The Israeli city has the highest number of startups per capita in the world. What can it teach other cities about how to build a healthy business ecosystem?

With 170 miles of Mediterranean coastline and an estimated 300 days of sunshine a year, Israel’s tourism industry is booming, with record numbers visiting in 2017. But in Tel Aviv, it’s the startups that have got the business world talking.

According to the 2018 Global Startup Ecosystem Report, Tel Aviv has the highest number of startups per capita in the world, and the highest investment of GDP in research and development (R&D). It’s also one of the top-performing cities for global connections and global market reach, and has been highlighted by Compass and Fortune magazine as one of the best places in the world to start a business.

Big ticket acquisitions by some of the world’s largest companies have given homegrown entrepreneurs the confidence to dream big. Google acquired Waze, a traffic and navigation app, for $1.3bn in 2013, beating off competition from Apple and Facebook. That sale was followed by deals to buy the autonomous-driving startup Mobileye by Intel, for $15.3bn; meanwhile Israeli taxi app Gett isvalued at $1.4bn. Tel Aviv is also home to hundreds of venture capital funds, acceleration programmes and co-working spaces, spread across the city’s 20 square miles.

Facebook Twitter Pinterest Uri Levine, co-founder, Waze. Photograph: Uri Levine

“The startup scene was very good even back then,” says Waze co-founder and serial entrepreneur Uri Levine about launching the company in 2008. “But the ecosystem has matured a lot over the past decade, with experienced angel investors, higher aspirations, and an ecosystem that embraces change.”

Experts say the Israeli government has been pivotal in kickstarting the industry, not least with tax cuts in the mid-1980s; the creation of the Yozma programme, a $100m (£75m) investment company that created a homegrown venture capital sector, in 1993; and a high-tech incubators programme. Yozma’s founder, Yigal Erlich, had previously been Israel’s chief scientist. In 2016, that office was rebranded as Israel’s Innovation Authority (IIA), and supported 1,115 projects of 650 companies, awarding average grants of £290,000 (1.4m ILS).

The government has also been responsible for reducing corporation tax for tech companies, from 25% to 6-12% (depending on the nature of the business), and removing bureaucratic obstacles to encourage hi-tech mergers – and it has stated its commitment to increase the number of skilled personnel employed in the sector from 270,000 to 500,000 in the next 10 years. Part of that drive will entail looking internationally for talent, targeting underrepresented local populations – such as Israeli Arabs, ultra-Orthodox Jews and women – and initiatives such as the innovation visa pilot for foreign entrepreneurs.

In Hebrew there’s a word – chutzpah – that means ‘positive rudeness’

Entrepreneurial education is also an important part of the infrastructure. IDC Herzliya university has been running the Zell Entrepreneurship Program in Tel Aviv, on which 25 students create a business in the final year of their degrees, for the past 18 years. In 2017, it also launched a BA in entrepreneurship for the first time. Dr Yossi Maaravi, vice-dean of Adelson Entrepreneurship School at IDC Herzliya, agrees much of Israel’s entrepreneurial spirit comes down to culture.

“In Hebrew there’s a word – chutzpah – that means ‘positive rudeness’,” he says. “Approaching people you don’t know and asking them for a favour or asking them to connect you to someone you need … in Israel people do this easily, even if they’re not entrepreneurs. This is important to deliver ideas, perspectives, and criticism – and we have a good network of Jewish people throughout the world.”

The size of the domestic market in a country of only 8 million people has led to many entrepreneurs in Tel Aviv thinking internationally from the start. Ruth Pollakine Baruchi, who launched MyndYou – which uses machine learning to personalise care for older people – with her husband Itay in 2016, says its main market is already the US. It’s an international perspective that is supported locally – the company has received a $900,000 grant from the Bird Foundation, supported by the Israeli and US governments, to encourage collaboration between companies from the two countries. MyndYou has since announced a partnership with a large US rehabilitation company, called Genesis Rehab Services.

Facebook Twitter Pinterest Ruth and Itay Pollakine Baruchi, co-founders, MyndYou. Photograph: Shahar Tamir

But Pollakine Baruchi, who has lived in Tel Aviv for the past 18 years, says she loves being based in the city. “There’s a good energy … a creative atmosphere of doing things and being eager to do things, which I like being part of … and in some ways it’s easy to recruit people. There’s a lot of talent in Tel Aviv.”

MyndYou is based in SOSA, a hub for tech startups in Tel Aviv, that aims to connect big corporations in traditional industries, such as insurance, finance, energy, construction and manufacturing, with Israeli entrepreneurs. Israel is proving increasingly attractive to those seeking external innovation. According to Forbes, more than 300 multinationals, including Facebook, Microsoft and Amazon, have set up research and development centres in the country.

“These companies come to Israel looking for solutions,” says SOSA chief executive Uzi Scheffer. “We create a lot of IT [but] don’t really have the market, so we are creating an export-oriented industry.”

But Scheffer believes the startup nation needs to become a scale-up nation. In 2018, the IIA announced it would provide government guarantees for bank loans to startups to encourage companies to remain in Israel, rather than seek foreign investment and move abroad. Startups will also be able to pilot technology using state-owned infrastructure, such as the postal system, electricity board and national social security agency. Building bigger businesses at home, Scheffer says, would have resounding benefits for the economy.

“If you’re a serial entrepreneur and money isn’t the issue anymore, you might want to go further and see how big you can grow the company,” he says. “You might have motivations for the good of the country and the good of the economy – I think this is a natural evolvement of an ecosystem that is perhaps three decades old.”