When LeBron James scores basket after basket from anywhere on the court, he makes us believe that putting the ball through the hoop is the most natural thing in the world… but it is not. Behind it lies a great deal of talent, but also a great deal of work done well. Something similar is happening in Israel. It looks as if the Israelis have discovered the philosopher’s stone of creating start-ups, but behind it lies a great deal of effort and a way of doing things that is far from obvious. Sharing it may help the talent that exists in many places, Spain included, to crystallise.
The first thing to be clear about is that you need an ecosystem that nurtures start-ups, supports them, helps them grow and benefits from the results. That ecosystem has a number of key elements that generate start-ups and help them grow:
- Universities
- Investment Funds
- Institutional Support
- Large Companies
Let us look at each in turn: why it matters and what it contributes.
Universities and the education system
Israel has a population of about 8.5 million. By comparison, Catalonia has about 7.5 million and the Madrid region 6.5 million. With a population of that size, Israel has 8 universities ranked among the best in the world, 12 Nobel prizes for research, the fourth-highest number of patents per capita of any country, and an efficient system for transferring the technology developed in its universities to society at large. The universities have in-house accelerators that allow researchers and entrepreneurial students to put their ideas into practice. Sustainability is key. If this effort brought no return, it would last only a limited time. The return comes when the investment translates into business success. The professors involved, the departments, the students and the universities receive a percentage of the companies, businesses or patents created. In this way the funds invested are recouped, the participants are motivated, and the process can be sustained over time.
Institutional Support and Investment Funds.
Average global investment in R&D is around 2.1% of GDP. In Spain it is 1.2%. In Israel it is 4.2% of GDP. Every year Israel’s R&D effort is three and a half times that of Spain. Need I say more? How do they do it? The Israeli government set up its own public investment funds back in the 1990s. Today it has more than 70 active investment funds which, among other things, promote the transfer of technology from academic research to industry.
One form of collaboration takes the shape of bilateral agreements with private funds, whereby the public sector commits to financing of the equivalent of €500,000 per start-up, repayable only if the company succeeds. The State provides this financing on condition that a private fund invests the equivalent of €100,000 in equity. This means the private fund selects start-ups carefully, since it is putting its own money at risk, but in return it has six times the development capacity it would have if it invested alone. This drastically reduces the proportion of money that is “wasted”. Everyone wins: the State generates high-quality added value and jobs, and increases the likelihood of recovering the funds invested so that it can keep promoting new start-ups. The benefit for the private funds is obvious. In the technology sector alone there are some 20 incubators financing up to 85% of the costs of new projects’ first two years.
Large companies in the sector.
One of the problems facing both start-ups and academia is getting market needs right. An entrepreneur may have an idea which, naturally, he believes will change the world. He sets to work, raises funds, produces prototypes and so on, and when it is tested on the market it may not be the great success he had hoped for. Time and money may have been lost and the opportunity wasted.
One way to reduce this risk is to bring the large companies in each sector into the process. The effect is twofold. On the one hand, it creates a “match” between what entrepreneurs have in mind and what companies know about their customers. On the other, it shortens lead times (“time to market”), thanks to these companies’ ability to “fine-tune” the start-ups’ ideas. The result is mutually beneficial.
Another fundamental aspect is a global outlook. From minute zero, the entrepreneur sees the whole world as his market. No question of thinking his market is his province, his region or his country. The market is the global world, and it must be reached quickly. Thinking big from the very start is what makes you big: “Think Big”. In fact, many of these start-ups end up being bought by the large companies that “mentored” them along the way, for sums that seem staggering to the entrepreneur but cheaper to the companies than if they had had to build the businesses themselves.
A picture is worth a thousand words, and a selection of some of the companies present in Israel may help to convey the message. This is not about having a branch office in Israel; it is about having an R&D centre, a laboratory or something similar. Specifically, these multinationals have more than 300 R&D centres in Israel. Even Telefónica is there.
As a result of applying this strategy consistently over time, Israel has created more than 7,700 start-ups. In 2017 alone, the companies created in this way that went public raised some $23 billion. A significant proportion were bought by large companies: Mobileye, acquired by Intel for $15 billion; NeuroDerm, for $1.1 billion; Gigya, by SAP, for $350 million, and all of this in 2017 alone.
The talent is there. It is like having a good seed and knowing what it can produce. If we look after it, give it the right fertiliser and support it as it grows, it can bear abundant fruit. Others have already proved it. Are we really incapable of doing it even better?
Francisco Canos
Article published on 30 July 2018 in:
