I spent last week visiting Israel with a group of fellow venture capitalists touring what is referred to as Start Up Nation--a trip sponsored and organized by Combined Jewish Philanthropies (CJP). We had a terrific time--despite being in the midst of a pretty tough neighborhood, the country's innovation economy is absolutely booming. A recent report named Tel Aviv the second most vibrant start-up ecosystem in the world, behind only Silicon Valley.

A few takeaways from the trip provided some insight into why such a tiny country (with a population of 8 million) is doing so well:

Big Winners are Emerging.  

There used to be a perception that Israeli start-ups had great technology, but were weak at growing sales and marketing. This required them to sell out to bigger companies early in their lifecycle, precluding the opportunity to build very valuable companies. But the success of Waze ($1 billion sale to Google), Wix (IPO filed), Outbrain (IPO rumored to be quietly filed or in process) have entrepreneurs on the ground thinking big. The Times of Israel reports these success stories are inspiring Israeli start-ups to focus on the IPO path, rather than shoot for the M&A route as a potential path to greatness. I see this through the lens of our portfolio company, tracx, whose ambitions to build a great SaaS social intelligence company seem to rise with the country's ambitions.

Home to Start-Up Heroes.

A culture is defined by its heroes. The American entrepreneurial narrative has been shaped and amplified by the oft-celebrated heroic journeys of Bill Gates, Steve Jobs, and Mark Zuckerberg, among others. The Israeli narrative has gone from celebrating its war heroes (think Moshe Dayan, Ariel Sharon, the Mossad) to celebrating its entrepreneurs. I think we were told no less than a dozen times that Warren Buffet's largest international investment was in an Israeli company ($6 billion for Iscar) and yesterday it was reported that he is acquiring his third Israeli company. The country is bursting with pride at its latest Nobel Prize winner in Chemistry (now numbering 11 Nobel laureates in its 65 year history). Everywhere you go Israelis want to tell you how smart and entrepreneurial they are! Unlike any culture I have ever seen, this country gets the value of raw intelligence.

Partnerships Matter. 

Knowing their position as such a small country, Israeli businesses are always looking to partner outside of Israel. Native Israeli venture capital represents only 25 percent of the VC capital invested in the market--most of the money is coming from global firms like Battery, Greylock, Lightspeed, Sequoia and others. The two recent partnerships from Israel's elite technical university, Technion, are manifestations of this open approach. First, the ambitious partnership with Cornell to build a new engineering school in New York City--called Cornell Tech--which appears to be off to a strong start, helped in part by a $133 million gift from Qualcomm founder Irwin Jacobs. More recently, Technion announced a joint venture with a Chinese university to build a new campus in Guangdong. This venture is thanks to a $130 million gift from Chinese billionare Li Ka Shing, a large investor in Waze, matched by the Chinese government.

These elements suggest a bright future for Start-Up Nation. Now imagine what would happen if a peace agreement with the Palestinians could be reached (for a glimmer of home, read this New York Times report on a recent interview with President Abbas) and a nuclear deal with Iran (again, if you're an optimist, read today's Wall Street Journal report on Iran's seriousness in negotiating a deal). A bright future, indeed.

This article was originally published on Bussgang's blog, Seeing Both Sides, and has been reprinted with his permission.