The Committed Innovator: The future of Israel’s start-up ecosystem

This episode of The Committed Innovator podcast, the second in a series on Israel’s vibrant start-up ecosystem, is a continuation of McKinsey innovation leader Erik Roth’s conversation with Avi Hasson and Chemi Peres. Avi leads Start-Up Nation Central, a not-forprofit that promotes Israel’s start-up sector, while Chemi leads the venture capital firm Pitango and the not-for-profit Peres Center for Peace and Innovation, which was started by his father, former Israeli prime minister Shimon Peres.

This is an edited transcript of their discussion. You can listen to the full episode on your preferred podcast platform.

Erik Roth, McKinsey: Given where we are today—in recovery from a pandemic and amid economic uncertainty—where does Israel sit relative to innovation?

Chemi Peres, Peres Center for Peace and Innovation: To understand where Israel is, we have to first take a look at the global scenery, at least as we see it at the Peres Center for Peace and Innovation. We are entering a new era of global threats, and [COVID19] is probably the first time the world has encountered something that attacked all of us at the same time, forced us into solidarity and working together, and told us that with technology and innovation, we can actually survive and sustain our activities.

Climate change is one global threat. Cybersecurity, pandemics, and inequality are others. While every company and every business will have to deal separately with those challenges, no single country can sustain by itself. It has to be based on global collaboration and global affairs.

I believe that the two most important values for the world are, number one, solidarity, working together, and secondly, trying to repair the world with innovation, which we in Israel call tikkun olam. Israel is at the heart of this transformation. It is a country that combines the ability of tikkun olam with the values and the mission statement of solidarity. For example, we believe at the Peres Center for Peace and Innovation that peace will be achieved with innovation, with entrepreneurship, with solidarity.

We believe that innovation is the other side of the coin of peace, or the currency in which we invest in order to change the future. We believe we have an opportunity now with the Abraham Accords, and with the transformation taking place in the world, to shape a new tomorrow that everyone can be part of. We are now entering an age of peace with innovation, and we definitely see those ideas and values embedded in the companies we’re investing in.

Erik Roth: Innovation can be a force for good and peace, but there is a reality, however, that the ways technology is being developed across the world are different. Some might argue that certain countries have chosen a posture to create more walled gardens around their technology. It’s not just China; other markets as well have made similar choices. As you think about Israel and its unique position in the world—both with its neighbors and in its role on the global stage—can innovation really achieve what you’re describing, which is to jump borders, jump technology walls, and bring people together for more common good?

Chemi Peres: Absolutely. When I look at Israel, I imagine a tree. A tree has very deep roots, and it can grow up and bear fruit. A tree can become strong and successful, side by side with other trees.

In the old world, in order to be successful, somebody had to lose; it was a world of winners and losers. In the new world, when you have technology and innovation, you can make up for all your scarcities and all your needs. You need more energy; you need more food. You can achieve that with technology and with innovation, and you can become strong not at the expense of others.

For me, the most important part is that we are approaching the global-threats era not just as very strong trees but working together as a forest, collaborating in order to weather the storm. The pandemic could not have been stopped by one single country. As someone said, it will never be over anywhere before it’s over everywhere. Solidarity is a must, and working beyond borders is a must. Of course, there are countries trying to do things, and they are leveraging technology in a bad manner. But it’s an absolute necessity for the world to go beyond that point into solidarity and make sure everyone is a strong tree in a very large forest that can weather the storms.

Erik Roth: How does the Israeli ecosystem then spread its branches to embrace the world and stimulate the kind of innovation that will achieve the goals you’re describing?

Avi Hasson, Start-Up Nation Central: One of the reasons Israel has a very good chance to play that role is the fact that from the very early days, we were tightly coupled to the global value chains because of things we spoke of in the last episode—not having a local market, needing to rely on global funding, and so on. It was always built on partnership. That’s what the story of Israeli innovation has always been on all fronts. So there’s a natural affinity for, and practical experience of, dealing with strategic partners or other countries from other cultures. True, we traditionally looked west into the US mostly, but over the last few years, we’ve gained experience also in interacting with other hubs or other potential partners. At Start-Up Nation Central, innovation diplomacy is one of our strategic pillars.

Israel can offer innovation as an asset that can create, nurture, establish, and deepen those types of relationships. I agree with Chemi that this is not a zero-sum game. Knowledge has a sort of attribute, which is unique to this specific asset, right? If I have a dollar and Chemi has a dollar and we give each other our dollar, we each still have a dollar—not an interesting deal. But if I have an idea and he has an idea and we exchange those ideas, we now have two ideas each. And that’s great.

We can talk about the challenges, which I think you asked about. I truly believe that most of Israel’s challenges in maintaining that leadership or being on the podium of medals can be solved through partnerships. The human capital challenge is one that we have. We need more people. But those people could be offshore, sitting in countries like Morocco or Bahrain or others. This is happening as we speak. It’s not theoretical. We need, as Chemi said, to solve some of our shared challenges, be it health or climate or food security. This can be done and should be done by working with others.

Erik Roth: What are the Israeli ecosystem challenges to creating different kinds of partnerships and scaling capital flows? Where are the tensions in the system today?

Chemi Peres: The tension in Israel, in my view, is from one of the challenges the world is facing, which is inequalities. It’s the tension between those who are part of the force that is moving forward, that is rushing ahead, and those who are lagging behind. You need to close that gap. It’s not only about growth; it’s closure of the gaps with those who are left behind.

So how do you get more people to participate in the game, to be part of it? Avi spoke about innovation diplomacy. At the Peres Center, we talk about innovation affairs as opposed to foreign affairs—partnerships and collaboration—pretty much like what Start-Up Nation Central is doing, maybe tactically a bit different. Also, we put a lot of effort into bringing parts of our society to the Peres Center for Peace and Innovation, to see the story of Israel. We have visitors from all over the country. We have secular and religious people, Arabs and Jews. Some of them do not even know what Israel has managed to offer the world and deliver to the world with technologies and solutions. And they’re very proud, taking a look at it.

Our message is that in this world that is moving forward, everyone needs to be a little more entrepreneurial, a little more of an innovator, a little more tapped into this world that is changing so fast. For us, the challenge is not how to scale up our ecosystem but how to make it more cohesive so there are not parts that are left behind. That, in my view, is the biggest challenge.

Avi Hasson: I want to add a purely economic, practical, and instrumental view to this. There’s no way to have sustainable growth as an ecosystem unless you widen the base of the pyramid. It just doesn’t work. Israel has today 10.4 percent of its workforce working in high-tech. That’s the highest percentage in the world. It’s double what most advanced countries have. The government set a goal of 15 percent, and we might get to that. But even if we do, it’s not enough. We need more people. We need more parts of the economy to play the high-productivity and innovative games. Otherwise, besides inequality, the social questions it brings about, we’re just not going to have a growing economy. So that’s a superimportant point, regardless of where you’re coming from.

Erik Roth: Do you believe the challenge may lie in the fact that a lot of the problems Israel and the Israeli innovation ecosystem were solving were really localized? If so, as the challenges migrate from localized to being more globalized, does Israel struggle?

Chemi Peres: In my view, all of our local problems are global.

Avi Hasson: I agree.

Chemi Peres: We don’t do anything here that is purely local, because we don’t have a large local market to serve. The challenge is that the talent is equally distributed, but the opportunities are not equally presented. What we need to do is to be able to present the opportunities.

I agree with what Avi said: the future of Israel is about innovation. Israel will never be attractive enough as a market or as a local place that attracts enough tourism or trade. We can only flourish if we are a source of problem solving and introducing new things for the world—and we need to have more participants.

Erik Roth: What are the other things Israel needs to do to evolve its innovation ecosystem to achieve what you’re describing?

Chemi Peres: One thing is introducing those opportunities equally. For example, we invested in a company called Masterschool that is trying to build the largest school and center of employment for people. What we see today in the world, and in Israel as well, is the biggest human migration that is not physical: people are moving from old jobs to new jobs. In my view, this is what is creating this scarcity of talent. A lot of people are leaving their workplaces in services, manufacturing, and logistics and migrating to the high-tech ecosystem, whether it’s the gig economy or part of the high-tech sector. That transformation will revive the economy and make the world much more resilient, much more productive.

The global crisis we’re talking about now is really a shift that creates local scarcity. Everybody is worried about it. Some people call it the Great Resignation or a transformation to the digital age. But a lot of people are moving into new industries, into new professions where they can make a better living and they can be part of a more advanced ecosystem and economy. And it will drive the economy forward.

When you think about [COVID-19], it was the first time the world agreed to ruin its economy to save lives—unlike world wars. The way to recuperate is by increasing productivity and being more resilient. That will happen where more and more people shift to sectors that are related to technology.

Avi Hasson: I think as a country, what we need to do—and the same challenges are shared by most countries—is create multiple entry gates to the process Chemi talked about. We need more active players in the high-tech talent market, not just graduates of computer science or electrical engineering programs at leading universities.

Another challenge is diversifying the sector vertically—so building on our cybersecurity industry to strengthen our financial technology, bioconvergence, and other sectors—and also expanding the range of talent, not just engineers but customer support people and designers, for example. A whole lot of people can be part of the high-tech industry, even if they’re not the type of person you first think about.

And we need to bring the underrepresented sectors in Israel into it, especially Arab people and the ultra-Orthodox. Every country has similar underrepresented groups who could be great contributors to the high-tech sector.

Erik Roth: If we set the clock to ten or 15 years from now, and Israel has solved its equality and diversity challenges and connected even more to the global centers around the world, what does the innovation ecosystem look like?

Chemi Peres: I’m very bullish on the state of Israel. I think we’re going into an unprecedented decade of growth, breaking new records and glass ceilings. I do believe we will be able to inject more content into the Abraham Accords, into the normalization, which will not only open up the region but will also have a ripple effect on the entire global industry. This region has huge potential to go forward. I’m a believer that Israel will become part of the solution of the region, not part of the problem. And I believe the world will move more into solidarity and will understand that we need to be trees that are forming a forest, not single trees isolated from the others.

I think we will be able to scale faster than we’ve ever been able to. And not only that, we will close the time gap. We’re going to be ahead of the curve in many areas. I’m suggesting people come to Israel to learn, to experience, to invest, and to scale up with us, because I think the potential of this country is huge.

Avi Hasson: The reason I’m equally optimistic, like Chemi, is that I think a lot of the attributes that brought Israel to what it is today are exactly the same things that will be needed in the future. And the ecosystem has shown its strength of figuring out the next challenges through those relationships with the big corporates in the markets and then coming up with the right solutions. I think Israel has both the infrastructure and the right culture to tackle some of those challenges.

Chemi Peres: I think the problem, though, will be the cost of living here. People say the prices of housing are skyrocketing, and there’s no way we can deal with it. I’m saying it’s bad, but it’s also good. It shows you that demand is there. For example, in Tel Aviv, [people are] willing to pay high prices to be part of that community. It says something about the country and its potential.

Erik Roth: Does that create a challenge, though, for your point on equality?

Chemi Peres: Absolutely. You need new ways of thinking about everything. If you really want to sustain yourself as a strong country, how do you go about education, about housing, about making life more affordable?

There are different ways we need to do this than we did in the past. We cannot take marginal steps. There are some things we need to disrupt fundamentally and solve. You cannot take prices in Tel Aviv down. But you can create new tools to allow more people to be part of it and enjoy it without mortgaging their entire future economically.

Erik Roth: As in many countries, much innovation stems from defense spending. We hope we’re headed to a time of greater peace, though, so does Israel need to think differently about how it sources technology?

Chemi Peres: Absolutely. In my view, 100 percent of the source of innovation is changing. It’s going to be more from research by universities and institutions. The shift is from necessity to purpose.

The second thing I see is something that was described by Bill Clinton, who said that a lot of people are putting a lot of effort into making sure bad things do not happen, but very few put enough energy into making sure good things do happen. For example, when someone leaves a military cyber unit and goes on to build a digital health company, that’s a shift from making sure bad things do not happen to making sure good things do happen. And those shifts in the source and purpose of innovation are very significant for the world and for Israel to maintain its position at the forefront of science and technology. This is a big challenge for us.

Avi Hasson: I would just add that collaboration, again, is key. I think a lot of the next-generation solutions are going to be interdisciplinary. You need multiple types of organizations working together—hospitals along with software companies, research universities along with military units.

And if you look into the utilities of the future, they’re pretty much the same. We all know about AI and data, but the same AI utility can be applied to many different problems. So the purpose part is really going to make the difference. Where do you put the brainpower into use?

Erik Roth: I hope that more people from Israel and everywhere else focus more on how we do more good. Thank you both for joining us.