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The “startup nation” tackles fintech

Letter from Tel Aviv explores Middle Eastern rival to Silicon Valley and other tech hubs

A summer's internship at an Israeli fintech firm gives Next Voices blogger Amrita Vir an immersive look at a hot startup market with different roots and definitions of success. A summer's internship at an Israeli fintech firm gives Next Voices blogger Amrita Vir an immersive look at a hot startup market with different roots and definitions of success.

I have been spending this summer interning in Tel Aviv at a fintech startup.

For many Americans, including my business school peers, this is a wild notion. In fact, I am the only student from my class of 900 who has been working in the Holy Land for the summer.

Why not go to Silicon Valley like roughly 30% of my class? I’ll tell you.

But first, a quick quiz. Which of the following are Israeli startups? Wix. Waze. Gett. Mobileye. Lemonade.

Trick question. They’re all Israeli startups!

While still considered exotic to many Americans, Israel has become a booming startup hub, and American companies should learn how to leverage this innovation in their own streams of business.

Looking beyond politics to tech pioneering

Before I go any further, let’s also talk about Israel/Palestine. This place is heavy with political baggage. I first came to this part of the world last March for a spring break trek to the West Bank, organized by some of my Palestinian peers.

I became fascinated by the Israel-Palestine conflict; the ways in which each people have dealt with their situations; and how outsiders have chosen to interpret the political movements on both sides.

In fact, the spectrum of beliefs about what has been done and what should be done varies widely. I find it impossible to ascribe a certain belief that is 100% true for everyone on either the Israeli or Palestinian side. Before we go any further, I want to say that I am not endorsing any political stand and have deep empathy for those in the Holy Land and the diaspora who have been hurt by the situation.

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That said, this article is a look at how Israel has become a hub of innovation and how that relates to my fellow Americans back home. So let’s skip the political stuff and talk about the status of startups in Israel today!

Hotbed of startup innovation

According to non-profit Startup Nation Central, there are over 5,000 startups in Israel today. That’s one startup per 1,500 people and twice the venture capital dollars per capita than in the U.S.

Government-funded startup incubators and multi-national-funded startup accelerators abound. Pretty much everyone I have met here has worked with a startup in some capacity. This gives Israel the nickname, “Startup Nation.”

What drives this concentration? In their best-selling 2011 book, Start-up Nation: The Story Of Israel's Economic Miracle, Dan Senor and Saul Singer assert that two major factors have driven Israelis towards innovation: the constant stream of immigrants coming into the country and the government’s policy of mandatory military service.

As in the U.S., immigrants usually come with limited possessions but a wealth of experience and grit to contribute to their new homeland. As the daughter of Indian immigrants to America, and my father being an entrepreneur, I can relate to the notion that immigrants have nothing to lose in a new country and therefore are more willing to take risks. About 90% of Israelis are immigrants or descendants of immigrants within the last two generations.

The mandatory military service in the Israeli Defense Force (IDF) also provides young people the opportunity to develop their leadership and creativity at a young age. Unlike many other militaries, where hierarchy is well-respected, the IDF is a flatter organization. It rewards innovation and intelligence above following explicit orders.

Additionally, required IDF service means that children dream of joining specific branches of the military, rather than becoming a famous athlete or rock star.

One of the most well-respected military organizations is the 8200 Unit, which comprises several thousand soldiers working on national security and intelligence programs. It is likened to the U.S.’ National Security Agency, and is where many of the brightest minds get their start in Israel. The 8200 Unit also serves as a pipeline for the entrepreneurial ecosystem, with many 8200 soldiers cultivating relationships with their future startup co-founders, developers, and funders, while in the service.

This environment has created generations of young people who are unwilling to accept the status quo. They believe everything can be improved, and they are not afraid to fail in this pursuit.

In this regard, success to the Israeli entrepreneur is not necessarily having their startup IPO; rather, success is exiting the company through a sale to a larger international player and going on to start another company.

Willingness to take risks is celebrated in Israel. In Hebrew, this is called chutzpah.

Land of fintech development

I found my way to Israel for the summer in pursuit of more innovative thinking—and chutzpah for myself. This brings me to fintech. As in all other sectors of the economy, the Israelis have tackled the banking sector as well.

The community for fintech lovers in Israel is also robust, with meetups, lectures, and conferences happening every week. Everyone in the industry knows one another, and I have never even had to explain what the conjunction “fin-tech” means here.

According to fintech accelerator, The Floor, there are 500 fintech startups in Israel with $650 million in venture capital investments. Other accelerators are supported by foreign banks, including Barclays Bank and Citi, which provide financing, work space, and advisory resources to Israeli fintechs. This allows these firms to tackle financial issues from international payments (Payoneer) to microinsurance (Lemonade) to crowd-investing (OurCrowd).

Even the banking industry in Israel, which is dominated by two major banks, Hapoalim Group and Bank Leumi, have their own fintech arms, Poalim Hi-Tech and LeumiTech, respectively. Just this summer, Bank Leumi launched its digital bank, Pepper, targeted at millennials.

Blending in at Blender

In fact, I was able to secure my internship through this well-connected fintech network. I have a friend named Guy, who passed my resume to another Guy, who passed my resume to the Barclay’s RISE fintech accelerator, who passed my resume to over 20 Israeli fintechs. And suddenly, my inbox was flooded with interview invitations!

The startup that I decided to work with is called Blender, the leading online lending platform and alternative credit scoring engine in Israel. The company is expanding globally, and being part of its growth has been a great way to spend my summer.

Specifically, my role was to help with product and market development, allowing me to work directly with the CEO and business development team.

This was my first time working at a fintech startup, so getting used to the fast pace and autonomy of my work was challenging at first, but I soon learned that taking initiative on my own projects and seeking support from different teams independently were integral for success in this environment.

Impressions from inside the startup community

I also made a few observations about my work environment that are broadly applicable to Israeli fintech startups—and that make them a tour de force in the global fintech landscape.

1. The work ethic of the Israeli team I interned with is incredible.

While work days start between 9 a.m. and 10 a.m., the team labors late into the evening and on weekends, especially when there is a deadline.

The work week is also altered in Israel to accommodate the Jewish Shabbat, or day of rest. Work stops from Friday afternoon to Saturday evening.

Even though Friday is technically part of the weekend, I regularly received emails from the CEO on Friday mornings. This also means that while the rest of the world is working on Fridays, Israeli startups that must engage with Western counterparts either work on Fridays too, or cram a lot of work into the Monday to Thursday each week that overlap.

I also experienced the Israeli version of “happy hour,” a 30-minute break around noon on Thursdays for the entire team to gather over snacks and drinks. My first week, we had Arak, an anise-flavored alcoholic drink, the Israeli version of Ouzo.

After the break, everyone was expected to get right back to work, even if they were a little wobbly.

2. Blender, like many Israeli startups, is extremely technology-focused.

The product is centered around the underlying technology, with the user experience and marketing being secondary focuses that can be easily adapted to the relevant markets.

Israeli fintechs’ competitive advantage is their superior technology, not necessarily their UI/UX [user interface/user experience]. Many of the tech giants have also recognized this technology orientation of Israeli startups and have set up R&D centers in Israel. Some of the largest are Google, Facebook, Apple, Amazon, GE, Microsoft, Intel, and Tata Group. Financial service giants PayPal, Barclays, Citigroup, and ICAP have also set up R&D centers or startup accelerators in Israel.

Furthermore, Israeli companies are at the bleeding edge of technology, including the newly coined trend of ICOs [Initial Coin Offerings, of the cybercurrency world]. Israeli companies represent 2 of the top 10-largest ICOs to date. This is a lot for such a small country.

3. Finally, my job at Blender was to help the firm achieve the long-term goal of being the preeminent global player in alternative credit scoring and online lending.

This global ambition is perhaps due to the fact that Israel is still a tiny country. While Blender is a market leader in Israel, this simply serves as a testing ground for the product-market fit, with the goal of global market expansion already in mind.

Furthermore, Israeli startups do not necessarily target the U.S., recognizing that stiff competition and regulatory ambiguity, especially in fintech, are challenges that can be more easily surmounted in other regions.

This means that Israeli companies can be much more globally focused and target regions and financial institution partnerships that may otherwise be ignored by American startups.

While the Startup Nation is very different from Silicon Valley, it offers capabilities, grit, and hummus that cannot be replicated anywhere else.

As I finish out my summer here, I know that Israel’s time as a global fintech hub is just beginning.

Amrita Vir

Amrita Vir, a regular contributor to the blog Next Voices, is a student in the joint Harvard Business School and Harvard Kennedy School program, where she is pursuing a career in financial inclusion at the intersection of innovation and regulation. Vir is also research assistant to Jo Ann Barefoot, senior fellow at the Mossavar-Rahmani Center for Business and Government, and a member of the Banking Exchange Editorial Advisory Board.

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