The spring semester is well underway and that means the Business, Innovation and Entrepreneurship in Israel course has started. We are asking the undergrad students in this class to reflect on their takeaways while they prepare for their immersion trip to Israel during spring break. Keep up with the students’ thoughts by clicking the “Business in Israel” feature tag in the right hand column of the Olin Blog.
Reflections from Samuel Blumkin, Arts & Sciences, Class of 2016
After talking about Israeli history and culture for the past two classes, today, we discussed the fundamentals behind Israel’s booming startup sector. We learned the possible routes a company can take to become a startup, each involving large amounts of capital. A startup can receive funding from “Angel” Investors (individuals lending money), banks, self-funding (a.k.a. Boot Strapping), or from Venture Capitalists.
Since it is rare for individuals to fund risky companies, and by the same token, it is risky for a bank to lend out that much capital to a potentially risky investment, startups look mostly to Venture Capitalist (VC) firms to receive funding. VC’s are made up of individuals looking to find companies in need of funding, providing that funding, and then receiving a piece of each company’s equity once it is either bought or goes public.
However, given the statistic that most startups fail, VC’s invest in multiple companies, and calculate the risk that out of 10-20 companies, two or three will fail, and two or three will be the VC’s jackpot, while the remaining companies don’t experience nearly as extreme an outcome.
Israeli startups receive a lot of funding from private VC’s, but it wasn’t always that way. Israel’s economy hasn’t been the strongest since its founding, experiencing the effects of widespread boycotts over the past few decades. Arab nations would make companies choose between trading with them and trading with Israel, and many would choose the former. France led another boycott against Israel in the 1970’s, and Israel really wasn’t able to fully recover until the very end of the century.
Israel has always had the brainpower to begin startups, but they really haven’t had the money or the manpower. In 1996, the Israeli government set out to change this, and established its own VC, Yozma. Its goal was to energize the startup industry and it did just that. By 2001, Yozma ceased being a government-owned VC and went private, still in operation today. Despite the fact that there have been failed projects since started by the government, Yozma laid the foundations for an economy with a booming startup sector. It successfully took Israel’s military and human capital as well as its population’s education and translated it into enormous sources of income for the country, and some might say, a culture.
Yozma’s success truly interested me because we seldom hear of a government stimulus to the economy that experiences the results that Yozma did. I believe it is one of the factors responsible for not only restoring Israel’s economy, but also inspiring a country of innovators. A unique characteristic that Israelis have is that they are not afraid of failure. This characteristic is essential as an entrepreneur, so that one day, he or she might be successful. This is truly a trait that separates Israel from any other country.