Decoding the Israeli miracle: Can startup DNA be replicated?
Harvard’s Paul Gompers on talent, risk culture, and the demographic threats to Israel’s tech engine.
Amid soaring tech salaries, demographic shifts, and political uncertainty, Harvard Business School professor Paul Gompers is trying to decipher the secret behind Israel’s so-called “miracle.” Over three decades, startups and high-tech have accounted for 70% of Israel’s per capita GDP growth, but Gompers warns that without preserving talent and expanding participation among underrepresented communities, the engine of innovation could stall. His new research project aims not only to understand the forces driving Israel’s success, but also to explore how they might be adapted elsewhere.
Prof. Paul Gompers, an expert on entrepreneurship and venture capital from Harvard Business School, you are promoting a project on Israel and the regional economy that seeks to decipher the variables behind the “Israeli miracle.” Are you trying to create a model of the secret of Israeli success in order to replicate it in other countries? Is that even possible?
“The goal is indeed to understand the variables that created the ‘Israeli miracle.’ The data speaks for itself: over the past 35 years, 70% of the growth in Israel’s per capita GDP has stemmed from the startup and technology sector. In my visits to 30 different countries, from South Korea to Uruguay and from Rwanda to Saudi Arabia, the most common sentence I heard was: ‘We are trying to imitate the Israeli rulebook.’ The initiative we established at Harvard, the Harvard Israel Initiative, was designed to define a research agenda that would identify the essential components of this ecosystem, what is the secret of the magic. The goal is not only to understand the past, but also to help the Israeli ecosystem move forward and to serve as a bridge for economic cooperation in the Middle East and North Africa.”
Can Israel be copied? After all, we are the product of a chain of events, developments, and sometimes historical accidents.
“You can study the ‘Israeli rulebook,’ but you must adapt it, you cannot copy it word for word. Israel benefits from a very specific historical and cultural context that does not exist elsewhere. Some key elements are extremely difficult to recreate artificially, such as the fact that Israel is a country where the vast majority of the population consists of first- or second-generation immigrants. Immigrants, by nature, are people willing to take risks and build something new, and this creates a unique entrepreneurial DNA. Add to that a culture of risk-taking, a willingness to fail and try again, and a traditional emphasis on education.”
When discussing the “secret” of Israel’s economic success, which element is most at risk today?
“Without a doubt, the supply of talent. Israel currently faces developer costs that are the second highest in the world. About 432 multinational companies operate in Israel and pay enormous salaries, making it very difficult for local startups to recruit talent. This is the chink in the armor: if the supply of talent does not catch up with demand, it could dramatically slow and hinder the technology sector. In addition, there is the demographic story: participation by ultra-Orthodox and Arab Israelis in the technology workforce remains very low, and this is a challenge that must be addressed.”
In this context, the data shows that the fastest-growing communities are those that participate least in high-tech. How does this affect your model?
“The fastest-growing communities are the ultra-Orthodox and Arab populations. The latest data shows that the ultra-Orthodox make up about 16% of the general population, but among school-age children the rate is close to 30%. These demographic trends do not bode well in the long term unless corrective action is taken, for example through upskilling and incentives to bring these populations into the high-tech boom. There are promising signs: at Harvard we developed an AI platform for training entrepreneurs that can be made available in Yiddish and Arabic. We plan to conduct controlled experiments to see what really works in these communities.”
The issue of brain drain has become a hot topic, especially around the legal reform debate. What is your analysis of this phenomenon, and can it be reversed?
“The data shows there has indeed been an outflow of talent from Israel, mainly toward the United States around the time of the legal reform proposals. This began even before the war in Gaza. The deep polarization in Israeli society has triggered serious soul-searching; it is the internal rift that is tearing at the social fabric. Yet I am an eternal optimist. Israelis who go abroad for three to seven years to study or work in major companies often bring back connections and experience, which can be a huge advantage. Repair depends on healing the political divide and on the government projecting a message of unity at home, which would encourage their return.”
How critical are judicial independence and financial stability to venture capital decisions in your model? Isn’t this concern somewhat exaggerated?
“Research shows that regulatory clarity and judicial independence are positively associated with a vibrant startup ecosystem. If the legal system is perceived as being fully controlled by the government, that is a negative signal. Ultimately, the most important factor is how these moves affect talent and what signals they send to people in the ecosystem. One of my best friends in the industry has protested every Saturday for years and fears that the internal conflict will cause anyone with options to simply leave. I hope the upcoming elections will usher in an era of healing.”
If you were advising the Israeli prime minister, what is the one step you would insist on, despite political pressures?
“Don’t give up on recruiting the ultra-Orthodox into the IDF. This answer may get me in trouble, but I truly believe it is critical, not only for security and society, but also as an entry ticket to high-tech. The Israeli army is characterized by very low ‘power distance’: it gives significant authority to soldiers on the ground and forces them to make decisions in complex situations. Moshe Shalev, who grew up ultra-Orthodox in Bnei Brak, is a perfect example, service in Unit 8200 gave him the skills and network to found Decart, one of today’s hottest startups. The army is an engine of integration and entrepreneurship.”
The Israeli venture capital market is 80% dependent on foreign capital. Does this make the ecosystem more vulnerable? Is there a void in local decision-making?
“As we saw with Decart, companies are often identified early by firms like Sequoia. The giant American funds are a tremendous asset, opening global doors, and they will stay as long as there are good deals. But it is essential that Israeli funds do the heavy lifting in Seed and pre-Seed stages. The problem is that companies remain private longer and require huge rounds of $100-150 million at relatively early stages, while there are almost no Israeli billion-dollar funds capable of providing this without American institutional capital. Dependence on U.S. capital in later rounds is therefore almost absolute.”
Another criticism is that Israel has become an economy of one thriving sector while everything else is left behind.
“Inequality in Israel is now similar to that in the United States, and this carries devastating potential for internal conflict. Many Arabs and Haredim are on the disadvantaged side of this equation. We must think about how to make sectors such as manufacturing and finance more productive and global so that prosperity is not confined to the high-tech bubble. Human capital is the key, if we neglect talent, the Israeli miracle may stall.”
Let’s turn to the regional vision. Did October 7 close the window for Middle Eastern cooperation?
“In my view the window was postponed, not closed. I visited five Muslim countries in November 2022, before the war. I walked around wearing a kippah, and everywhere, including Saudi Arabia, there was a strong desire to learn from Israel. Mohammed bin Salman’s Vision 2030 includes building a startup sector, based on the belief that the future depends on an economically integrated Middle East. The idea is to use Harvard’s convening power to hold conferences in the UAE or Bahrain that bring together Israeli and Arab entrepreneurs, investors, and professors. Most people simply want to provide for their families, and startups are an engine for growth and good jobs.”
Some argue that the real engine of Israeli high-tech is companies like Intel and Google.
“I agree 100%. Multinationals are a major engine of success. First, they invest heavily in employees and expose Israeli professionals to cutting-edge development. Second, their presence provides a safety net, if a startup fails, there is always a job available, which reduces personal risk. Perhaps most important, they serve as an exit channel; every VC ecosystem needs exits, and multinationals are the primary buyers of Israeli startups.”
Is the reliance on exits through acquisitions problematic?
“Startups backed by institutional investors must eventually reach an exit. While Israel has used the Nasdaq for IPOs, for most companies the realistic path is acquisition by a technology giant. Deals like Google’s acquisition of Wiz show that multinationals are willing to pay enormous sums. Without this option, the ecosystem could not survive in the long term.”
Do tax benefits keep these companies in Israel?
“Tax policy can influence decisions at the margin, but the main factor is access to talent. In the U.S., states that raised taxes saw some impact on company location. In Israel there are fewer alternatives; taxes matter, but workforce quality matters more.”
You cannot ignore what has happened on U.S. campuses since the Gaza war. How did this affect you and the project?
“The war and the campus turmoil were a major catalyst. I felt Harvard had to demonstrate a commitment to serious, policy-relevant research on Israel. Over the past three years the atmosphere has been very difficult; many universities focused on politicization rather than constructive thinking about the region’s future. I wanted to use Harvard’s power to bring people together and promote economic integration as a counterweight.”
Do Jewish and Israeli students at Harvard feel protected today?
“My message is simple: Come. Your presence matters because it obligates Harvard to be aware of and protect Jewish and Israeli students. It has been a difficult struggle, but I believe the administration under President Alan Garber is working hard to change the institution. They support the initiative and see it as an opportunity for Harvard to be a positive force in the region.”
