Israel is increasingly being seen as a role model for entrepreneurship.

Israeli Mums and Dads used to want their children to grow up to be lawyers and doctors. Today they want them to become entrepreneurs, says Nitza Kardish, chief executive of Trendlines Agtech, part of an Israeli group investing in and incubating medical and agricultural technologies.

It might just be working. When asked about his future aspirations, her grandchild replied in best start-up jargon: "I want to exit".

Welcome to Israel, dubbed the Start-Up Nation following the 2009 book of the same name which explored the country's rise in the global technology market. More than 300 multi-nationals have set up R&D centres in Israel, which spawns 1000 start-ups annually compared to 600 in Silicon Valley, the world's leading innovation hub.

Israel has the world's highest venture capital investment and is ranked second for R&D expenditure, recently usurped by Korea. "For us, innovation is not a hobby," says Israel's Chief Scientist Avi Hasson.


Public/private partnerships have been key to Israel's economic success, he says. "It's a three-legged table making the eco-system - multinationals, start-ups and large, established Israeli companies. You can't be successful in this world unless you collaborate."

With scant natural resources, a tiny local market, and a highly-developed sense of existential threat that feeds its stance in the Middle East, Israel decided in the early 1990s to develop a hi-tech sector.

Unsurprisingly, much of its innovation originates from the Israeli Defence Forces, where conscripted troops are encouraged to challenge authority and think creatively. Some start up private sector ventures when returning to civilian life, often using spun-off defence technology.

Israel, itself a start-up country at only 68 years of age, is a society of immigrants - a common source of entrepreneurial spirit.

Due to its hi-tech success, Israel hosts delegations from all over the world, including a recent New Zealand innovation mission. Led by Spark chief executive Simon Moutter, the New Zealanders went to see what lessons might help produce a similar transformation at home.

Within the next six weeks Moutter plans to produce an action plan created by mission members to be presented to the business community and Government. A number of participating companies have also separately initiated future deals and collaborations with Israelis.

There are 4000 start-ups of which four out of 100 succeed in Israel. Photo / Bloomberg
There are 4000 start-ups of which four out of 100 succeed in Israel. Photo / Bloomberg

The New Zealand Government has already adopted a number of aspects of Israel's innovation system. The New Zealand Venture Investment Fund was copied from the 1993 Yozma Government initiative that offered tax incentives to foreign venture capital investments in Israel, doubling any investment with government funds. It started with 10 VC firms; there are now over 100.

New Zealand's Chief Scientist, Sir Peter Gluckman, who's pushing for a bi-lateral R&D agreement between the two countries, says Kiwi politicians wound up turning NZVIF into a low-risk rather than high-risk fund. In looking to lessons from another country, "we have to listen very carefully to why it really works", he says.

The idea of having a chief scientist reporting to the Prime Minister was taken from Israel. Tellingly, the Israeli Office of the Chief Scientist is run by former private sector entrepreneurs who contribute their experience to industrial R&D policy and funding initiatives before returning to the business world.

Israel's success with technology incubators and accelerators led to New Zealand setting up three private tech incubators in 2014 to commercialise intellectual property, mainly from universities and Crown Research Institutes.

Under the Israeli model the Government provides 85 per cent of funding, with 15 per cent from the private sector. The grant is repaid through royalties from any revenue generated. New Zealand's model is less generous at 3:1 Government versus private funding and doesn't provide the same expansion funding as companies grow. New Zealand also has three accelerators that got additional Government funding this year after a three-year pilot.

Lessons for New Zealand are much the same as for any country seeking an innovation boost, says Chemi Peres, co-founder of VC firm Pitango and son of former Israeli Prime Minister Shimon Peres.

Entrepreneurs need to forget their home market and go global, he says. And countries should tap into the entrepreneurial talent of their younger generation.

"If you talk about innovation as a wave, young people are the best surfers," Peres says. "Once they've done it, they're going to do it again and again, and those that do avoid lots of mistakes, create more success stories, and become role models."

As Israel's innovation eco-system has matured, more companies have started aiming for an IPO rather than early exit.

"That's why Israel is now Start-Up Nation Plus," he says.

Younger leaders want to grow the country's next unicorn (a tech start-up reaching a US$1 billion market valuation) rather than exit early, says Inbal Arieli, vice-president of strategic partnerships at non-profit connector, Start-Up Nation Central.

Arieli served in Israel's elite 8200 military unit and founded the first accelerator. He says challenges facing Israel's high-tech sector include distance to market - and, therefore, from understanding customer needs - a growing talent shortage, and increasing innovation hubs in other countries.

New Zealand's entrepreneurial eco-system is relatively young - Silicon Valley has been around for seven decades compared to New Zealand getting focused at the time of the 2001 Catching the Knowledge Wave conference.

Chemi Peres, founder VC firm Pitango and son of a former PM. Photo / Supplied
Chemi Peres, founder VC firm Pitango and son of a former PM. Photo / Supplied

A key insight from the Israeli mission is that New Zealand lacks commercialisation and entrepreneurial skills despite having plenty of innovative ideas. New Zealand often has superior technology but Israel is much better at selling what it has, Moutter says.

Israeli-based serial entrepreneur Isaac Bentwich, whose latest company, CropX, is born out of New Zealand technology, lived here for two years helping vet ideas for R&D funding. Though great ideas by Israeli standards, commercialisation of them was "near zero", he says. The answer lies with the business community rather than Government.

"Entrepreneurship is not, and never has been, run by committees."

Larger New Zealand corporates and foreign direct investment are "missing in action", with business expenditure on R&D (BERD) as a percentage of GDP far below Israel's, Moutter says.

Kiwi investors favour high dividends which forces corporates to focus on short-term yields.

Gluckman says policies to promote BERD are part of research underway by the Small Advanced Economies Initiative, of which New Zealand and Israel are among the seven participants.

Paul Stocks, of the Ministry of Business, Innovation, and Employment, says there's been an increase in New Zealand's reported BERD "although we still have a long way to go".

What struck him about Israel was the development of human capital, the drive to commercialise good ideas, and access to international capital and ideas. "Some of these features stem from the unique circumstances of Israel, including the compulsory military service in a challenging environment and the significant diaspora."

Vector chairman Michael Stiassny's main insight from the trip was that Israel and New Zealand are both "islands" in terms of distance to market.

"What we don't have is that Israeli start-ups view the market firstly as global and secondly as local. That leads to start-ups being "bold and fast", improving technology as they go rather than the typical New Zealand start-up spending years perfecting products before going to market.

New Zealand can make better use of existing innovations in partnership with offshore venture capital funders and entrepreneurs, Moutter says. "We need to entice more serial entrepreneurs from other countries who have done a great job to help us learn to commercialise our innovation."

Arguably, the mission's biggest insight is the importance of cultural attitudes. Kiwis tend to be risk-averse and critical of failure.

Israeli venture capitalist and crowd-funder John Medved says, by nature, entrepreneurs are delusional because the odds are against them succeeding. "Mass delusion changes the odds. The Israeli eco-system believes the impossible is possible and that empirically changes the chances of success," he says.

When flying out of Tel Aviv's Ben Gurion Airport, travellers pass profiles on the walls of Israel's successful entrepreneurs and their technology. Contrast that with Auckland Airport, New Zealand's largest visitor gateway, where shots of scenery, sheep, and birdlife adorn the walls.

It's symbolic of the nation's success at tourism and agriculture. Do we have the collective will - the Israeli "chutzpah" - to also become New Zealand - Innovation Nation?

Israeli ventures now turning their eyes to Australia for backdoor listings

The exit scene in Israel - "Silicon Wadi" in local slang - has the world's highest concentrations of start-ups outside Silicon Valley. There are 4000 start-ups of which four out of 100 succeed - twice the number in Silicon Valley.

Israeli start-ups have mainly been sold off early to foreign investors, although 240 have opted for an initial public offer on the Nasdaq, which lists more companies from Israel than any country other than the US.

Tamir Hay, PwC Israel technology partner, says a new trend this year has been a handful of Israeli start-ups seeking a backdoor listing on the Australian Stock Exchange, where costs and compliance are easier than in the US.

The latest is a A$29.15 million deal for ASX-listed Lithex Resources to acquire Voltape, parent company of QuickCharge, which partnered with Singapore's Nanyang Technological University to commercialise a new lithium-ion battery technology.

QuickCharge (being renamed Ultracharge) is run by Kobi Ben-Shabat, an Israeli previously seconded to Australia while working for a US tech company. His tech start-up Open Platform Systems was acquired by ASX-listed Hills Pty in 2014.

Ben-Shabat says he's regularly approached by Israeli companies keen to follow a similar ASX path. Cost-effective fundraising is the "tiger" for the backdoor listings rather than exit, as an alternative to VC or angel investment, he says. "In most cases the founder keeps control after the merger with the shell."

ASX spokesman Max Cunningham says there are plans to visit Israel later this year to meet the start-up community. Though the backdoor trend has been strong this year, the same admission rules apply whatever the mechanism companies use to list, he says.

Israeli exits generated US$9 billion in 2015, of which US$5 billion came from venture capital-backed exits, the highest in a decade.

There has been past criticism Israeli start-ups were sold too early to foreign investors and PwC's Hay says VCs are more willing to allow portfolio companies to grow and reach a higher valuation. The average time to exit VC-backed deals keeps climbing, to 9.5 years in 2015.