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What Israel's startup scene can teach the world

The Tel Aviv skyline

FINBARR O'REILLY/REUTERS

Israel is a tiny country with an outsized impact on tech. Not only does it house as many as 3,000 tech-related startups (centred around Tel Aviv), but more than $6-billion a year flows into the country through exits (mergers, acquisitions or IPOs), according to Israel's IVC Research Center.

Yossi Vardi, 73, sometimes called the grandfather of Israeli tech, is a serial investor and long-time booster of his country's innovation sector. In 1996, he famously funded his son Arik's company Mirabilis, which invented early message system ICQ and was sold to AOL in 1998 for more than $400-million. A featured speaker at Cybertech Canada conferences held by Israel's embassy to Canada (and hosted at Toronto's MaRS Discovery District last month), Mr. Vardi was asked what's made Israel so good at startups.

Israel is often called the startup nation. How did it happen?

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There is immense, enormous curiosity about this phenomena which happened in Israel, this hotbed, this mania of creating startups. If you do it on a per capita basis, it's even more impressive, because we are only 8.2 million people.

We ourselves are succeeding to decipher the phenomena only recently. It first happened and then we went into a kind of soul searching to understand it. I'm asked all the time to go to places and talk about it. I'm doing it 50, 70 times a year.

What's the key? Government money? Military needs? Education system?

I think one of the misunderstandings of how entrepreneurship, creativity and innovation works is you think that by technology – or by education or by government policy – you can kick-start it. And this is definitely not the case. The technology, education, government support, military, are the fuel, the question is what is the spark plug. What is the catalyst?

I was asked by people in Sweden, how can you replicate the phenomenon? I told them it's very easy. You bring around your country 1.4 billion people who don't like you, and you bring three million Jewish mothers, and then you replicate the phenomenon.

Not every country has Jewish mothers, though.

Jewish mother doesn't have to be female, and doesn't have to be Jewish. Jewish mother is a state of mind. It's not gender, it's not ethnic. The Jewish mother, she tells her son who is five years old: 'After all that we have done for you, asking for you one Nobel prize is really too much?' Then you grow with this kind of challenge, so you go and try to conquer the world.

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We worry a lot here that Canadian companies sell out too soon, and fail to scale. Is that a problem in Israel?

We have in Israel a real difficulty in scaling. Small countries cannot create big companies, they don't have enough of domestic market. For that reason we created this amazing symbiotic living between the Israeli young, quick, mutually supportive ecosystem and large American companies who love to buy the Israeli startups. They provide the scalability, they provide the financial resources, they provide the management style. The success of Israel is because 400 of the best multinational companies from the U.S. but also from Europe and now from China and India, are coming and working with us.

But if you sell off your companies, how does that support the ecosystem?

You cannot have a startup community without angels which are putting up the first money. To get the angels you have to have exits. The nice thing of being an angel investor is that when you lose, you lose 1X, but when you win you can win 10X or 1,000X. And you don't have to have too many 1,000X to make your portfolio nice. A few successful exits will be much bigger than your many failures.

I made 86 investments. I closed 29 of them; I made 25 exits. I have still [about 30] companies which keep me busy. I tend not to do new investments because I have enough. What I found is a startup is like a kitten. You nourish a startup – it's like giving milk to little kitten, you get a very warm feeling about yourself. And when you have one kitten it's nice. When you have two kittens, okay, when you have five it's beginning to have an issue. When you have 86 you find yourself covered in kitten [excrement].

Biggest investment you ever missed out on?

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I made a whole career of missing opportunities, dotted here and there with some small success.

One is [social-mapping data startup] Waze. It came to me and they said the drivers will decide where to go, and I said this is a really [bad] idea. And then when Waze was sold to Google. [Reports peg the 2013 sale price at more than $1-billion (U.S.).]

So, what do you think of Canada?

Canadians are exceptionally nice people. In Israel exceptionally nice is not a compliment.

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About the Author
Technology reporter

Shane Dingman is The Globe and Mail's technology reporter. He covers BlackBerry, Shopify and rising Canadian tech companies in Waterloo, Ont., Toronto and beyond. More

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