational system Israel is the country with the highest share of scientists andengineers per capita in the world, at the rate of 140 per 10.000 residents, thanks

to the country’s attempt in building an army of well-educated, ambitioustechnicians with entrepreneurial outlook in past decades This starts with earlyintroductions of the basic technological concepts into the educational system.For instance, cybersecurity related subjects have been inserted into the schoolsyllabus designed for the students at the age of 13 Mobileye, early mentioned asthe biggest Israeli IPO ever in the US, is also a concrete evidence of the nation’sproper education system, as it was founded from Professor Amnon Shashua’sresearch at the Hebrew University and many of its core employees are students

or graduates of the same university Additionally, not only are they creating theirown army of intelligence, the country has also showed its attempt to attractforeign scientists as well as migrated Israelis back to the country, by regulatingthat anyone who signed a contract with innovative startups will benefit from100% tax exemption for five years With the combination of internal andexternal forces, Israel’s talented workforce would be extremely helpful to itsstartup environment.55 56

Lastly, one of Israel’s mass contributor to the startup nation’s success isthe Israeli Defence Forces, as they have proven to be the pivotal to platform formany founders to emerge Israel’s compulsory military service offers earlyeducation of sophisticated technology at the age of 18, as well as putting themunder extreme stress The military's strict discipline accompanied by highlyspecialized tasks have helped to hatch an array of geniuses that soon becamesuccessful entrepreneurs with technical expertise Even when technicalknowledge and skill are not absorbed, the service time would also help to shapethe citizens of Israeli, allow them to continue their lives with essential soft skillssuch as teamwork, commitment to a mission and taking part in something larger

than themselves All of these became extremely helpful in the entrepreneurworld 57 58

There also exist a “secret ingredient” to the success of Israel, the mostelite division of the Israeli Defence Forces, that is “Unit 8200” Nicknamed the

“startup machine”, the 8200 alum is an Intelligence Corps unit that takes on theresponsibility of collecting signal intelligence and code decryption Despite themilitary-oriented missions, many of the unit’s former members turn out tobecome successful entrepreneurs A sub-unit program for people aged 16 toeighteen focuses on teaching computer coding and hacking skills is set prior tothe main serving time in order to provide the applicable candidates The mainunit 8200 mostly comprises of people aged eighteen to 20, who are commanded

to utilize the latest technology in nearly impossible life-or-death situations, withlittle to none guidance, to complete Due to the young age cohort, short servicetime and the complexity of the tasks, discharged soldiers from the alum are said

to be the brightest minds of Israel After finishing their serving time, manyformer members of the unit occupied top positions in international IT companiesand established new ones.59

Avishai Abrahami, a former member of unit 8200 answered Forbes(2016): "Just from my generation, there are more than 100 guys from the unitthat I personally knew who built startups and sold them for a lot of money.There was a team of ten people in one room in the unit I call it the magic roombecause all of them created companies where the average market cap is a half-billion dollars." Abrahami is not an exception, as he is the co-founder of Wix,one of the world's top cloud-based web-development platforms, of which marketcapital is around $1 billion This is the prime example of Israel’s military’spower turned into economic power.60

57

Crain’s Detroit Business (2017), Israel's secret to startup success? Government support,

military training,

http://www.crainsdetroit.com/article/20170130/BLOG018/170139985/israels-secret-to-startup-success-government-support-military

58

https://medium.com/@BlueFuture/venture-capital-in-israel-landscape-overview-f9d733fa62f9 59

Wikipedia (2018), Unit 8200, https://en.wikipedia.org/wiki/Unit_8200

60

https://www.forbes.com/sites/richardbehar/2016/05/11/inside-israels-secret-startup-machine/

#34eeed281a51

Conclusively, much of Israel’s startup success is not only attributed to itsmilitary background, but also the nation’s early attempts to nourishentrepreneurship So far, the country has continued to either maintain pasteffective initiatives or launch new ones so as to back new startups This is apositive sign that shows the country’s leaders attempt to push forward ratherthan live with the glorious victory it has achieved.

2.1.2.2 Favorable conditions created by the private sector

It is true that the public sector stimulates more startups, but it is theprivate sector that eventually fruits the industry A lot of Israel’s later success isattributed to the generosity of the private sector Therefore, it is crucial tomention some of their contributions to the ecosystem

The private sector in Israel, consists of foreign and local investors, isseeing a shift in proportion During the initial startup thrusts in the early 1990s,the private sector had invested over $2.5 billion in incubator graduates WhenYozma was established in 1993, 60% of its total fund was provided by foreigninvestors, who were attracted to the program by risk guarantees Over threedecades have passed, foreign investors seem to maintain themselves as thebigger contributor to Israeli startups, at points contributing up to 85% of totalcapital, most of which came from the United States, Europe, and China.Although foreign funds were four times as many as local ones in 2013, the gaphas narrowed down as more domestic funds were founded while foreign fundsretreated from the market in recent years In fact, in terms of quality, foreigninvestors seem to have lost in the race with local counterparts There were onlysix investors listed in the top eighteen most active funds of Israel, and despitethe number of deals closed by foreign funds was always higher, domesticinvestment deals only lack behind their counterparts by 21 deals in 2017 Thisshowcases that the local investors are slowly taking over the dominant thestartup scene in Israel.61

61

IVC Research Center (2017), Vertex Israel is the most active VC fund in 2017 - leading the

list with 12 new investments , http://www.ivc-online.com/Portals/0/RC/FundPRs/MAF%20PR

%202017-Eng-final.pdf

Chart 2.7 First investments by Israel and foreign investors by year

$2.5 million The Yozma program, mentioned as one of the rare examples ofsuccessful governmental initiatives, was later privatized and completelyseparated from the public sector by 1998 By 2012, all ten of Yozma’s drop-down funds including Eurofund, Gemini, Inventech, JPV, Medica, Nitzanim-Concord, Polaris, Star, Vertex, and Walden, totaled $4.035 billion in value andare kept running by the private sector 62 63 64

Israel is home to around 200 venture capital active funds, some of themost noticeable names include local Vertex Ventures, Viola Ventures and

https://www.forbes.com/sites/davidyin/2017/01/09/what-makes-israels-innovation-ecosystem-64

IVC Research Center (2012), The success mode of Israel innovation technology ,

http://embassies.gov.il/nicosia/NewsAndEvents/Documents/Doing%20Business%20with

%20Israel%20(Erlich).pdf

outsiders Intel Capital, SGVC and Mindset Ventures Both founded around thebeginning of the 21st century, Vertex Ventures and Viola Ventures remain thecountry’s top funds after nearly two decades The $970-million fund ViolaVentures has invested in 175 startups, generally offering from $100,000 to $10millions in subsidy for startups Its predecessor Vertex Ventures, managing $700million in funds, has backed 288 others with investments from $1 million to $6million Both are focused on early-stage funding in high-tech verticals and hashelped multiple tech startups, such as Waze, CyberArk, and SolarEdge, toflourish Considering their experiences and expertise, these top-tiered funds,along with other newcomers, would continue to assists the startup ecosystemhere 65 66 67 68 69

Israel’s large network of incubator and accelerator also helps Recorded tohave the first of its kind in Israel in 2011, it is extremely fast paced that by 2015the nation has owned around 210 operating incubator and accelerators, in whichsome of the most noticeable ones are The Junction, TheTime, Microsoft

Ventures Accelerator, Nautilus AOL, UpWest Labs, Elevator, 8200 EISP, ZellEntrepreneurship Program, and so on

Despite the mushrooming, the first accelerator in Israel, The Junction,remains one of the most active accelerators in the nation Startups under theJunction can exchange 5% equity for around $50,000 in initial funding So far,the Junction has backed 127 companies and helped them raise more than $345million in funds Another of Israel’s strong incubator is TheTime, whichtypically provides funds for early-stage digital life technology startups In mostcases, TheTime offer from $500,00 to $1 million in initial sum and more forfollow-on investments Thanks to the large quantity and quality of these funds,the incubator was titled the best Israeli incubator for three consecutive years It

is noteworthy that these are only two of many already established incubators andaccelerators in the region, not to mention the soon-to-be-founded ones.Therefore, the combined force of all these facilitators has surely helped nourishthe startup environment in Israel 70 71 72 73

Funding does not just take place in the entrepreneur world, but also in theacademic zone in Israel The largest university in Israel which also carries thebest entrepreneurial record outside the United States, Tel Aviv University, hasfounded an early-stage venture capital fund called TAU Ventures Similar tofunds introduced at the world’s principal universities, such as MIT, theUniversity of California Berkeley and Stanford, the newly introduced fund inIsrael aims at focusing on first-time pre-seed backing for startups founded bystudents and alumni of the university’s network, thereby, all students and alumni

of the university are eligible The fund is also a critical incentive to furtherencourage entrepreneurship on campus It is estimated that the fund’s valueworth about $20 million, with the main contributors from Singapore, the UnitedStates, and Canada Knowing that around one-fourth of all Israeli

businesspersons are alumni of Tel Aviv University prior to the establishment ofthe fund, this activity is expected to help boost the vibrant startup ecosystemeven more.74

The private sector also brought a mammoth number of co-working spaces

to the nation, from which the startup community benefits a lot from.Accordingly, there are at least 70 co-working spaces opened for startups in TelAviv, and around the same amount in other cities, making up the total 197 listedworking spaces in Israel Not only do they provide a place for startups to gather,work and develop their innovative ideas, the building also houses venture capitalfunds and incubators, who are potential investors for startups in such closeproximity In addition, it is also the venue for many educational eventsorganized for startups to improve their businesses For instance, one of Israel’sbiggest co-working space is SOSA, founded by 25 leading Israeli investors andhi-tech entrepreneurs to support the startup ecosystem here Placed in Tel Aviv,the building helps early startups to make connections with fellow entrepreneurs,corporates and even investors and potential partners SOSA’s startup workshopswith global experts are organized nearly on a daily basis Startups renting aplace at SOSA are given the price based on its size, length of stay and type ofaccommodation, which is a lot more favorable than traditional offices SOSA isjust one of the many co-working spaces that are offering startups a place to markthe beginning of their businesses in Israel 75 76 77

Lastly, the startup community in Israel is also supporting itself Overtwenty mid-size Israeli startups, including Wix, Lemonade, and Outbrain, cametogether and founded the Israel Growth Forum in order to help fellow startups

by influencing the government on issues worth concerning to the community Sofar, much of their activity revolves around inducing laws to ease taxationpolicies, so that Israeli startups are able to buy another Israeli startup at the same

Time Out (2017), Culture shock: Startup Nation's top local co-working spaces ,

spaces

https://www.timeout.com/israel/attractions/culture-shock-startup-nations-top-local-co-working-tax rate the government has offered to multinational companies The currenttaxation process for tech companies is also being influenced to become moretransparent and easier to follow The mitigation of red tapes and barriers wouldencourage the startup environment to further blossom in Israel.78

To sum up, the private sector in Israel, with the participation foreign anddomestic investors, either under the form of angel donors, venture capital funds,incubators, and accelerators or co-working space providers, has done a great job

in motivating startups with generous funds Not only that, numerous startupevents and competitions have been organized by private entities so as to bridgestartups and potential investors After all, it is the prime incentive to make profitthat pushes entrepreneurs to startup in the first place Therefore, although not asdiverse and revolutionary as the government, their contributions to the vibrantcommunity cannot be denied

2.1.3 Evaluation

Israel has certainly succeeded as a startup nation without doubts Not onlythat, thanks to these innovative startups, in recent years, Israel has drawn theattention of many multi-national giants in the world, hence attracting even moreFDIs to this small country Many large technology firms, including Microsoftand Cisco, chose to build their first research and development facility outside ofthe United States in Israel The growth of high-tech startups also urges over 300multinational companies including Intel, Google, General Motor and Motorola

to build more R&D centers in this area so as to comprehend and applypioneering technology as soon as possible Israel’s reputation for being one ofthe world’s innovation hot spot has pulled more crowdfunding and newinvestors to the local scene In the end, not only are startups able enhance theirconnection with international platforms, the people of Israel also benefit frombeing employed by credible companies, thus improving the country’s macro-economy.79 80

However, the achievements do not arrive on a path paved with roses Thetiny domestic market of just over eight million people is way too small forentrepreneurs to expand in the future Therefore, instead of coming up withbusiness expansion strategies to the later stages, Israelis startups tend to selltheir invention at an early stage and make a profitable “exit” Back in the early2010s, 99% of asked Israeli startups would choose “exit” as their ultimate goalwhen creating a new business Many other set the bigger goal to be acquired bymultinational giants The glory exits of many Israelis tech startups, for instance,AI-centered ones which receive averagely 8.2 times more than their totalfunding, even exacerbates the situation to some extents So far, Teva is the onlyIsrael-made firm to be ranked in the world’s 500 largest companies and thecountry only has a tiny fraction of unicorns out of thousands of new startups inthe past decade It is clearer that Israel is encountering problems with scaling upbusiness.81 82

Fortunately, the technology sector is showing signs of maturity In recenttimes, more Israelis startups have focused on expanding their companies instead

of selling their idea at an early stage More companies expand to employ up tohundreds of local residents, achieving valuations of $1 billion or more.Entrepreneurs are holding on to their companies, raising greater amounts ofmoney privately and rejecting early buyers in hopes of either evolving thecompany themselves or getting a better valuation in a sale at a later date.Considering the growing list of companies that have raised a significant amount

of growth rounds, Israeli startups are becoming more independent.83 84

Also, the mounting interest in Israeli startups has given creators moreleverage and flexibility to decide their future For instance, when early investors

of CyberArk, one of Israel’s biggest cybersecurity firm, pressured initiators to

81

https://www.ft.com/content/a5c2ad5a-b471-11e5-b147-e5e5bba42e51

82

Crain’s Detroit Business (2017), Israel's secret to startup success? Government support,

military training,

http://www.globes.co.il/en/article-higher-investment-reflects-new-israeli-startup-mindset-exit at $460 million, they held on to the company’s independence by enquiringfor Jerusalem Venture Partners and Goldman Sachs to buy the firm out from theinvestors They were right to not exit then, because by taking their time,CyberArk continued to develop and got listed on NASDAQ in 2014 Thecompany’s market capitalization went up by five times hitherto Such case is theposter child for other Israeli startups to learn from and start thinking of furtherdevelopment aside from a glorious exit 85

Another obstacle blocking Israel’s startup prospect is the sharp shortage

of skilled workers Despite the mass number of trained engineers mentioned,more startups forming increases overall demands and local ones are witnessingthe lack of approximately 10,000 engineers and software programmers.Redundant demand and lacking supply results in extreme salary increase, whichhas made it favorable for large multinational corporations, since they have themonetary advantage to offer above-market wages, but financially challenging toIsraeli startups Having their best talents taken away by multinational giants,small startups are worried about their future without the technicians Not only isthere competition within the region, Israel is also suffering from brain drain, as anumber of highly-educated Israelis departed the country to seek for bettereconomic opportunities in Silicon Valley and elsewhere Left unfixed, somefirms may be obligated to relocate abroad in order to meet the adequate number

of technical workers.86

Proposals to combat this issue has been voiced, both of which areeducation-oriented At least 1,500 hi-tech employees are estimated by the IsraelInnovation Authority to spawn if the government of Israel provide greaterfunding to students majoring in science, technology, engineering and math in thenext five years Another proposal suggests funding “coding boot camps” inIsrael to reproduce personnel specialized in this department This proposal, infact, has been set in motion in a number of private schools and institutes, andeven became popular among workers, who are offered the chance to re-equipthemselves with necessary computer coding skills so as to become a software

85

Forbes (2017), What makes Israel's innovation ecosystem so successful,

so-successful/5/#35bee5dc6531

https://www.forbes.com/sites/davidyin/2017/01/09/what-makes-israels-innovation-ecosystem-86

The Times of Israel (2018), It takes a village: Israel entrepreneurs team up to help startups

https://www.timesofisrael.com/it-takes-a-village-israel-entrepreneurs-team-up-to-help-startups-grow-up/