Despite the flourishing of work from anywhere during the pandemic, it still matters where a startup is located. That's because, as I wrote in Startup Cities, regions of the world differ in the vitality of their local Startup Commons -- a collection of regional resources that at best provide an irresistible attraction for capital and talent or at worst repel both.
This comes to mind in considering the flow of venture capital around the world in 2021. A striking conclusion is that on a per capita basis, capital flows into Israel were a whopping 28 times more than those in the U.S.
To be sure, 2021 venture capital flow into the U.S. was way larger than into Israel -- up at 154 percent in 2021 to $330 billion versus 136 percent higher to $25.4 billion, according to NoCamels
But Israel's population of about nine million is a fraction of the U.S.'s 330 million people. Hence, Israel's $28,000 in venture capital invested per capita in 2021 is far above the U.S.'s $1,000.
While other parts of Israel attract venture capital -- in 2019, $233 million (3 percent of Israel's $8.3 billion total VC) was invested in Jerusalem-based startups -- the lion's share goes to Tel Aviv.
Why is Tel Aviv Israel's most vibrant startup scene? Capital seeks to invest in talent that can build businesses that grow rapidly -- and that talent wants to be in Tel Aviv. And rapid growth most often yields exits that enrich investors.
Such exits peaked last year for Israeli startups. In 2021, 57 Israeli companies went public, raising an accumulated $4 billion -- nearly three times 2020's 22 IPOs, which raised $1.7 billion.
2021 IPOs included four Tel Aviv companies -- cybersecurity firm SentinelOne, which is based in Silicon Valley with offices in Tel Aviv, project management software Monday.com, game and app developer IronSource, and digital adoption SaaS company WalkMe, noted NoCamels.
In my view, Tel Aviv's startup scene has succeeded because it has overcome many kinds of scarcity, including these four.
1. Lack of local venture capital.
Israel overcame this with a government program called Yozma -- launched in 1983 -- which matched any outside venture capital investment in an Israeli startup. In exchange, the Israeli government asked the venture firm to return its investment if the company had a successful exit -- leaving the excess returns for the VC.
In addition, Israeli startup founders relocated headquarters to Boston, New York, and Silicon Valley to help tap into local investment. What's more, many U.S. venture capital firms opened offices in Israel.
2. Lack of exit markets for investors.
To make themselves attractive to VCs, Israeli companies needed to find a way to exit. To that end, Israeli startups commonly went public in Nasdaq or sold out to large U.S. technology companies such as Microsoft and Google.
3. Lack of entrepreneurs with experience running publicly traded companies.
Initially, Israeli entrepreneurs excelled at turning an idea into a startup that could raise capital and grow to the point that it would be acquired by a public company.
Over time, those founders stayed with the publicly traded acquirer and gained insights into the skills required to run a public company. As a result, they were more comfortable leaving the nest, starting another company, taking it public, and continuing to run it after the IPO.
4. Small local markets and significant security threats.
Since its founding, Israel has lacked enough water to supply itself with food locally, so it developed globally valued expertise in drip irrigation. Israel also lacked large local markets, since Israel had a relatively small population and most of its neighbors did not recognize its right to exist. In response to these challenges, Israeli startups are born global -- meaning that they open offices and/or develop partnerships so they can sell their products around the world.
More fundamentally, Israel required its citizens to serve in the military and it channeled its most STEM-talented high school students to elite cybersecurity units such as the 8200. This produced a steady stream of world-class cybersecurity founders with a ready-made network of talent for their founding teams.
A region's startup success creates new challenges. For example, Tel Aviv is ranked the most expensive place to live in the world, according to the Economist Intelligence Unit. Such high costs mean that local startups need more capital to afford to hire local talent -- and it puts pressure on founders to identify lower cost locations from which they can hire world-class talent.
The lessons of Tel Aviv's startup success for local policymakers are clear. First, you must understand and turn your weaknesses into strengths. In so doing, your growth will create new challenges which you must solve effectively in order to sustain your region's growth.