Even as a country with less than 8 million people,  Israel maintains roughly 4,000 startups today.

The New Jersey-sized country's venture capital per capita is 2.5 times greater than that of the U.S., and 30 times greater than Europe's, making Israel the  largest startup ecosystem outside of Silicon Valley. Considering Israel's political and social climate, this is an incredible feat.

But is Israel's startup economy sustainable?

While the past 20 years have served as a fertile time for the small-business sector worldwide, we have to consider the challenges Israel currently faces, and how it can turn those obstacles into opportunities to persist as the world's global startup center.

What makes Israel the ideal place for a startup to flourish?

When Theodor Herzl dreamed of the Jewish state, his resources were limited--Israel's infrastructure was primitive--but the young generation that supported him built the country into the modernized place it is today.

"The state of Israel is kind of the ultimate startup when you think about it," says Hillel Fuld, co-founder of ZCast and an international startup adviser.

Fundamentally, Israel thrives on the entrepreneurial mindset: developing a passion, conceptualizing an idea, and then executing it successfully.

The Israeli Defense Forces (IDF) is also a powerful engine behind Israel's startup successes. The army recently established the Cyber Defense Academy in Tel Aviv, offering a six-month intensive training program in network administration, programming, communications, and other areas based on the IDF's technological needs.

Clearly, it's working: Graduates of the Cyber Defense Academy have received over $3.2 billion of combined startup funding.

Israel's immigrant-heavy population also contributes to its prominent place in the startup world. In 2014 alone, 26,500 people immigrated to Israel, and the numbers are rising.

Aside from their tenacity, a nation of immigrants is significant because a global population means a globalized country. Israel is filled with people with an eye beyond their borders who can create products that will succeed across markets.

This is crucial because Israel's small population makes it almost impossible for a product to sustain itself on the country's demographic alone.

But can the startup nation last?

One well-known issue regarding Israel's economy is the country's problematic working demographic.

Although Israel's labor participation rate is at 64 percent--a considerable increase since 2010, when it was just over half and one of the lowest in the world--the labor division of Arab-Israeli women and Ultra Orthodox Jewish men is still disparate: In 2010, only 39 percent of Ultra Orthodox men and one quarter of Arab women were employed. 

These groups will make up roughly one-third of the Israeli population by 2025, and their lack of involvement in the Israeli economy could bring the startup nation to a halt.

To address this, think tanks such as the Milken Institute are trying to encourage small businesses in Arab-majority areas. Hopefully, these programs will involve the non-working populations by stimulating startup interest in their hometowns.

Still another concern is that Israel has yet to produce a tech giant. Among the 3,800 high-tech startups in Israel, only four (yes, four) reach sales of more than $1 billion a year. Israeli policymakers are therefore worried that entrepreneurs are taking too long to go public.

According to Saul Singer, co-author of Start-up Nation: The Story of Israel's Economic Miracle, it's not the huge companies that help the job market most but rather the medium-size companies that have just passed the startup phase.

Perhaps Israel should work to improve certain regulations and tax systems to make it easier for startups to break out of the small-business sector.

With Israel's entrepreneurial spirit and can-do foundation at its roots, these concerns could easily be turned into great openings for valuable business ventures.

If Israel can engage the currently less involved areas of its country into its modern, innovative culture, there is hope that this tiny country can continue as one of the world's greatest startup nations.

Makena Owens contributed to this article.

Published on: Jul 13, 2016