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ISRAEL: An Introduction to Startups & Emerging Companies

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 By Advs. Jacob Ben-Chitrit, Sophy Litvin and Nitzan Fisher Conforti.

A decade ago, the bestselling book “Start-up Nation” showcased Israel’s rising high-tech sector. Ten years and dozens of multi-billion dollar deals later, Israel is well on its way to becoming a global tech powerhouse. Everybody uses Wix to build their own website within minutes, navigation forever changed because of Waze, and Check Point is a global leader in all things IT security. Though a relatively young country with a population of just over 9 million, the Israeli high-tech sector utilises the unique conditions it has going for it. A talented and experienced workforce, the presence of multinational conglomerates, governmental benefits and tax breaks and an affiliation with American business culture that is common in the Israeli market are used to great advantage. These all lead to a unique ecosystem, attracting many investors and business partners.

Israeli startups truly adhere to the age-old saying – when life gives you lemons, make lemonade. The complex Israeli security and geopolitical considerations require a highly skilled army to face new challenges on a regular basis. Due to its mandatory nature, a vast majority of Israel’s high school graduates join the military, including many who are talented in computer science, mathematics and other technological fields which are in high demand in the high-tech sector. Once these young men and women complete their military service, they often apply their skills to emerging companies.

However, Israeli entrepreneurs do not only gain their skills in the military. They also have vast experience working for international tech giants. Companies such as Google, Facebook, Microsoft, Intel, PayPal and eBay are attracted to, and are familiar with, the Israeli market and business environment, and have established research and development centres in Israel. Often, after a few years with an international company, these young professionals then introduce the business practices they have learned into the startup scene. These startups are then better placed to co-operate with or be purchased by tech giants, further refuelling the high-tech cycle with new ideas and technological innovation.

While the skilled and innovative workforce plays a significant role and is valued by foreign companies, it is far from being the only reason why international companies step into the Israeli market. The Israeli government acknowledges the contribution of foreign companies to its industry and provides them with various benefits and incentives. In its desire to attract foreign companies and investors, the Israeli government has taken steps to encourage incorporation of local startups and foreign investments, such as providing financing resources for Israeli early phase research and development companies. The Israeli Innovation Authority is a governmental entity tasked with examining Israeli startups and granting government funds earmarked for research and development to the most promising. These funds can cover up to 60% of the company’s research and development expenses in a given year, and are required to be repaid through royalties on sales. The Israeli high-tech and legal sectors have gained extensive experience with respect to both complex commercial transactions and repayment of such grants if and when there’s an exit.

Another method the Israeli government uses to encourage the involvement of foreign companies in the Israeli market is through tax incentives, including tax exemption on capital gains on the sale of shares of an Israeli company, reduced tax rates and other tax provisions which aim to assist them conduct business in Israel. Another important tax incentive is the Capital Investment Encouragement Law, which provides foreign investors with significantly lower tax rates on dividends than that applicable to Israeli companies, subject to certain conditions. Furthermore, the State of Israel is a party to many international tax treaties which provide for reduced withholding tax rates on dividends, royalties, interest income and other types of income.

The Israeli corporate and business atmosphere also feels very familiar to foreign investors. Both research and development centres of multinational companies, as well as fledgling startups, work in English, drawing inspiration from the American market and trends. Israeli firms benefit from lawyers who moved to Israel after working at large law firms in the United States, the United Kingdom or Australia, bringing their knowledge and expertise to Israeli law firms, enabling them to provide service equal to that which is provided in the global top tier firms. Corporate and high-tech departments in the top-tier Israeli firms have extensive experience with foreign investors and purchasers, as well as many years of handling complex matters for startups, from their incorporation all the way through to M&A transactions. This prevailing business atmosphere and corporate culture serves Israeli companies well in their business relationships worldwide.

All of these characteristics create a unique ecosystem, conducive to the continued growth and success of Israeli companies. International investors, buyers and partners will find a mature Israeli market with vast experience and ambitions. The next big thing to come out of Israel is just around the corner.