Goldman Sachs Interview with Avi Hasson

Avi Hasson is CEO of Startup Nation Central, a non-profit organization that aims to strengthen Israel’s innovation ecosystem and connect Israeli innovation to the world. He previously served as Chief Scientist at Israel’s Ministry of Economy and Industry and as Founding Chairman of the Israel Innovation Authority. Below, he discusses the importance of the tech sector for Israel’s economy and how the sector has fared amid the ongoing Israel-Hamas war while delivering no matter what.

The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Jenny Grimberg: How important of a role does the tech sector play in Israel’s economy?

Avi Hasson: The importance of the tech sector to Israeli’s economy is second to no other country. High-tech accounts for around 18% of Israel’s GDP, double the percentage of the US and three times that of the European Union.

Around 14% of Israel’s workforce is employed in high-tech—the highest in the world. 30% of Israeli income taxes are paid by high-tech employees, and the sector accounts for around 50% of the country’s exports. The productivity of Israel’s high-tech sector substantially outperforms high-tech sectors in its OECD peers, while most other sectors in the Israeli economy frankly lag them. Basically, the business plan of Israel is high-tech, which has led the country to outgrow many comparable economies over the past few decades.

Jenny Grimberg: How did Israel become a global technology and innovation hub?

Avi Hasson: It was truly a journey—I sometimes joke that it took Israel 30 years to become an instant success. Leading scientific and research universities like Technion and Hebrew University and the agricultural technology-focused Volcani Institute have existed for over a century, some Israeli defense companies have been around for several decades, and multinationals started putting down roots in Israel as early as 1949. But the turning point for Israel’s tech sector occurred in the mid-1980s.

Until then, Israel had a centralized, government-based economy, focused on feeding, housing, and defending the population of the still-young nation. 70% of the economy was owned by the government. But, the country basically went bankrupt, and the government undertook a series of major economic reforms to liberalize the economy and increase its reliance on markets. Legislation during that time, nicknamed the R&D Law, defined the mission of the government entity formerly known as the Office of the Chief Scientist, now called the Israel Innovation Authority: to foster innovation in Israel. That helped kick off the transformation of Israel from a problem-solving nation—in which the prowess of the innovation ecosystem was used to solve the country’s basic challenges—to a startup nation that harnessed that ecosystem to develop technologies for others and then commercialize those technologies and build businesses. Today, Israel is home to over 100 unicorn, category-leading, and scaled-up companies, thanks to an innovation ecosystem made possible by a wealth of human and financial capital.

Jenny Grimberg: How is a small country like Israel able to develop and attract the human and financial capital needed to make such an ecosystem possible?

Avi Hasson: It’s true that Israel is a very small country, roughly the size of New Jersey. But, to quote what OpenAI’s Sam Altman said recently when asked why he thinks Israel could become a global leader in AI innovation and technology, Israel has high “talent density”. That talent has many dimensions, including scientists, engineers, and entrepreneurs. And unlike Silicon Valley, where tech talent comes from around the world, all of the talent in Israel is either homegrown or Jewish immigrants. Local talent has always been the main source of our human capital, primarily the result of a strong education system. But Jewish immigrants that studied in the US and returned to Israel to grow their businesses have also played a key role. Intel’s Dov Fruman, Microsoft’s Moshe Lichtman, and General Motors’ Gil Golan are a few examples. So, the first component of the innovation ecosystem—talent—always existed in Israel, as did a culture of “chutzpah”—a boldness and scrappiness when it comes to business and beyond.

But the second component—financial capital and expertise—only came later. Almost no venture capital existed in the country before 1992. And so, these talented people with great ideas had little knowledge of how to go to market or with no access to the funds to get there. That changed in 1993 when a government program known as Yozma, Hebrew for “initiative”, created the Israeli venture capital industry, giving rise to a dozen venture firms. Today, the government is long gone from the venture capital market and plays only a limited role in R&D. Israel invests 6% of its GDP in R&D annually—the highest share of GDP in the world—but only one-tenth of that comes from the Israeli government. But government policies and programs were instrumental in engaging the private sector, resulting in an ecosystem of startups, venture capital investors, multinationals, accelerators, universities, and everything else required to transform an idea into a company. So, this public-private partnership laid the foundation for Israel to become a global hub of innovation.

Government policies and programs were instrumental in engaging the private sector, resulting in an ecosystem of startups, venture capital investors, multinationals, accelerators, universities, and everything else required to transform an idea into a company.”

Jenny Grimberg: How has the ongoing Israel-Hamas conflict impacted the Israeli tech industry so far?

Avi Hasson: The war has impacted virtually every sector of Israel’s economy given that an estimated 15% of Israel’s workforce has been drafted for active duty, which also affects the family members of those workers. And it has added to the funding challenges that startups in Israel and around the world, especially early-stage startups, were already facing as investors pursue less risky investments amid the higher interest rate environment.

That said, Israel’s tech sector has shown remarkable resilience so far. The management teams of global companies headquartered in Israel,  have wasted no time in shifting internal resources to ensure business continuity and timely product delivery. And the roughly 450 multinational companies that have innovation and R&D centers in Israel have done the same, supporting their workers, providing everything their local sites need to continue operating, and utilizing their global capabilities to shift resources to ensure minimal customer impact. Companies have been able to successfully adapt by drawing on lessons learned during the pandemic and the war in Ukraine—roughly 20k Ukrainians worked for Israeli tech countries before Russia invaded Ukraine—which taught them how to operate remotely and manage employees working in war zones.

The war has impacted virtually every sector of Israel’s economy… That said, Israel’s tech sector has shown remarkable resilience so far.”

Jenny Grimberg: What accounts for the tech sector’s resiliency amid the current conflict?

Avi Hasson: Four main factors are working in the tech sector’s favor. One, the demand for tech, unlike, say, tourism, hasn’t been hurt by the conflict. Global customers are still consuming tech products and services made in Israel, and they’ll likely continue to do so as long as firms continue delivering. Two, the vast majority of the Israeli tech sector is software-based, so the supply chain and logistical issues that inevitably result from war haven’t affected it.

Three, most Israeli tech firms aren’t located in the north or south of the country, but rather around the Tel Aviv metropolitan area, which, thanks to the Iron Dome, is not a war zone. And four, the devaluation of the Shekel relative to the Dollar, while not necessarily a positive for the country, has benefited high-tech companies, because both their revenues and funds raised are denominated in dollars while most of their expenses are denominated in shekels. And the high-tech workforce has not just mobilized to ensure the continued resiliency of their companies, but is also putting their knowledge to use to address broader national needs like gathering information about the hostages held in Gaza, monitoring cybersecurity threats, and building software solutions to manage health systems.

Jenny Grimberg: What—if anything—is being done to address the funding challenge for startups?

Avi Hasson: Several vehicles have been created, most of which Start-Up Nation Central is involved in assisting, to supply emergency bridge funding to young startups to ensure that they can survive the war. While these are venture funds, they’ve been structured without management fees or carried interest. The Israel Innovation Authority has also launched a $100mn fast-track grant fund for startups with limited runway. And those funds are matched given the way the Authority works, so that $100mn will probably generate around $200mn of total private and public money. These are just some of the many initiatives that have been launched by both private investors and the government to ensure that Israeli startups can continue operating during and after the conflict.

Jenny Grimberg: Are you seeing any evidence of companies pulling back from Israel as a result of the conflict?

Avi Hasson: Not at this time. The CEOs of the biggest tech firms have expressed support for Israel through their public statements and have stood by those statements so far. And Israel has become strategic for many businesses, so reducing the reliance on it would be complicated and challenging. People may not realize it, but they are using Israeli technology every day, whether it be through their iPhones, computers, cars, etc.

The Israeli tech sector has endured and even prospered through previous conflicts… [which] keeps us optimistic in these very trying times that the Israeli tech sector’s future remains bright.”

Jenny Grimberg: How concerned are you, though, that a prolonged conflict could change that?

Avi Hasson: A lot will depend on how the war unfolds. Companies have shifted to a “routine in crisis” mode to ensure that they can continue to operate, and, as I mentioned, several initiatives have been launched to extend startups’ runways. But a prolonged conflict will undoubtedly make it more difficult to continue running and managing a company. Large companies with steady cash flows will likely find it easier to manage so long as they continue to deliver, while younger and smaller companies will likely find it more difficult, which is why both the government plans and emergency funds are focused on that tier of companies.

That said, the Israeli tech sector has endured and even prospered through previous conflicts. We have found that many companies that raised funds during the 2006 Lebanon War and 2014 Operation Protective Edge have gone on to become global leaders in their field and achieved more significant financial milestones—such as acquisitions, IPOs, and unicorn status—compared to other periods. Companies founded during those conflicts also had higher success rates than those established in other periods. That the tech ecosystem came out stronger after such events keeps us optimistic in these very trying times that the Israeli tech sector’s future remains bright.