Israel’s Secret Sauce: How To Become A Startup Nation (1/4)

VC funding in Israel hit $2.3B in the first half of 2021, surpassing the 2020 full year total by 28% (Photo © Unsplash)

No country has pulled off Project Startup Nation as successfully as Israel. With 6,000 active startups, a record-shattering number of IPOs and no signs of slowing down, Israel’s startup ecosystem deserves a closer look. In this first article of a four-part series, the first ingredient of Israel’s secret sauce is discussed: Yozma.

The nineties were an eventful era. Not only did they bring us the dot.com bubble, Ebay and a Clinton scandal, most importantly, they ushered in the era of startups. Suddenly, spurred on by the early successes of Silicon Valley and Silicon Wadi (Hebrew for ‘valley’), bland services-oriented countries wanted to become innovative ‘startup nations’ too.

While becoming a startup nation sounds like a great idea on paper, the ingredients for pulling it off are neither straightforward nor universally applicable. However, the lure of fame and money being strong, many have looked in the direction of Israel, the quintessential Startup Nation, for clues on what to emulate.

Although many people outside the world of startups do not associate Israel with startups, few countries rival the innovation and investments generated in The Holy Land. Indeed, this last year alone, VC funding hit $2.3B in the first half of 2021, surpassing the 2020 full year total by 28%.

“It’s really a tremendous number, even when you put it in the context of Silicon Valley,” says Manuel Sussholz, co-founder and Managing Director and of Sweetwood Capital. “Israel is really today emerging, as, I would say, the main Technology Innovation Hub after the US.”

As part of a four-part series to get a better grasp on the secret sauce of Israel’s Startup Ecosystem, Silicon Luxembourg caught up with Manuel Sussholz from Sweetwood Capital. His experience as a Managing Director of Sweetwood Capital, whose Sweetwood Ventures arm is based in Israel, was an invaluable source of knowledge and forms the backbone of this series.

“It was kickstarted by the government which decided to inject a little money, not directly to startups, into VC funds.”

Manuel Sussholz

Early Beginnings

To understand what makes Israel one of the leading startup ecosystems in today’s world, one first has to take a look into the country’s past. Whereas most European tech countries started investing in startups and innovation just before the turn of the century, Israel’s took its first steps in tech in the late 80s and early 90s.

“It was kickstarted by the government which decided to inject a little money, not directly to startups, into VC funds. So, they kind of created the first programme, which was called Yozma,” says Manuel.

Yozma (Hebrew for initiative) was a government led initiative or as Manuel calls it “a VC fund of funds”. Founded in 1993, Yozma offered tax benefits to foreign VC investments and the private sector, which quickly led to massive increase in startups launched in Israel.

By taking a great risk and providing up to 40% of the capital raised by outside investors, Yozma acted not only attracted a lot of startups but also VC funds. During the brief five years of its existence, Yozma was incredibly prolific and invested in more than 40 companies.

Yozma did so well that their value increased from $100 million to $250 million in three years. This in turn attracted more than 30 foreign-based VCs to set up shop in Israel and invest in up-and-coming startups.

Once local and international VC firms saw how many opportunities and talent there was, Yozma was no longer needed. The ball was rolling and Israel was taking its first steps to becoming the first true Startup Nation.

However, Yozma is only one ingredient of Israel’s secret sauce. Other aspects of government intervention will be further discussed in the next piece.


To find out about the last, and most important, two ingredients of Israel’s ‘secret sauce’ click here:

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