Why Israel is now the scale-up nation of the world

LeumiTech CEO Yifat Oron gives GrowthBusiness a run-down on the start-up scene in Israel and how the banking needed a shake-up to accommodate the nation's scale-up needs.

While the rest of the world has been shouting about its entrepreneurial heroes and burgeoning finance infrastructure, Israel’s best and brightest have been quietly plugging away, starting up businesses that have gone on to become household names.

Companies like Playtech or EZbob seem quintessentially British, but they’re both Israeli start-ups that have successfully grown and become a core part of the UK business ecosystem. “And that’s a good thing,” says Yifat Oron, CEO of LeumiTech, a subsidiary of one of Israel’s largest and longest standing financial institutions, Bank Leumi. “We want our businesses to become a part of the local communities in which they grow. Israel is a start-up nation, but banking wasn’t a core part of its growth early on,” she adds. “This is why we focus on bringing a new generation of banking to our start-ups who are essentially scale-ups now.”

Speaking to GrowthBusiness during a two-day business trip to London, Oron gives a run-down on the start-up scene in Israel and how the banking needed a shake-up to accommodate the nation’s scale-up needs.

Israel: over two decades of start-up success

Israel owes its start-up success to its entrepreneurial mindset, says Oron. “Since we were founded as a nation, we have been technology and innovation-led. R&D is a part of our DNA because we have zero natural resources, a lot talent, and a lot enemies around us,” Oron says.

“Our culture is such that we are not afraid to fail, and that what makes the strongest entrepreneurs. A lot of the natural characteristics of Israel made it ideal to create the kind of start-up friendly environment over the past 20 years.”

Israel now has more high-tech start-ups and a larger venture capital industry per capita than any other country in the world, and according to Oron, a lot of that is due to international capital, particularly from the US.

“The government injected funds, matching money to LPs from abroad. But we see so much international interest. Investors like Eric Schmidt and Ben Horowitz are always in Tel Aviv. We used to be second only to the US (as a start-up capital), but now we have some competition from small countries like China,” she adds jokingly.

Over a thousand new start-ups are spawned every year, and Israel’s 350 R&D centres, now mostly backed by multinationals, all started as acquisitions of local Israeli outfits, says Oron. “Many of our local companies have been acquired more than once, which is a sign of a successful acquisition. Once acquired, Israeli businesses usually grow 10-fold, from a company generating, say $30 million to $50 million a year, to generating revenues of $500 million a year.”

There are no surprises for foreign companies when acquiring Israeli start-ups, according to Oron, which is why so many of these start-ups exit by floating on the NASDAQ. “Our culture is such that we’re very Western in the way we do business. It’s very easy to buy us. Intel bought 12 Israeli companies, Microsoft bought 15. We’re good at being acquired,” she explains.

Intel’s recent acquisition of autonomous vehicle start-up Mobileye is the all-time largest acquisition of an Israeli company at $15.3 billion, and it will see Intel moving all of its driverless vehicle R&D to Israel. Similarly, Apple’s only foreign R&D base is in Israel.

Scaling up is a priority now; banks need to keep up

“We used to be a start-up nation, but now we’re a scale-up nation,” Oron explains. Before Israel had the rubber-stamp as start-up nation, early-stage businesses would sell to multinationals before they grew the business themselves. “It’s very tough to refuse a $200 million exit when you have no money in the bank. That’s why so many businesses exited early back then. That’s changing now. Now, Israeli start-ups are not under pressure to sell. The ecosystem is healthy and deep, but banks were sitting on the sidelines.”

When a start-up goes to a bank, there’s always the issue of which team should serve them, she explains. “The issue is these start-ups are going to grow very quickly. Who should treat them? Private banking? Retail banking? The people who deal with the bank don’t know about finance or banking. They’re usually engineers or dreamers, and when they meet a banker who doesn’t understand their business, it’s going to be hell.”

Realising that banking as a service urgently needed to reinvent itself, Bank Leumi formed LeumiTech in May 2014 to act as a growth partner for these start-up and to create value for them before they even start making money.

“It’s a win-win system. The more we get involved, the more we can bring back to the (business) community. Every dime matters when you’re growing. We realised that we needed a new service model to educate bankers who don’t get it, and a new credit model, to lend to businesses that are losing money and would traditionally be considered ‘unbankable’.”

One of the things LeumiTech introduced is a community-based credit card for tech start-ups that gives them discounts they can use, like at Amazon.

“We have to come up new products all the time, just as start-ups come up with new things all the time,” Oron adds. LeumiTech also looked into how to make lending cheaper for start-ups, starting with signing a strategic agreement with the European Investment Fund to take on a part of the risk of the credit LeumiTech gives its companies.

“We don’t think banking, we think tech. EIF supports a lot of R&D in the European Union, so we thought let’s see how we can help Israeli companies via the bank. We are their long arm to reach companies in Israel.”

“This is our North Star. Banking by definition is a relatively conservative business. You have to be a very strong leader to challenge this. We’re not a start-up, so we can’t have a gap anywhere in the organisation,” she explains.

As an example of intra-bank disruption that could potentially ruffle feathers, Bank Leumi introduced a new free, only mobile, no-personnel bank. “With (this fintech offering), it’s mean to attract various customers within your own bank, so it’s only natural that you will cannibalise existing customers. Not everyone will like that. But when the leader explains the value of this change, and the bigger picture, everyone aligns with that vision.”

A global focus

Bank Leumi has offices in Israel, Palo Alto, New York and London–hubs where Israeli businesses thrive the most, with over 4,500 customers, which is 70 per cent of the Israeli market. Its global focus mirrors that of the start-up ecosystem, Oron explains. “London has become the perfect place for tech, particularly Israeli tech. We’ve talked about how companies like EZBob and Playtech are Israeli, though maybe you’d think they’re British. Companies like Wix and Waze are also Israeli, although they have been growing in the US market,” she adds.

For Oron, it’s about supporting Israeli businesses, and helping them staying ahead of global competition, which means starting out globally with quiet confidence. “We cover every single tech trend you see in the Valley, but we’re a little less heavy on the ‘consumery’ tech. We’re now signing a huge strategic agreement with one of the larger companies in China that will open the market up for Israeli companies. That’s what we’re all about.”

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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