Why collaboration and competition are key in Israel’s investment scene

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From Startup-Nation to Scale-Up-Nation. Today 10% of the world’s unicorns are based in Israel. But while the country is rich in unicorns, it isn’t a one-trick pony: those 64 unicorns are spread across a whole range of categories, everything from infrastructure to security, fintech and insurtech to adtech and marketing. And if you think that sounds promising, consider that 400+ leading developers and manufacturers have a presence and or R&D centers in Israel (think: Google, Microsoft, Facebook, Amazon, IBM, Bosch, Barclays, Sony, Apple, Qualcomm, Merck, Philips, Johnson & Johnson, Siemens — the list goes on and on and on). Plus last year was the best ever year for Israeli tech, with companies reaching their highest ever valuation and the GDP per capita figure exceeding that of Germany for the first time – due in large part to the booming high-tech sector. 

At hubraum, we have a small team based in Tel Aviv. We reached out to Alon Segal, the managing director of Deutsche Telekom’s office in Israel (and an Israeli himself) and Florian Steger, a venture capital investor and MD at the hubraum fund, to find out why innovation seems like one of Israel’s natural exports, about the investment scene in Tel Aviv and why the greatest opportunity hubraum can offer startups is partnership, not just access to funding. 

Let’s start with an easy question. What do you both think is special or different about the Tel Aviv startup ecosystem?  

Alon: Isareli’s use the expression “let’s talk Tachless” (actually a loan word from German!) which means let’s be blunt or direct and save time.  In this context the meaning is:-´ Is this a real problem/opportunity? Can we solve it? Can we work together?  We’re good at speaking directly here and we have a healthy disrespect for authority which I would argue deviates from German norms, and we tend to rise up to meet a challenge. Necessity is the mother of invention and Israel has been driven by necessity. We’re a lot younger than the crowd in Europe, which contributes to a kind of exuberance or optimism that’s present in the ecosystem here, with a mean age of 30 versus Europe’s mean age of 42.  

Alon Segal

Florian: Plus, maybe to sum it up quickly: Israel’s success has been a combination of people being knowledgeable about certain topics plus there being industries which are active here which are relevant for tech innovation: think about the political and military situation and how that’s spread over into academia and research. It’s an attractive place to situate global businesses in terms of the landscape — startups based in Israel can easily secure investments from Europe, the US and even from Asia. 

Florian Steger

Alon: To return to Florian’s point about the military, we point to the military as a source of lots of different technologies, but collaboration is also something we learn there — when you’re thrown at the ripe old age of 18 in with a bunch of people in a stressful scenario where they’re not really from your milieu or they’re not really your friends just yet, you have to learn to collaborate.

There is also a new geopolitical reality – and some truly amazing new collaborations. For example —Tim Höttges (Deutsche Telekom CEO) flew here for a meeting on a commercial flight from Dubai, which would have been inconceivable just a couple of years ago. For example, we now have Emirati money coming in here, they’ve announced an investement of around 10 billion in Israel. 

What is the secret sauce that fuels the Israeli innovation engine in comparison to Europe’s? 

Alon: I would say that the Israelis are competitive and not afraid to challenge the status quo or tech giants – one could say the same of startup workers in other environments like the Valley or Europe but this said, Israelis’ ability to collaborate is an advantage. You will probably find at least three or four startups who cover the same topic. The founders will sit together and discuss it — they’re competing with each other but they’re also seeing how they can get to market faster — together.  

So this ability to try and help each other out, (and again, it can still be in a competitive environment) is unique to this environment which is open, engaging and also very small. It reminds me of Silicon Valley in the 90s, when everybody knew everybody. This is still the case in Israel. So it’s easier to say, ‘I’ve tried that, that doesn’t work’, this isn’t about helping your competition, you’re helping the industry in general. I think this is a very unique Israeli flavour and is one of the reasons people want to carry out innovation here. 

Florian: It’s interesting that you first mention competition because I agree about collaboration but I do think of Israeli startups as really competitive and not afraid of competition! Yes, inside of Israel — at least geographically, it’s such a small place that you can’t ignore your competitors. You’re forced to decide if you want to compete or if there’s a way to partner.  

Unfortunately, what I see in Europe is that if you’re not in the same city, in  early-stage startups don’t even see each other as competitors. If I’m a startup in Berlin and there’s a startup in Paris or in Barcelona doing something similar, I’ll only start worrying two or three years from now. And I have the feeling that this isn’t something you can do if everything is concentrated in Tel Aviv and you know who is working on what. 

What advice do you have for startups in Israel to secure investment from hubraum?

Florian: Obviously at hubraum, we are interested in investing in Israel. But what we found out early on is that we need to play a certain role role in the ecosystem: we’re not going to compete with leading VC funds, but we can bring something else to the table and that’s the connection to Deutsche Telekom, to Germany, to Europe, to the other markets, to telecommunications. That’s why we only make co-investments. This means that a pre-requisite for investing in a startup is that there is another investor, preferably someone coming from the financial side who says I believe in that company from an investor’s perspective, but a connection to Telekom will can strengthen that startup even more. 

Do you think it’s easier for startups based in Israel to secure investment than it would be if they were based in the Valley, for example?

Florian: I would say the times are long gone when something like location really makes a difference. Investors are willing to invest all over the place and startups are competing with each other globally. Even in the last two or three years, where a lot of funding was available, it’s always been hard for most startups to raise money, but equally, it’s always hard for most investors to get into the really good startups. As such, it’s hard on both sides. 

Let’s see if that changes in the future, there’s a lot of talk about changing valuations following the recent losses at the at stock market, and about re-localization of supply-chains and business because of macroeconomic developments like Covid and the Ukraine war. But startups have always been good at taking challenges and turning them into opportunities.  

 

Alon: That’s fair. These days, truly, everyone is present globally, foreign investors invest in US companies and vice versa. You’ll find all the valley names present here. Everyone’s competing with everyone — the VCs for the good deals, the entrepreneurs for the good VCs. At the end of the day, there’s not much difference in that sense. It’s become more accessible than it was 20 years ago, but I would say it’s fairly similar.  

The one element that might be unique here and which contributes to Israelis’ strength in collaboration is that there’s a real network now of repeat-entrepreneurs who mentor. And this is maybe a little different from the US scenario, there’s literally organizations across military units, Team8.vc would be a great example of a VC that even turned this into a business model, recruiting from the Israeli equivalent of the NSA (the name itself a play on the origin). Many of the unicorns actively mentor and support younger startups.

Obviously, this doesn’t change access to capital but one of the things that has happened in the maturation of the VC economy is that you look to minimize mistakes. When a first-time founder doesn’t really have a supporting element, that’s a risk. It might be a great business idea, it might be a great technology, but it’s a risk. If there’s mentorship, you avoid some of the “stupid” mistakes. 

Certainly sounds more efficient! What are the most interesting startup exits that hubraum Israel has witnessed?

Alon: There have been some nice partnerships and some financial successes from selected investments. We made investments in Texel and CiValue which led to a positive outcome in the early stages, especially from a financial perspective. However, I would argue this is not the primary purpose of hubraum in Israel. The process is actually about being available as an industry (Telco) partner – to validate and scale quickly – in addition to a financial investor. We want to help startups become big partners for Deutsche Telekom and that’s a huge journey.  

If you want to meet partners where you can carry out big business together you have to start early. You need to try out many different things and this is why we’re interested in starting out with startups, even if they are not at a scale yet where they’re relevant to Telekom. We need to start early to show them what we expect from them, to learn from them how to integrate them into our businesses and that’s a journey that can’t be carried out in a few weeks or months.  

What ideas has hubraum Israel brought to fruition that DT has profited from the most — not necessarily financially but perhaps intellectually?

Florian: hubraum’s activity in Israel is still at an early phase and there’s still a lot more to come. Given this, I wouldn’t select one special topic where you say “This has been a huge thing.” Obviously, we’ve learned a lot both in terms of lots of interesting startups and ideas coming from the area of security but also everything related to facial recognition and AI. Maybe people underestimate the fact that while it’s great to have a success with something that does work out, it’s also helpful from a corporate innovation perspective to figure out what doesn’t work.  

 

Alon: Startups gain a lot as well. It allows them to test various use cases. Plus, if their idea doesn’t work then they can cut losses quicker and move on to the next innovation. As an entrepreneur, I can tell you that the one resource you can’t buy is time. Any time saving measure is worth its weight in gold.  

 

 

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