Inside Silicon Wadi: Why VC in Israel is a booming business

Print 11 March 2016
Kevin Dowd / PitchBook

Israel is a country of just 8.5 million people, roughly the same population as New Jersey. But the sliver of a nation on the eastern shore of the Mediterranean Sea punches well above its weight in the world of venture capital, earning the nation's tech-centric coastal area around the nickname “Silicon Wadi” (Wadi means “valley” in Arabic and Hebrew).

Since the start of 2012, 4% of all VC deals outside the U.S. have taken place in Israel, according to the PitchBook Platform. That’s the seventh most of any country, trailing only China, India, the U.K., Germany, France and Canada—all of which dwarf Israel in terms of GDP.

There were 326 VC investments completed in Israel during 2015, some of the largest among them a $105 million round raised by software company ironSource and a $60 million round for freelance marketplace Fiverr. Nearly 60% of these deals were in the information technology sector, supporting the nation’s reputation as a hub for high-tech innovation.

Total deal count declined slightly year-over-year, from 342 in 2014, but looking at the larger picture, investment in Israel is clearly on the rise. The average number of completed VC investments from 2013-2015 was 329, compared to 180 in the three years prior and 111 in the three-year period before that. While some foreign firms such as Sequoia and Microsoft Ventures are pumping money into Israel, there’s also no shortage of domestic investors supporting the booming industry, including Pitango Venture Capital, Jerusalem Venture Partners and Carmel Ventures, all of which rank in the top 10 most-active Israeli investors in the past decade.

So how has such a miniscule country assumed such an outsized role in VC? Tax cuts in the mid-1980s were one of the early drivers, leading to economic growth and reduced inflation after decades of stagnancy followed the nation’s founding in 1948. In 1993, the Israeli government implemented the Yozma program, which offered tax incentives to foreign investors and pledged to use government funds to double any outside investment in an Israeli company. And during the early 2000s, the government enacted a series of reforms that helped open up and privatize what had once been a more centralized economy. Combined, the changes made the nation much friendlier to VC investment.

That’s all useless if there are no targets to invest in, however. The other major factor in Israel’s uptick is the prevalence of companies churning out innovative ideas and products.

Aside from ironSource and Fiverr, these include navigation app Waze (acquired by Google for $1.15 billion in 2013), mobile app platform Conduit (valued at $1.3 billion in 2012) and messaging app Viber (acquired for $900 million in 2014).

And then there’s the nation’s reputation as a cybersecurity center, aided by the government’s commitment to investing in military R&D, as well as the efforts of private companies such as Check Point (NASDAQ: CHKP). Founded in 1993, Check Point has been a direct source of future entrepreneurs—its alumni have gone on to found other cybersecurity companies such as Imperva and Tufin. Later companies picked up the mantle, including Aorato and Adallom, the two of which were acquired by Microsoft (NASDAQ: MSFT) for a combined $445 million. And VC activity in Israeli cybersecurity has never been more popular than it is today. In 2015, more than $182 million was invested through 40 deals—both 10-year highs, and both more than a 50% increase over the previous record.

At this point, Israel's high-tech market is somewhat of a positive feedback loop: Companies churn out innovative products and workers, which in turn draws more companies like Apple and Amazon to establish offices in Israel, which in turn draw and produce more talented individuals, which in turn go on to found new innovative companies, ad infinitum.

Nobody knows for sure what the future of investment in Israel holds. But considering the past quarter-century in general and recent data trends in particular, the upstart VC juggernaut is showing no signs of slowing down.

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