Is Israel the best place to start your start-up?

For those wanting to set up a tech company, there's a lot to consider. ZDNet takes a look at some of the major start-up hubs in EMEA and what each can bring for those wanting to get their own IT business off the ground. Next up: Israel.
Written by David Shamah, Contributor

For many in the IT industry, the dream is to set up a tech start-up and grow it into the next Google or Apple. Individual start-up scenes are thriving in EMEA, but from staffing to rent, exit potential to government support, there are huge differences between countries. But which country is right for your fledgling tech company? ZDNet examines some of the major hubs in the region, and what each can bring to the start-up table.

Tel Aviv, Israel
Tel Aviv, one of the tech start-up clusters in Israel. Image: Shutterstock

So well known is the country's start-up scene, Israel is known as 'the start-up nation'.

And it's no wonder: altogether, according to estimates, there are between 4,000 and 5,000 start-ups in Israel right now – working alongside the thousands of more established companies that began life as start-ups.

The start-up scene in Israel has benefited from the country's entrepreneurial mindset, as well as its ample technology and engineering talent - found both in its fledgling IT businesses as well as the multinationals that have set up shop in the country.

Tech giants from Apple to Microsoft to IBM and everyone in between have a presence in Israel

Tech giants from Apple to Microsoft to IBM and everyone in between have a presence in Israel, bringing a potential exit route for start-ups – and providing a useful antidote to Israel's relatively small home market. US tech heavyweights regularly snap up Israeli start-ups: this year alone has seen Face.com sold to Facebook, DesignArt to Qualcomm and Anobit to Apple, for example.

Bigger companies often turn their Israeli acquisitions into their local R&D labs, and some 39 percent of Israeli high-tech employees now work in the R&D departments of multinational companies, recent research by Start-up Genome and Telefonica (PDF) found.

But for those not yet ready to be taken over, Israel isn't short of funding for promising early-stage companies.

While "the local VC market remains relatively small, with less funds available", according to M&A news service Mergermarket, the country's start-ups still attracted $2.14bn of VC funding last year, a quarter of it from local private equity firms. Software companies do well in particular in Israel when it comes to funding, a study by IVR Research Center (PDF) found, attracting over 60 percent of all private equity funding in the country in the first half of this year, with internet services and communications also taking home significant chunks of the financing.

Not bad for a country of about seven million people that sits on a land mass about the size of New Jersey.

A small country it may be, but Israel has a number of large cities in the centre of the country – including Herzliya, Petach Tikvah, and Ra'anana – that play home to large Israeli and US R&D centres.

The pull of 'the centre'

While global companies including Amdocs, Motorola Solutions, HP, IBM, Oracle, and many others all have research presences in the county's centre, most companies still prefer to be located in the suburbs of Tel Aviv, the country's financial and business heart – which has its own R&D presence from the likes of Intel, Microsoft, and Google. With so many big names, and a large start-up community, the area is flush with tech workers, who often live in 'the centre', as Tel Aviv is known.

"Tel Aviv has among the highest density of tech start-ups in the world and is the core of the Israeli tech scene – which attracts more venture capital dollars per-capita than any other country and is amongst the countries with the greatest number of companies listed on the Nasdaq," a spokesperson for the Tel Aviv municipality said. And, according to a recent study by Start-Up Genome and Telefonica, the city has the highest density of tech start-ups in the world, and ranks as the world's second best start-up hub, behind only Silicon Valley.

For start-ups, you can't beat the downtown area of Tel Aviv, according to Gilad Tuffias, director of the privately owned TechLoft, a shared space where entrepreneurs can set up shop with just themselves and a couple of partners at a low cost.

"There's a vibe here," he said on a recent tour for journalists. "Visitors who come to Tel Aviv think that people don't work here, because there are three or four coffee shops on each street and they are filled morning and night."

But the patrons of those coffee shops aren't whiling away idle time. "Most of the time they are high-tech entrepreneurs, either working out a marketing strategy for their technology, talking to an investor, or developing the building blocks for the next big thing."

And it's that community that is key, according to Tuffias. "One of the important things about the start-up life is getting help from people who have been there and done that, and downtown Tel Aviv has so many start-ups in so small a concentration of space that it's rare to walk down the street and not run into someone you know with their own business." It's a tight-knit community, too, Tuffias adds. "Everyone knows each other and helps each other out. And the people who have made it remember where they were when they started, and give back to the community by helping out those starting out now."

But the close-knit nature of the Israel start-up scene is not all up side, however.

"Start-ups in Tel Aviv face different challenges than start-ups in other ecosystems" — Avner Warner

"Tel Aviv is the centre of a small country with a population of seven million, and therefore lacks a local market or even a regional market," Avner Warner, director of Economic Development Tel Aviv, says. "For this reason, start-ups in Tel Aviv face different challenges than start-ups in other ecosystems and they have different considerations when it comes to scaling and growth in contrast to exits. Many also move their operations to the US at some point.

"The ecosystem is very tight and many of the local talents come from similar professional backgrounds. On the one hand, this allows the creation of close-knit highly efficient teams, but on the other hand this means we often lack the diversity which allows for the exchange of know-how and adoption of a range of skills and technologies."

Despite the popularity of downtown Tel Aviv among start-ups, there are more options for those wanting to set up a new IT business: there are tech centres in places like Haifa in northern Israel, and even in 'peripheral' areas (usually defined as being an hour or more commute away from Haifa or Tel Aviv), like Yoqne'am in the Galilee, where networking company Mellanox has its headquarters.

Haifa, Israel's second hub

But if rents are cheaper out of town, they're even cheaper way out of town – in Haifa, which is a good hour's drive (without traffic) or train ride away from Tel Aviv. "Haifa is becoming a real tech centre," says Sharon Weshler, an entrepreneur who has helped get angel and VC funding for a dozen Israeli start-ups. "And it's cheap. I can't think of anything more important to a start-up that is stringing along by its bootstraps or angel money than keeping costs down."

Haifa is economical for other reasons as well, says Yael Mittleman, director of Top Center, the city's first – but by no means last – tech hub, accelerator, and perhaps in the near future, venture capital fund for start-ups. "We have some top universities here, like the Technion, and top facilities like Google Labs and Microsoft's R&D facilities", so there is plenty of Tel Aviv-style 'start-up vibe' in Haifa, says Mittleman.

Plus, because it's not Tel Aviv, companies don't have to pay top shekel for talent. "The combination of low rents and operating costs, and lower salaries for superior talent, have made Haifa very attractive for start-ups, and over the past few years we have seen dozens of start-ups moving here, as well as the opening of several new accelerators," Mittleman says.

While Tel Aviv may be one of the best-known start-up hubs globally, Israel has more than one location ready to play home to fledgling tech companies – each with their own strengths.

"Ultimately, it may come down to what kind of company you're starting up," says Weshler. "If you're an internet start-up, downtown Tel Aviv," where, among others, eBay's Israel R&D facility is located, "might work for you. If you're in telecom, Ramat Hahayal (another area of Tel Aviv) would be better. And if you're doing software engineering, Haifa might be best."

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