Best Cities for Startups – Tel Aviv

By Adriaan Brits | Friday, 26 November 2021 | Feature, Startup, International

Israel has become a startup mecca, particularly in Tel Aviv. In fact, Startup Genome says it has about 2,750 startups – approximately one for every 154 residents – which is the most per capita in the world outside of Silicon Valley. It’s home to 107 multinational companies with research and development centers and innovation hubs, including Amazon and Alibaba. Moreover, Israel spends the second-most per capita on R&D in the world, attracting tech giants like Apple, Microsoft, and Facebook – all of which provide important resources for startups.

Startup Genome rates Tel Aviv the No. 6 startup city in the world, calling out its particular strengths in artificial intelligence, big data, and cybersecurity. “It is well-understood… that the high-tech industry in Israel holds the key to pulling us out of the economic crisis following the coronavirus pandemic,” Aharon Aharon, former head of the Israel Innovation Authority (IIA), told Startup Genome. It estimates Tel Aviv’s total early-stage funding at $3 billion and its startup ecosystem value at $47 million, both of which are well above average. The city’s startup ecosystem raised $6.8 billion in 2020 — 25% more than 2019 — and doubled the number of unicorns to more than 20. 

Startup Genome places Tel Aviv third in the number of AI startups globally, noting that Google established its first AI- and machine learning-focused startup accelerator outside the US in Tel Aviv in 2018. Firms like Logz.io, an open-source analytics platform, have received millions in venture capital funding. AI is the leading startup sector in Tel Aviv, comprising 40.7% of its startups and employing 25% of its workers. Cloud and big data aren’t far behind at 38.1% of the city’s startups.

Israel is also a cybersecurity powerhouse, exporting $6.5 billion in products related to the sector annually. It was the first nation in the world to offer a Ph.D. in cybersecurity and has six cybersecurity research centers. Last year saw 23 exits in this industry totaling $3.4 billion.

What else is great about Tel Aviv for startups? Read on to find out.

Plenty of Government Assistance

As in cities around the world, government support has been crucial to the success of Tel Aviv’s startups. For example, the national government has strong protections for intellectual property and has reduced the corporation tax for tech companies. It also provides tax incentives to entrepreneurs via the IIA, an independent publicly funded agency. The IIA provides practical tools and funding platforms to help boost innovation in Israel by several different entities, including:

• Early-stage entrepreneurs
• Mature companies developing new products or manufacturing processes
• Academic groups seeking to transfer their ideas to the market
• Global corporations interested in collaborating with Israeli technology
• Israeli companies seeking new markets abroad
• Traditional factories and plants seeking to incorporate innovative and advanced manufacturing into their businesses.

To meet the needs of this wide range of clients, the IIA has developed a new internal structure focused on six primary innovation divisions, one of which is aimed at startups. This division offers:

• Incubators Incentive Program: This is intended for entrepreneurs who want to found a startup based on an innovative technology via a technological incubator. The incubator’s role is to invest in companies in their early stages and to provide a framework that supports the establishment of the company and the development of the idea into a commercial product. 
• Innovation Labs Program: This program helps entrepreneurs in the preliminary stages prove the feasibility of new technology. The assistance is provided through innovation labs operated by major corporations.
• Ideation (Tnufa) Incentive Program: Through this program, new entrepreneurs can develop and validate innovative technological concepts. Funds are used for building an initial prototype, intellectual property protection, and business development.
• Early Stage Companies Incentive Program: This is designed for startup companies seeking to develop and promote an innovative technological project, as well as penetrate the market by raising investments from the private sector. The program offers preferred incentives to minorities and Ultra-Orthodox entrepreneurs.

Lots of Skilled Workers

Tel Aviv has more scientists and engineers per capita than most other cities. It has similarly high levels of academic publications and people with college degrees. This is in part because the city has excellent colleges and universities like Tel Aviv University, most of which offer science and technology degrees. 

Another reason for Tel Aviv’s surfeit of tech talent is Israel’s mandatory military service for young adults. During this time, many of them receive invaluable training in technical subjects and develop skills that are directly transferable to the private sector. These workers tend to stick around after their military service is complete and contribute to Tel Aviv’s thriving tech industry, enjoying high salaries.

Finally, Israel is also a magnet for educated immigrants who settle in the country, start businesses, and contribute to the culture of innovation.

Ruth Pollakine Baruchi, CEO of the machine learning firm MyndYou, said the city’s large number of dedicated, skilled workers is one of its best attributes. “There’s a good energy … a creative atmosphere of doing things and being eager to do things, which I like being part of … and in some ways it’s easy to recruit people,” she told The Guardian. “There’s a lot of talent in Tel Aviv.”

Plenty of Funding

According to IVC Research Center, Israeli tech companies raised $2.74 billion in the first quarter of 2020. This was an all-time record and a substantial increase from $1.56 billion in the fourth quarter of 2019. Venture capital-backed deals totaled $2.43 billion, which also was an all-time record. Startups in the life sciences, cybersecurity, and AI sectors did especially well. 

That’s not all. According to Tel Aviv’s Municipality Press Office:

• Tel Aviv tech companies accounted for 20% of the Israeli tech workforce and generated nearly half of the total volume of investments and exit value.
• In 2020, investments in Tel Aviv tech companies rose to $6.8 billion – 34% higher than in 2019 – and accounted for 48% of all investments in Israeli tech companies.
• Foreign investors held 68% of total investments in Tel Aviv companies.
• Tel Aviv tech company exits reached a record $4.43 billion in 2020, a 20% increase compared to 2019 and 46% of all exits by value.

Perhaps it’s not surprising that during the past five years, the number of tech companies active in Tel Aviv grew by 25%, compared to a 16% increase across Israel.

A Startup-Friendly Culture and Ecosystem

Tel Aviv’s culture is also conducive to startups. “The geographical and cultural traits of [Tel Aviv] contribute to its status; the great, warm weather, the openness to ideas, cultures, languages and ethnicities, as well as the proximity to leading academic institutions and the young, vibrant enthusiastic atmosphere that characterises the local culture,” said Yoni Assia, founder and CEO of social trading and brokerage company eToro. 

In addition, because Israel is a small country, startups must focus on international markets almost from the beginning. While this can be a disadvantage, it can also work in companies’ favor if they are immersed in a thriving startup ecosystem. “A rich and diverse ecosystem has evolved in Tel Aviv over the years and provides support for startups to grow, from meetups, training sessions and shared offices to legal and financial advisors, investment specialists, and world-class investors,” Assia said.

About the Author

Adriaan Brits

An analyst of global affairs, Adriaan has an MSC from Oxford, with diverse interests in the digital economy, entertainment, and business. He is a specialist trainer in advanced analytics and media.