StartupBlink, which bills itself as "the world's most comprehensive startup ecosystem map and research center", covering 1,000 cities in 100 countries, finds in its latest report that Tel Aviv, the only Israeli city in the top twenty globally, is falling in the startup ecosystem rankings.
The rankings are according to three criteria: quantity; quality; and startup business environment.
Under quality, the study examines the numbers of startup companies, investors, coworking spaces, accelerators, and startup-related meetups.
Among the sub-criteria examined under quality are total accumulated private sector startup investment, total accumulated number of startup employees, number and size of unicorns and exits above $1 billion, and presence of strategic branches and R&D centers of international technology corporations.
The business environment is examined on a national basis, and the criteria include such elements as a diversity index, Internet speed, Internet freedom, R&D investment, English proficiency, corporate tax rate, a corruption perceptions index, and top universities.
The scores under these three criteria are combined to give a total score, according to which the cities are ranked.
There are in fact two rankings: a country ranking, and a city ranking. In some cases, such as that of Israel, there is a mismatch between the two rankings. While Israel’s country ranking is very high, third after the US and the UK, Tel Aviv’s city ranking is rather lower, at tenth, down one spot since last year (and thus changing places with Paris). Tel Aviv has fallen by one spot every year since 2019.
On the other hand, Jerusalem, the only other Israeli city in the top 100 internationally, moved up seven spots this year to 79th. Haifa is down eleven spots, at 133rd, while Beersheva, despite its efforts to promote itself as a cybersecurity hub, is down thirteen spots, at 324th.
One reason for the discrepancy between the country and city rankings is that population size is taken into account in the country ranking, but not in the city ranking, and Israel is a small country with a very large entrepreneurial innovation output for its size.
But when it comes to the city ranking, for which the political and business infrastructure that enables entrepreneurship to thrive is examined more closely, the gap between entrepreneurial innovation output and the business environment and political infrastructure is found to be very wide. For all the immense potential of the local technology industry in high quality human capital, the infrastructure does not enable these entrepreneurs to realize their visions, and the gap is growing, pushing entrepreneurs to look elsewhere. The report concludes that "the nation's startups succeed in spite of the business environment, not thanks to it."
The report also points out that the current ranking does not take into account possible consequences of the Israeli government’s judicial overhaul plans.
"Dozens of unicorns moving overseas"
The report indicates that, although the Israeli ecosystem is impressive in its scope, it is on a downward trend. "Israel's startup ecosystem books outstanding results, although the country significantly lags behind competitors in its business climate," the report states. Israel, it says, is "trailing on policy, regulation, and infrastructure." The country is ranked only 21st for business environment.
The report notes for example that fintech companies such as Stripe and Revolut are not available in Israel, while Israeli fintech companies such as Lemonade, Payoneer and eToro thrive internationally. "This reflects a massive gap between the quality of local entrepreneurs and the ability of public sector policy makers to create an environment that encourages vibrant startup ecosystems. In the last decade, there have been some positive signs that this gap can be narrowed, and if it will, Israel has a massive potential to produce a substantially better startup ecosystem than it has already," it states, although it gives an honorable mention to the Israel Innovation Authority, which it calls "an example of massive public sector success."
The report also highlights the phenomenon of talent leaving the country. "Israel is not only a startup nation, but also a brain drain nation. Over 80 Israeli unicorns are now operating in the US. Part of this exodus can be explained by the need to be close to clients and major markets. However, a substantial part is also related to Israel's relatively low friendliness toward startups," it states.
The report warns that this phenomenon is liable to gather momentum because of the current government’s moves on legal reform. "The controversial proposal for a judicial overhaul threatens to impact investment in the country's startup ecosystem and break the trust between the country and its entrepreneurs. Regardless of the need for judicial reform, the way it has been introduced has infuriated the vast majority of the Israeli tech scene and its entrepreneurs.
"It is extremely rare to see a country that blatantly engages in policies which alienate the majority of its most successful entrepreneurs. It is worthwhile for the same decision makers who until recently successfully promoted the narrative of the ‘Startup Nation’ to make sure they are not taking steps that will be almost impossible for the ecosystem to recover from in the foreseeable future." The report also stresses the importance of that ecosystem to the economy in general: "Recent decades in Israel showcase how startups can transform a low productivity, developing economy into a high efficiency, developed economy. The Israeli startup ecosystem is a cash cow, generating tax revenue for the country both from exits and high salaries."
Another problem that the report picks up on is the local ecosystem’s narrow base. "Israel is not doing enough to attract talent from outside," it says. "The Israeli ecosystem cannot rely solely on native founders if it wishes to close the gap with international hubs such as San Francisco and London."
"There is no other country in the world that loses dozens of unicorns built by local founders and at the same time does not accumulate human capital consisting of foreign workers and not those who have made Aliya. The country is losing dozens of unicorns that are leaving for overseas, and we are not bringing in any external talent here," says StartupBlink founder and CEO Eli David.
David also says that there is no reason for Tel Aviv’s relative decline to continue. "If you compare the situation in London, most of the unicorns there were not founded by people born in the UK, but by immigrants. In Israel, there is not a single unicorn founded by people from outside." Noting the efforts made by other countries to attract outside talent, David says, "As far as successful entrepreneurs are concerned, I haven’t seen any country that comes close to our output. The problem is that people don’t stay here, and we are not managing to attract entrepreneurs from outside, and that’s the tragedy of the ecosystem in Israel."
Since 2020, San Francisco and New York have taken first and second spots in the global rankings. London maintains its third place position for the second successive year. Los Angeles is stable in fourth place, followed by Boston in fifth. Cities like Bangalore are showing constant improvement in the rankings; Bangalore itself was in fourteenth place in 2020 and is now ranked eighth. Paris has also risen consistently: it was ranked twelfth in 2020 and is now ninth, displacing Tel Aviv, as mentioned.
Commenting on the judicial overhaul, David argues that, whether or not it is justified on the legal or political level, it is proving damaging to the local startup ecosystem. "Countries all over the world do everything they can to create a positive atmosphere, to attract the best entrepreneurs. The atmosphere in Israel is not good. From this point of view, there’s a strange policy here of creating friction with the local ecosystem. In a global market in which everyone is competing with everyone else, that is not a smart thing to do, because people can move elsewhere in a moment."
Published by Globes, Israel business news - en.globes.co.il - on July 13, 2023.
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