Tel Aviv Is #1 (outside the U.S.)!

The Data Behind Tel Aviv’s Tech Ecosystem Ranking

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My last blog post “Why I’m Doubling Down on Israel”, published on July 5th, was the most engaged with piece of content I’ve ever written. It was an anecdotal look at the strengths of the Israel tech ecosystem based, in large part, on a week I spent there in June for my Israel Syndicate on AngelList. As I tend to prefer data driven analysis, I was excited to delve in to The 2015 Global Startup Ecosystem Ranking by the benchmarking specialist Compass (a follow up to it’s first first ranking of start up ecosystems published in 2012).

It’s important to appreciate the extensive work involved in Compass’ ranking research. Compass enlisted six global partners including database powerhouse Crunchbase, Pan-European accelerator Startupbootcamp, and Microsoft Ventures Accelerators. In addition, Compass had more than 60 regional partners (including incubators, accelerators, VCs, policy makers, and universities) across 23 countries, and another 14 partners across 9 cities in the U.S.. These partners helped aggregate 11,000 surveys from entrepreneurs, investors and other tech ecosystem stakeholders over five months. Additional insights were garnered from over 200 interviews with entrepreneurs and local experts from 24 countries.

Here’s are the bottom line results of all that research:

Tel Aviv was ranked as the 5th best tech ecosystem in the world, and the best outside the United States! As we look in to each of the five categories that factored in to the Ranking, it’s important to note that each category carried a different weightings in terms of their % impact on the Ranking:

Performance Index: 30%

Funding: 25%

Market Reach: 20%

Talent: 15%

Startup Experience: 10%

Below is a deeper look in to each of the five categories in order of how Tel Aviv ranked:

TALENT

Among the five factors above, Tel Aviv ranked highest in Talent at #3 out of the 20 top ecosystems, behind only Silicon Valley and Moscow. Tel Aviv’s high Talent ranking was driven by high marks that Tel Aviv got in the interview section of the ranking (sounds like a Miss America competition), as well as great scores in terms of the experience of the Talent pool, and good scores in terms of the time it take to hire an engineer.

Interestingly, Moscow powered by Tel Aviv in the Talent ranking due to its Coding Skills as ranked by TopCoder (a site that ranks coders based on competitions) where Israel ranked poorly, in part, due to the low number of competing Israeli coders (just 9 Israeli coders vs. 388 coders in Russia).

At $61k on average for an engineer, Tel Aviv is much less expensive then the U.S. ($108k), on par with London and Berlin, but higher than the cost of engineering Talent in Paris ($53k) and Moscow ($36k).

Among the areas that Tel Aviv can improve is in attracting foreign workers, where it’s share of foreign talent, at 27% of its total, is the lowest among the top 7 ecosystems, and 40% lower than the 45% share of foreign workers in Silicon Valley.

FUNDING

Tel Aviv ranked 5th out of 20 in Funding, as the country ranked well in both total volume of dollars invested in the ecosystem, and the amount of time it took to raise financing (particularly for Seed Rounds which took almost 40% less time in Tel Aviv then the average ecosystem).

With an increase of 32% in 2015 YTD in funding in Israel, Tel Aviv appears poised to retain it’s high Funding ranking.

Not surprisingly, Tel Aviv was the top ranked ecosystem in the world, according to the Compass research, in terms of attracting foreign investment, with 47% of financings including a foreign investor.

Performance

Tel Aviv ranked 6th out of 20 in terms of ecosystem Performance, which is defined as the total value of exited startups (see below, Tel Aviv ranked 4th), the total value of current start ups (Tel Aviv ranked 7th), and the total # of startups (where Tel Aviv ranked 8th, but second in Europe behind only London, a city with 20x+ times the population).

In terms of the total value of exits, Silicon Valley had a remarkable 47% market share of exits from the 20 top ranked ecosystems in 2013/2014 (which was down from 55% in 2012). Israel ranked 4th in terms of exit value market share 2013/2014:

While a common refrain is that Israeli founders sell too early, it’s remarkable that tiny Tel Aviv has created 80% more value from exits over the 2013/2014 than the value created by exits from the New York City tech ecosystem. Looking at it another way, Tel Aviv created value at roughly 38X the rate that NYC does on a per capita basis.

Start Up Experience

Israel also ranked 6th out of 20 in terms of Start Up Experience. The ranking in this category was 100% based on survey data, with equal weightings across four categories: Proportion of Employees with Prior Experience in a Startup; Proportion of Startups with Founders with Prior Experience in a Hyper-Growth Startup; Number of Startup Advisors with Equity based compensation; and Proportion of Startups Providing Stock Options to their Employees.

Tel Aviv has one of the most experienced Talent pools in the world, with 49% of all startup employees having previously worked in a startup (26% above the European average).

While Tel Aviv ranked highly in terms of Start Up Experience, it could be even higher, but Tel Aviv is ranked 6th out of the Top 20 ecosystems in terms of start ups who move their headquarters to another ecosystem out of Tel Aviv (e.g. NYC, San Francisco, London), reducing the ecosystem experience levels.

Market Reach

This is where Israel, not surprisingly, scored the lowest (13th out of 20), as 60% of the weighting in this category was based on market size (as determined in large part by GDP), where Israel ranked 17th out of 20 (behind only Bangalore, Austin and Vancouver).

Market Reach also looked at Global Market Reach, where Tel Aviv is a star, ranked #1, with the highest percentage of foreign customers at pre-funding and seed funding stages segmented by both B2B and also B2C startups.

Growth Index

While Compass’ Growth Index was not factored in to the ranking, it’s interesting to note that Israel ranked 6th out of the top 20 ecosystems (behind Berlin, London, Sao Paulo, Bangalore and Amsterdam) in terms of ecosystem growth. This high ranking was driven by Tel Aviv’s 3.5X growth in exit values and 2X grwth in VC investments since the 2012 rankings:

In Summary….

While Tel Aviv was an impressive 5th overall, it did move down three notches from the 2012 report due to changes in how the the ranking was calculated. The removal of the metric “number of startups per capita” (a measure of density) from the Performance Index, which is the highest weighted factor, hurt Tel Aviv. Also, the addition of Ecosystem Value (sum of startup valuations at exit and funding events) and the inclusion of a much improved estimation of Output (total number of startups in an ecosystem); benefitted larger ecosystems like New York and Los Angeles, that passed Tel Aviv since the last ranking

I also want to note that I recognize that this report is not perfect. By definition, ANY system of ranking is not perfect, which opens it up to criticism and derision. For example, the report excludes all of East Asia (Beijing, Shanghai, Shenzhen, Tokyo, Seoul), in part, due to the lack of data in many of those locales. I feel it weighs the size of the local market to much, which hurts Israel as one of the smallest ecosystems, not to mention other strong start up locations like Dublin, which is just half the size of Tel Aviv. But while it can be easy to focus on the inevitable perceived shortcomings of any ranking system like this, I applaud Compass for the amazing depth of work that they did, and beleive htere is much to learn from all the data collected.

Finally, in the report, Compass makes recommendations to the various stakeholders based on the findings of the study.

For entrepreneurs, Compass suggests distributing the organization to align with the strengths of different tech ecosystems. For example, headquarter, or at least spend a lot of time, in a well-capitalized ecosystem like Silicon Valley. Work in a smaller, and cheaper startup ecosystem when your startup is pre-product market fit. Then move your headquarters to a larger startup ecosystem after product market fit is reached and you’re ready to raise a big financing round. That advice seems ripped from the playbook of many Tel Aviv start ups.

For investors, Compass recommends spending more time looking for opportunities in the undervalued ecosystems of Amsterdam, Paris, Chicago, and Berlin.

For policy makers, Compass sees three areas where policy can impact the success of an ecosystem. First is to create policy that minimizes the friction of incoming flow of foreign capital and foreign talent. Second, simplify regulations for startups, allowing for low legal cost of startup formation, startup bankruptcy, and liquidation on startup exit. Lastly, differentiate your startup ecosystem and accentuate its strengths. Startup ecosystems can differentiate by, for example, focusing on a industry/product type, such as media in Los Angeles or hard science in Boston

Bottom line, the report is a highly informative read for any of the stakeholders noted above, and it’s great to see that my anecdotal findings about the awesomeness of the Israel tech ecosystem is confirmed by the data.

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