Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldDecember 1 2014

Israel's hi-tech ascent

Israel’s impressive ecosystem of hi-tech start-ups is increasingly taking on financial technology, with bold ambitions and an eye to the larger potential offered by the US, Europe and Asia. 
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Israel's hi-tech ascent

Israel’s reputation as the start-up nation is well deserved. The spirit of entrepreneurship that flourishes in the trendy districts of Tel Aviv and beyond has generated a hi-tech industry that now accounts for 20% of gross domestic product. Today Israel stands shoulder to shoulder with global technology hubs in the US, Asia and Europe. For a country of 8 million people, this is a remarkable achievement. A number of factors, including supportive government policy, private-sector finance and a talented human capital pool, have all contributed to this hi-tech ascent.

Yet, this journey is as much about entrepreneurial daring  as it is about finance or policy. The urge to try, to dare, to risk everything in pursuit of entrepreneurial success is at the heart of the country’s technology community. Most Israeli tech entrepreneurs have tasted failure more than once. While this may be a common theme for small business owners, in Israel there is no stigma attached to failure. Instead there is a reverence for the struggling entrepreneur.

Cumulatively these conditions have bred a tremendous amount of success for Israeli hi-tech companies, across all sectors, globally. However, over the past 18 months there has been a noticeable shift in the outlook of the country’s tech start-ups as they increasingly embrace financial technology, or fintech. The arrival of international banks looking to harness the prowess of Israel’s technologists has helped. So has the greater interest of domestic lenders as they establish dedicated programmes to support the industry and tap into its longer-term growth potential.

The next level

In turn, this has generated such momentum that a new generation of start-ups has emerged to take fintech to the next level. From cyber security, to e-trading, to payments, Israel’s fintech revolution is producing world-beating start-ups in nearly every sphere of the industry. For the country’s domestic lenders, this represents a huge opportunity not only in terms of new business but also the technological solutions these companies can deliver. Bank Leumi, Israel’s second largest lender by total assets, has been at the forefront of this engagement with the country’s hi-tech and fintech industries.

“One of the things that allows high-technology companies to succeed is if there is a fully functioning high-technology ecosystem. If you look at places that only have a highly innovative tech scene but don’t have the full range of support, from government policy to private-sector finance, you see that companies don’t succeed as often. Israel has that ecosystem,” says Yifat Oron, chief executive of LeumiTech, Bank Leumi’s dedicated hi-tech-focused subsidiary.

Launched in May 2013, LeumiTech is part of the bank’s ambitious plans to harness the potential of Israel’s hi-tech industry. With the ultimate aim of extending $2bn in credit to the start-ups and small and medium-sized businesses in the sector, LeumiTech employs tech-industry experts who understand the requirements of lending to small businesses. Moreover, LeumiTech has collaborated with local start-up accelerator, Elevator, to establish a fintech innovation hub to assist the country’s fintech start-ups.

“Historically, Israeli banks have not been a big part of the funding picture for high-tech companies. This is due to the nature of the tech industry itself. It’s very difficult to make a credit decision based on standard business fundamentals when you’re dealing with a financial technology start-up,” says Ms Oron.

Finding funding

This dynamic has meant that most of Israel’s hi-tech industry relies on non-local capital, sourced through equity financing from foreign venture capitalists (VCs). According to figures from LeumiTech, 76% of the $2.3bn in equity financing employed by hi-tech firms in 2013 came from non-Israeli VCs. Moreover, the same data suggests that 90% of local VCs’ capital is sourced predominantly from US investors, thanks in part to the attractive tax incentives the Israeli government applied to foreign investors for VC-based activity. To put this into perspective, in the US the capital structure of technology companies is made up of about 33% bank debt. In Israel, this number is about 10% to 15%, according to LeumiTech.

As such, Israeli lenders now see a significant opportunity to advance their activities in this space. “Bank Leumi has been covering this sector for 15 years, but now we’re taking it to the next level. We have an affinity for fintech-related developments. As a bank, we need to ensure we stay close to these companies because this is what will allow us to maintain our leadership in the business,” says Ms Oron.

Yet, the domestic lenders aren’t alone in their attempts to tap this market. Citi, already the largest foreign player in the Israeli banking market, has established itself as a leading force in the country’s fintech space. In 2011 the bank founded a dedicated fintech innovation lab following a call from the Israeli government for large, foreign institutions to establish research and innovation centres in the country. “The government itself has been very supportive. The main demand from the government was that we had to strive for innovation,” says Lyron Wahrmann, head of Citi’s Innovation Lab TLV.

Fintech accelerator

The innovation lab was followed by the creation of a dedicated fintech accelerator that opened its doors to a first wave of start-ups in November 2013. Citi is now the only institution that runs a fintech-specific accelerator in the country. It is also the bank’s first technology accelerator anywhere in the world.

“The early development of Citi’s accelerator presented an interesting conundrum. On the one hand it was established by a global bank but on the other hand the Israeli hi-tech community at that time was not really focused on financial technology,” says Mr Wahrmann.

“Israeli technologists have traditionally looked at fintech from a consumer perspective and not so much from the perspective of a financial institution. So we wanted to share the knowledge of the kind of issues that are facing financial institutions globally with Israel’s hi-tech community so that we could start to address them,” he says.

To that end, Citi has also been active in nurturing a fintech community in Israel. The bank now has about 800 followers, many of whom are entrepreneurs that are involved in regular meet-ups and discussions around fintech.

“When I started out very few people were involved in fintech. Now everyone I meet is an angel investor in fintech or is involved with it in some way. It has become a hot topic. This has happened over the last 18 months,” says Mr Wahrmann.

Citi is not the only large international bank with a hi-tech-focused presence in Israel. In 2011, Barclays established a research and development centre in the country. Both lenders were drawn to the country off the back of attractive government incentives, in which generous employment grants, combined with the strength of the country’s existing hi-tech industry, made the move appealing.

Human capital

Beyond these big-name investments, a further component of Israel’s hi-tech success is its talented human capital pool. A large number of the country’s leading technologists have emerged from years of mandatory military service. Many come from a military intelligence background, with significant exposure to research, technology and IT development.

In particular, Unit 8200, the Israeli army’s elite signal intelligence corps, has been responsible for the training and development of a large cadre of highly skilled and experienced technology specialists who have gone on to commercialise their knowledge.

LeumiTech’s Ms Oron, herself a former employee of the military’s research and development directorate, says: “The army is extremely important in terms of Israel’s tech industry. One reason is behavioural – you have people at a very early stage of their lives managing large teams, while negotiating difficult deadlines. They are a perfect fit for most start-ups.”

These trends, and others, have played a significant role in advancing the prospects of the next generation of Israel’s fintech start-ups. Success stories range from online trading to payment fraud prevention and financial cyber security. Companies such as eToro, an online trading company established in 2007, have emerged as truly global entities.

“We’re an Israeli venture capital-backed company and we’ve managed to raise $31m to date,” says eToro’s chief executive, Yoni Assia. This early-stage investment support has helped eToro to flourish, with offices in both London and Tel Aviv. “I think generally the investment industry in early-stage companies is quite strong. There is a very healthy ecosystem of entrepreneurship and innovation,” says Mr Assia.

Moreover, eToro exhibits a characteristic that is relatively unique to Israeli start-ups: a globally focused business model. With a small home market, most Israeli companies begin their early-stage development with an eye on the larger potential offered by the US, Europe and Asia. As such, the ambitions of Israel’s fintech start-ups are higher relative to their peers in Europe or the US.

In the case of eToro, this has led to a quiet revolution in terms of the online trading space. “We wanted to simplify access to financial markets. In essence, how do you build the Amazon of financial markets where it’s as easy to purchase a barrel of oil as it is to buy a pair of shoes?,” says Mr Assia.

Democratising trade

With 3.8 million users globally, eToro is well on its way to democratising the process of online trading. “We’re building the largest social investment network in the world. We’re an online brokerage where anyone who opens up an account also opens up a profile page allowing other people to see his or her trades.”

Israeli firms are also dominant in the sphere of payments, where e-commerce and fraud prevention start-up, Riskified, established itself internationally from the offset. “The company launched about two years ago and we are now working with over 1500 merchants. The majority of those are based in the US and European markets. I don’t know many start-ups that actually deal with the Israeli market. Sometimes it’s a good place to test ideas but most people are looking to go global,” says co-founder and chief technology officer, Assaf Feldman.

Behind most of these start-ups is a long history of trial and error. The majority of entrepreneurs have been circulating in the country’s tech scene for many years, before achieving success with one or more start-ups. Much of this activity is energised by the environment in which they operate; the close-knit community of tech-savvy businesses promotes knowledge sharing, discovery and innovation.

“I moved from start-up to start-up for around 15 years, until a partner at a previous firm approached me with the concept for Riskified,” says Mr Feldman. “There is a scene here that encourages you to just do it. Everyone has ideas. As a technologist you can easily start building a company yourself.”

Growth in cybersecurity

Above all, Israel is peerless when it comes to cybersecurity. The capabilities of the Israeli military, coupled with a challenging political and security environment, have lent themselves to the growth of an exceptional cybersecurity industry. This has particular pertinence to the fintech space. A number of Israeli firms are now looking to partner with banks and other financial institutions to provide solutions to the growing number of attacks they are subjected to, from organised networks to state-sponsored actions.

“Most companies are one step behind in terms of cybersecurity. People have to deal with the damage of a cyber attack while investigating the source of the threat after it has happened. It often takes around six to eight months in order to determine where, in a company’s infrastructure, an attack has occurred and who was behind it,” says Liran Tancman, chief executive of CyActive, an Israeli cyber security start-up.  

CyActive has developed a predictive system that enables the company to protect institutions from new types of threats. “Though roughly 160,000 new malwares emerge every day, the building blocks of these new malware variants are based on previous designs,” says Mr Tancman. “We compute the malware over and over again to predict hundreds of thousands of ways that hackers will try to evade security measures.” In September 2014, CyActive received an undisclosed figure from the venture capital unit of Siemens, pointing to the growing global success of a firm that was only established in 2013.

Israel’s success in nurturing such an effective hi-tech culture has come to define its recent economic trajectory. In light of ongoing investments from international and domestic lenders, the contributions of fintech in particular are expected to rise over the coming years. Moreover, Israel’s approach to hi-tech is spreading globally, which can only be good news for the financial services industry.

LeumiTech’s Ms Oron says: “The success of the Israeli model has generated interest from a number of other countries looking to create their own hi-tech ecosystems. For example, Singapore uses exactly the same mechanism as the Israeli government – privatised incubators.” 

Was this article helpful?

Thank you for your feedback!