Israeli Startup Scene Thriving Despite Conflict

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Editor’s Note: Christine Magee is an analyst for CrunchBase.

Investments in Israeli startups climbed to near record highs in the third quarter, even as the country was in the throes of the worst violence it has seen in years.

Venture investments in Israel-based companies have not only increased in number of deals – with a near 40% rise this quarter over last- but more than tripled the total amount invested in Q1 of 2014. And this doesn’t account for the hundreds of venture-backed Israeli startups headquartered in New York or the Silicon Valley.

“Basically it did not create any disruption,” says Chemi Peres, managing partner at Pitango Venture Capital, of the recent violence. “The high-tech industry continued to be vibrant, and we never delayed a product or missed a milestone,” Peres attests, adding that the single time he has feared for the safety of a team was in 2001, when one of Pitango’s New York-based companies survived the World Trade Center attacks.

While it seems plausible that regional instability would hinder deals or deter investors, “the bottom line is that it comes with the turf,” says Hillel Fuld, Israeli entrepreneur and startup mentor. “Even when it’s quote-unquote peaceful here there’s always violence – we’re surrounded by enemies – but there are more entrepreneurs per capita in Israel than in any other country, and the innovation is really off the charts.”

“This appetite for innovation and breaking the rules a little bit is appealing to U.S. companies” says Bruce Haymes, SVP of Business Development at Nielsen, suggesting that Israel’s instability may not be a negative factor at all. The global information and measurement company launched Israeli incubator Nielsen Innovate just over a year ago as its first step into the world of venture capital, beating out many Israel-based multinationals for a partnership with the Israeli government.

“In our facility they converted our safe room into a conference room and teams worked out of the safe room for periods of time,” says Haymes. “People adapt and they continue to work.”

If outside investors are still weary, Israeli VCs are raising new funds to sustain the ecosystem without international assistance. Magma Venture Partners just closed a $150 million fund to invest in early-stage Israeli companies, which according to managing partner Modi Rosen was raised during the three months of war with very little difficulty.

Although the press tends to separate the Israeli discussion into two separate dialogues – the Israel of innovation and the Israel of war – the two are intimately linked. “There’s a war but at the same time the innovation that led to the success in the military campaign is just technology,” explains Michael Eisenberg of Israel-based venture firm Aleph.

From the Israeli army’s use of SMS messages – warning civilians in Gaza to evacuate prior to air strikes, to the apps launched during the height of the war to alert smartphone users to falling rockets or attempted kidnappings – it is clear that many Israelis turned to tech to combat increasing violence.

Palestinians in the Gaza Strip do not have the same access to technology. Lacking an Iron Dome security system, over two thousand Palestinians were killed and thousands more wounded in comparison to the 68 Israeli deaths recorded in the seven-week span.

The majority of Israeli entrepreneurs receive their technical training in the military, which serves as a psuedo-accelerator to develop young Israelis into adept entrepreneurs with technical skills and practical experience. Carmel Ventures partner Daniel Cohen says that a lot of the entrepreneurs they back come out of the military, but adds that recently they’re starting to see many more 2nd and 3rd generation founders.

The connection between military training and startup success, however, means that a large group of Israel’s population is excluded from the burgeoning civilian tech scene. These are the 1.7 million Israeli Arabs, nearly 20% of the population, many of whom are highly skilled and highly educated.

To address this gap, Pitango’s Chemi Peres has helped launched Al Bawader, an investment fund with backing from the Israeli government, as well as startup incubator Takwin Labs, both dedicated to backing Israeli Arab entrepreneurs that are targeting the Arabic-speaking population.

“As a small country that mostly focuses on science and technology, we cannot allow ourselves to leave these minorities out of the circle,” says Peres, advocating for Israel to one, leverage inclusivity to raise national productivity, and two, focus on global markets, in order to retain its place at the forefront of global innovation.

Arabic speakers are believed to be the fourth largest language group of Internet users, following English, Chinese, and Spanish language groups, and the 300 million people in the Middle East have an average age of 25. The numbers alone signify a potentially massive opportunity for investors and founders alike.

But many of Israel’s most active VCs are choosing to take a more passive approach, maintaining the position that they will invest in Arab entrepreneurs if the business opportunity is good but will not seek them out.

“A lot of people are skeptical about the Middle East and don’t think it’s time to invest,” says Peres, “but my answer to them is this: 25 years ago it was not realistic to invest in China, 15 years ago it was not realistic to invest in Turkey, and 10 years ago Africa did not look so promising. We decided to be forerunners and invest.”

Featured Image: Boris Stroujko/Shutterstock