Tel Aviv creeps up on Silicon Valley as top start-up center

The Startup Genome project crunches the numbers — lots of them — and concludes that the TA metro area is a great place to found a new venture

Startup Genome Chart (Photo credit: Courtesy)
Startup Genome Chart (Photo credit: Courtesy)

While missiles pounded southern Israel and the IDF prepared to rout Hamas terror in a ground campaign, Israeli technology was once again proving its versatility. The world was stunned last week at the effectiveness of the Israeli-developed Iron Dome anti-missile system as it began shooting down Hamas rockets — and it was stunned again a few days later, when an international study declared Tel Aviv to be the second best place in the world for start-ups.

Tel Aviv was just behind Silicon Valley as the best place in the world to establish a tech start-up, according to Startup Genome, which created a tool called Startup Compass to, for the first time, scientifically measure the factors that go into start-up success. The US-based company was established in 2010 after a landmark study came out that nearly all US job growth these days is being driven by start-ups. For the past year, the company has been polling start-ups — some 50,000 from around the world are in Startup Genome’s database  asking them in-depth questions on what makes them tick, what works and what doesn’t.

The system then crunched that data based on criteria developed by top entrepreneurs, tech companies, and researchers from University of California Berkeley, Oxford, and Stanford — in short, the people who know what start-up success should look like. The study was prepared with support from Spain’s Telefonica Digital, which itself is a major funder and supporter of start-ups in Europe. Tel Aviv, second on the list, was bested only by Silicon Valley, but beat out other top start-up cities, like Los Angeles, third on the list, and Seattle, New York, Boston, and London.

So what goes into making for start-up success? Of course, there are the usual factors, like talent and funding. But those are only two factors of what the project calls the “start-up ecosystem,” which includes factors like how much a region’s laws and culture encourage entrepreneurship, infrastructure, the “vision” of entrepreneurs in a given location, the age, education, and expertise of talent a start-up can draw on, the kinds of funding options available, and more. Startup Genome questioned companies on these and other factors with the StartupCompass tool, analyzed the results, and came up with recommendations for start-ups about what to do and what to avoid during each stage of their existence.

When it comes to a successful start-up ecosystem, Tel Aviv beats just about every other place, except for Silicon Valley. As the world’s top start-up ecosystem, “the Valley” sets the benchmark for start-up success, and Tel Aviv (referring to the entire metropolitan area and taking into account start-ups in Herzliya, Ra’anana, etc.) comes as close as anyone to that benchmark. For example, 40 percent of Tel Aviv entrepreneurs have a Master’s degree or a PhD, compared to 42% of entrepreneurs in Silicon Valley; employees in Tel Aviv and Silicon Valley work a similar number of hours; and start-ups in both locations generate similar numbers of jobs.

And in some cases, the Tel Aviv “student” outdoes the Valley “master”: Twenty-seven percent of Israeli start-ups, for example, get income from paying customers, significantly more than similar companies in Silicon Valley.

With that, there are reasons why Israel is still behind Silicon Valley, said the report. On the negative side of things, Startup Genome said, “Tel Aviv start-ups are much less ambitious. They tackle 46% smaller markets than their peers in Silicon Valley. They are 5% less likely to tackle $1 billion-$10 billion, and 33% less likely to tackle $10 billion and higher markets. They are 9% less committed to work full time before product market fit, and pursue building a great product over creating impact.”

Tel Aviv is part of the Israel success story, said the report. Israel “has the highest density of tech start-ups in the world. In 2009, 63 Israeli companies were listed on the tech-orientated NASDAQ — which is more than Europe, Japan, Korea, India, and China combined. Almost every major tech company today has some kind of subsidiary in Israel, including Intel, Microsoft, Google and Cisco to name just a few. Consequently, 39% of Israeli high-tech employees work in the R&D departments of multinational companies.”

Tel Aviv itself, as an ecosystem, ranks second globally “because it has the second highest output index of start-ups with a healthy funnel of start-ups across the developmental life cycle, a highly developed funding ecosystem, a strong entrepreneurial culture, a vibrant support ecosystem and a plentiful supply of talent.” That talent, said the report, is key; with the highest percentage of scientists and engineers of any country in the world, start-ups have all the brainpower they need to succeed.

The report also quotes a slew of investors, entrepreneurs, venture capitalists, and government officials who positively kvell in the description of Tel Aviv’s success. But can the city, and Israel, keep it up? With all the challenges to doing business in Israel — not the least of which is putting up with the occasional war — officials realize they have their work cut out for them. “As policy makers we are formulating a plan for the coming years that will maintain Tel Aviv’s position as a leading hub,” said Avner Warner, director of Economic Development for the Tel Aviv Municipality. “The plan is based on the internationalization of the local ecosystem by attracting talents, start-ups and investment from abroad, thus bringing diversity and a range of know-how to the local community.”

And while it’s unlikely that Israel could overtake Silicon Valley itself, most experts say, you never know. “They say in America that ‘No. 2 always tries harder,’” said one entrepreneur. “Everyone I know certainly tries very hard to succeed. Despite the wars and missiles, no one I know in the tech community is giving up. Just the opposite, these experiences only make us stronger and more determined to succeed.”

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