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How Israel leads the way in venture start-ups

March 21, 2018
Global
  Its advanced and flexible eco-system offers lessons for China


This article is republished with permission from China Business Knowledge, the knowledge platform of Chinese University of Hong Kong (CUHK) Business School. You may access the original article here.

Israel has been dubbed the 'start-up nation'. With 140 scientists, technicians and engineers per 10,000 employees, it boasts the highest number of scientists and technology professionals per capita in the world. More than 250 multinational corporations, including Google, Apple and Microsoft, have R&D or innovation centres in the country.

What are the secrets behind Israel's miracle? How is the start-up environment there different from that of China? Are there any opportunities for the two countries to work together and benefit each other?

Yesha Y. Sivan, a Tel Aviv-based visiting professor of innovation and venture at the Chinese University of Hong Kong Business School, shares his insights with China Business Knowledge (CBK).

China Business Knowledge: As an Israeli, what do you think are the secrets behind the success of Israel?

Yesha Y. Sivan: The Israeli venture ecosystem (venture is defined as the combination of innovation and finance) is unique, which I believe is one of the most advanced and flexible ecosystems in the world. In recent years, Israel has become the Mecca for entrepreneurs, venture capitals, multinational companies and experienced professionals. It is efficient, particularly in terms of digitalisation, information systems, cyber technology and artificial intelligence.

The development of Israel's venture ecosystem started with the Israeli government's heavy national defence investments combined with the Israeli people's creativeness. It continued with Yozma (Hebrew for 'initiative'), an Israeli government initiative in 1993, which offered attractive tax incentives to foreign venture capital investments in Israel and doubled any investment with funds from the government.

These Yozma funds commercialised the defence ideas to successful firms which went global later through IPOs or M&As, which, in turn, continued the upward cycle with more venture capital, experienced managers, and super-angles.

'It is often said that if an engineer from Microsoft wants to talk to an engineer from Google, they better to do it in Hebrew, in Israel'

– YESHA Y. SIVAN

Today, in my mind, the biggest advantage of the Israeli venture ecosystem is the presence of multinational companies. There are already 250 multinational companies which have set up their R&D centres in Israel. They are top players in the global economy, including IBM, Intel, Amazon, Google, Facebook and Huawei.

I believe many of these big names have already realised how beneficial a presence in Israel can be. It is often said that if an engineer from Microsoft wants to talk to an engineer from Google, they better to do it in Hebrew, in Israel.

At the same time, the fact that the Israeli start-ups can learn from these big players is a wonderful plus for them. In recent years, we have seen some local companies that started from Israel become unicorns in some industries around the world. For example, Checkpoint, Wix, and Mobile Eye (recently merged to Intel for US$13 billion).

CBK: Based on your observation, when it comes to innovation, what are the differences between China and Israel?

Sivan: China (1.3 billion people) is obviously different from Israel (8 million people) – China's scale is much bigger than that of Israel. In simplest terms, I would say that Israel focuses on 'zero to one', while China focuses on 'one to 100'. This is also the source of mutual fascination.

Israel is good at creating something from nothing; Israelis are used to offering new solutions for new problems. Think about ICQ, which is the 'father' of QQ and the 'grandfather' of WeChat. There was almost nothing at first, and then suddenly there is something. That's what Israel has been doing in the past 70 years since 1948. Israelis seldom pay attention to the local market – they are always targeting global markets. They were born global.

In contrast, China is good at scaling up from one to 100. The market is vast in China, and so they need to come up with scalable solutions. They can easily achieve success by only focusing on the local market (which can be a honey trap – as some Chinese firms are globally impaired).

And that's the basis for the two countries to cooperate. In fact, many deals are happening now: Chinese companies are going to Israel to find the idea or technology (from zero to one) whereas Israeli companies are going to China to scale their markets (from one to 100). Lumenis is one such example – it's a globally based Israeli medical technology firm which has been bought by a Chinese PE firm in search of expansion.

CBK: Most people think that Hong Kong is falling behind in the innovation/venture game. What kind of advice would you give to the Hong Kong government to boost its development?

Sivan: Hong Kong used to be a strong player in innovation and entrepreneurship. However, it failed to find its 21st-century direction, as compared with other cities, such as Shenzhen.

Given the high land price in the city, small companies may not be able to survive. So the Hong Kong government should take a unique positioning – for example, by bringing big innovation players to Hong Kong to further support innovation. Giants can create giants.

We don't do innovation for the sake of innovation. What we want is to create and keep jobs in the city and improve people's quality of living. So the Hong Kong government needs to think about how to keep companies in Hong Kong by supporting them, which is the basis for long-term development. I call this HK 3.0.

'Companies should all learn how to transform from disruptive innovation to killer innovation'

– YESHA Y. SIVAN

CBK: Some critics think that China's innovation performance is relatively weak when compared with its R&D investment. What is your view on that?

Sivan: We have different data and measurements to evaluate innovation performance. But no one can deny that there are now several new-era companies in China becoming global players, such as Tencent, Alibaba or Mobike. 

These companies are growing with new technologies and business models for the 21st century. They are the top players in their markets – globally. In future, I believe we are going to see more and more such China-born companies. 

By analogy, China-born companies should not be satisfied with conquering just the Chinese market; they need to think more globally. The truth is even when you don't think about going global, your competitors will be thinking about that and will take over your market eventually. So thinking globally is important to a company's long-term development.

CBK: Nowadays, changes – particular those brought by digital innovations – are everywhere. And companies of any size are facing tremendous pressures to adapt to the new environment. What would be your tips for them?  

Sivan: This is my focused area of work, and digital transformation is the theme of the main courses I am teaching at CUHK Business School. In the digital era, suppliers, customers and shareholders are all expecting changes and should act quickly to adapt to changes. I believe there is one universal panacea to deal with external change – and that is the internal ability to change, and change often; namely being agile.

For example, in recent years, we have seen physical marketplaces transformed into digital and virtual market spaces. So companies today must understand the dynamics of such a new environment and become more responsive to operate in our digital world.

When it comes to innovation, even the well-known process of disruptive innovation, which in the past could take years to disrupt any industry, has now accelerated into a matter of months, or even weeks. So companies should all learn how to transform from disruptive innovation to 'killer' innovation.

Facing today's ever-changing digital environment, I would say being agile is one of the keys to any company's success.

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