Israel has emerged as a global tech startup hub, receiving twenty-eight times more capital flow than the U.S., on a per capita basis, in 2021. Ranked number two in the world for research and development expenditure per capita, and number two in the world for the number of AI and machine learning startups, Israel has become a startup nation in its own right. In 2022, Israel’s high-tech companies raised $14.95 billion through 663 deals, and Israeli cybersecurity startups raised $8.8 billion, an increase of over three times compared to 2020. One out of three cybersecurity unicorns in the world is an Israeli company. Israel invests 4.1% of its gross domestic product into research and development, double the OECD average. Israel hosts research and development centers for large companies like Amazon, Apple, Cisco Systems, Facebook, Hewlett-Packard, IBM, Google, Microsoft, Motorola, SAP, and Samsung. In 2021, 84% of the Middle East and North Africa’s total venture capital funding went to Israel.
Israel’s Tel Aviv has become the seventh-largest startup ecosystem in the world. With a patent count that has increased by 169% since 2021, a startup value of $120 billion, and the addition of thirty new unicorns in 2021, bringing the total to ninety-two unicorns in 2022. Tel Aviv also has innovation centers established by companies like Volkswagen, Anheuser-Busch, Apple, and Citibank. The city has a seven-year time to exit compared to a global average of 9.4 years.
Israel’s government programs and tax incentives have created a haven for entrepreneurs and innovators. The Yozma government program launched in 1983 matched outside venture capital investment in an Israeli startup and asked the venture capital firm to return its investment if the company had a successful exit. Over thirty grants and tax incentive programs for research and development have been established, including conditional grants, reduced tax rates, tax exemptions, employment aid programs, and intellectual property incentives.
A $70 million program was launched in January 2022 to promote entrepreneurship among Arab communities. Wage subsidies for new employees range from 10% to 40% for up to several years. Intellectual property assets created in Israel or transferred to Israel qualify companies for reduced corporate, dividend, and capital gains tax rates. The Angel’s Law offers tax benefits and deductions to single investors who invest in Israeli companies during the research and development stage. There are over forty research and development grant programs for multinational companies, individual entrepreneurs, research institutions, and non-governmental organizations, offering a customized and comprehensive incentive toolbox.
Several factors have driven Israel’s business success. The elite cybersecurity intelligence unit, Unit 8200, produced a group of world-class cybersecurity experts with the talent to start companies. Small local markets and security threats forced Israeli entrepreneurs to operate globally, making them attractive to venture capitalists. Many U.S. venture capital firms have offices in Israel, and Israeli startup founders have moved their headquarters to thriving US cities to tap into local investment. Going public or selling to large U.S. tech companies has made Israeli companies more attractive to venture capitalists.
The Abraham Accords, signed on September 15, 2020, normalized relations with the United Arab Emirates and the Kingdom of Bahrain. The accords extended Israel’s economic relationships in the Middle East, creating 150,000 new jobs for the four signatories. If the accords grow to include eleven nations, more than four million jobs could be created, with over one trillion dollars in new economic activity over a decade.
In conclusion, Israel’s emergence on the tech scene is driven by several factors. Israel’s investments in research and development and education, as well as its strong entrepreneurial culture, have helped to create a thriving tech ecosystem. Additionally, Israel’s unique geopolitical situation, surrounded by hostile neighbors, has forced the country to develop cutting-edge military technology, which has translated into civilian applications. The government has also played a role in promoting the tech sector through various initiatives, such as providing funding for startups and offering tax incentives for investors. As a result, Israel has become known as the “Startup Nation,” with a high concentration of tech companies and venture capitalists. Despite its small size, Israel is a global leader in areas such as cybersecurity, artificial intelligence, and biotechnology, and continues to make significant contributions to the tech industry.