From Kibbutz to Tech Giant: The Story Behind Israel’s Tech Boom
- Simon Kiwek
- 9. Feb.
- 14 Min. Lesezeit
Inside Israel’s Military‑Tech Machine: From Unit 8200 to AI Superpower – and the Limits of a Startup Miracle.
Once, the Israeli kibbutz was seen as an ideal by the Western academic left — a commune built on equality, collective ownership, and voluntarism. Even in China, this model attracted interest.Out of this socialist experiment, of all things, emerged one of the world’s most productive start-up and innovation ecosystems: in 2018, 76 Israeli companies were listed on NASDAQ – more than any country except the United States and China.
This small nation of ten million people is home to 6,000 start-ups. It boasts more unicorns per capita than any other country in the world – twice as many as the United Kingdom. Among them are platforms like Fiverr, the online gig marketplace, and the messaging service Viber, later acquired by Japan’s Rakuten.From Amazon and Intel to eBay, every major tech corporation operates research centers in Israel. By 2015, they accounted for 63 percent of all corporate R&D spending in the country.
Back in 2011, journalists Dan Senor and Paul Singer posed a question in their book Start-Up Nation: The Story of Israel’s Economic Miracle: How can a tiny country, barely sixty years old, in a constant state of conflict and devoid of natural resources, generate more start-ups per capita than large, peaceful, and stable nations like China, India, Japan, Korea, Canada, and even all of Europe?
A history of Jewish innovative spirit
Although Jews did not have their own physical state for a long time, a Jewish nation was already taking shape early on in Jewish minds through Zionism. This created a strong sense of cohesion, even though believers were scattered across the world.
The foundations for the Middle East’s start-up powerhouse were laid as early as the 1920s. The Israel Institute of Technology and the Hebrew University existed from 1925 onward – before the State of Israel, when the territory was still the British Mandate of Palestine.
Another central building block emerged in the shadows: with Shin Mem 2, members of the paramilitary Haganah founded an intelligence unit. Operating under the codename “Rabbit,” they intercepted military communications and gathered information on impending unrest between Jewish settlers and Arabs, while also working against the British administration.
After the establishment of the state in 1948, Shin Mem was integrated into the Israeli army (IDF) under the new name 515. It had a budget of 15,000 dollars and another 110,000 dollars to purchase new equipment. The group had little staff and little money. This scarcity forced it from the outset to pursue its own innovations, for example in decryption techniques. Entrepreneurial spirit and the need to secure one’s own existence against a larger enemy thus shaped parts of the Israeli army at an early stage.
In 1973, however, the unit – by then known as Unit 8200 – failed. Israel was taken by surprise by its Arab neighbours. Israel did defeat its Egyptian and Syrian attackers in the Yom Kippur War, but the country paid a high price. The financial losses were immense, and a period of economic stagnation began.
Israel’s high‑tech boom through immigration and economic reform
Paradoxically, this period triggered a restructuring of Israeli society. The country moved further away from central planning; young people who had previously been tied up in the public sector entered the labour market.
The start-up ecosystem in Tel Aviv took shape in the 1980s and early 1990s, as Israel emerged from its depression. Major tech corporations such as Motorola, Intel and IBM set up operations there, bringing microelectronics, research and development centres, and new standards. At the same time, Israeli engineers returned from the United States – bringing knowledge and contacts with them.
These links to the United States remain essential to this day. They facilitate the exchange of know-how and venture capital – often initiated through direct personal relationships between scientists, entrepreneurs and key investors.
From the 1990s onwards, the technology world changed. The breakthrough of personal computers (PCs) triggered a revolution, and globalization accelerated the pace of change. Traditional industrial nations such as Japan faltered as the internet spread ever more widely.
With the collapse of real socialism, millions of people left the former Soviet countries, many of them Jews. Israel’s population grew by 20 percent almost overnight. Among the immigrants were roughly 100,000 highly trained engineers and scientists from the Soviet weapons industry.
At the same time, a major wave of layoffs in Israel’s military industry released large numbers of technicians. Suddenly, with 140 per 10,000 inhabitants, Israel had the highest density of engineers in the world – twice as high as in the United States and Japan.
The Yozma Program: financing high technology
Still, many countries have young people with promising ideas, yet these often gather dust in drawers. Investors shy away from risk because many start-ups fail.
With the Yozma Program, Israel managed to tap and harness its latent tech skills: the program was designed to draw on the expertise of foreign investors and ultimately bring it to Israel.
At the same time, the state provided venture capital: 80 million US dollars flowed into ten new venture capital funds (“drop‑down funds”), while a further 20 million went into a state fund that invested directly in start‑ups. In this way, private investment was leveraged. Private partners received the option to buy back the state’s shares after five years, creating incentives for ambitious company growth.
In addition, the state insurance company Inbal guaranteed up to 70 percent of investors’ potential losses at the beginning of the investment period. This strengthened investor confidence in Israel’s start-up scene. Yozma funded around 200 start-ups in its initial phase, jump‑starting Israel’s development engine.
Beyond that, Israel was able to tap into the experience of the Jewish diaspora, especially from the start‑up hotspots of California. Venture capital also flowed through these networks. Israeli investors became technologically savvy enough to distinguish good ideas from bad ones.
The military as the incubator of development
In its dangerous neighbourhood, the Israeli army must always stay one step ahead of its enemies. To achieve this, it mobilizes all the resources the country can offer.
After the shock of the Yom Kippur War, Israel restructured its intelligence services and armed forces, and began deliberately fostering “chutzpah” (audacity) among its personnel. A strict meritocracy also applies: taxi drivers command millionaires, and 23‑year‑olds give orders to their uncles.
Mandatory military service of two to three years is, paradoxically, one of the country’s key advantages. Whereas other intelligence services recruit young talent with a view to lifelong careers, the Israeli army receives a constant stream of new conscripts who bring a wide range of skills and educational backgrounds with them.
These young people have grown up with the latest technologies, and the military offers them the chance to put these abilities to use. Hardly any other army nurtures such a strong entrepreneurial spirit as Israel’s.
Unit 8200 tests every recruit for intelligence, skills and qualifications. It and the air force receive the lion’s share of the best candidates. Over three to five years of service, 8200 cultivates their talents intensively. In six months, it teaches recruits everything a university would take four years to cover. Their projects are well resourced in terms of funding and personnel. Hierarchies remain flat, and decisions are made quickly. Small teams solve complex problems with a high degree of autonomy.
What they learn is applied continuously in practice. In the evenings, they sit together, analyse the day’s operations and battles, and learn from their mistakes – something almost unique among most armies. In this way, the military has created an environment that allows for experimentation – including the possibility of failure and the acceptance of setbacks.
This shapes a distinct innovation culture. In the private sector, for example in banks, security projects usually have to prove that investments will not erode profits. In the army, by contrast, projects can often start quickly. Even after failures, people generally keep their positions.
Numerous units thus push forward their own technologies, because Israel does not want to rely on off‑the‑shelf solutions for its defence. The systems it develops in‑house are tested directly for their practical usefulness. This often keeps other powers in the dark about how these systems actually function.
In addition, the army offers ample opportunity to network. Technology units are in constant contact, and people in the tech scene know each other well.
Unit 8200: Israel’s notorious spearhead in cyber warfare
This is especially true of Unit 8200. It has had to evolve constantly in order to process ever‑growing volumes of data. Its remit includes open‑source intelligence, cryptanalysis, threat analysis and cyber warfare.
In terms of expertise, Unit 8200 can even hold its own against the U.S. National Security Agency, despite the latter’s vastly larger budget. During the COVID pandemic, the unit supported the national information and knowledge centre with its expertise.
With 5,000 soldiers, most of them between 18 and 21 years old, Unit 8200 is the largest intelligence unit in the Israeli army. Unsurprisingly, it has an extensive alumni network within the wider ecosystem. Hundreds of cybersecurity firms trace their origins back to former members of the unit, including Check Point, CyberArk, and the controversial NSO Group, which developed the Pegasus spyware.
Gil Shwed, Shlomo Kramer and Marius Nacht, who all served together in 8200, founded Check Point in 1993 – 8200’s first roots in the private sector. Later they were joined by Nir Zuk, who went on to become CTO at Palo Alto Networks.
Reports from SecurityWeek indicate that every single founder of the cybersecurity companies they interviewed had served in 8200. But other military units also have technology sections from which spin‑offs emerge. These units develop scalable cybersecurity and IT products.
According to one study, 80 percent of cybersecurity founders have experience in IDF intelligence. The former head of the domestic intelligence service Shin Bet founded Diskin Advanced Technologies Ltd. Haim Tomer, a former chief of the Mossad intelligence unit, now works as a cybersecurity consultant. Minerva Labs likewise emerged from another technology unit.
In these fields, the army is therefore Israel’s largest enterprise. Products developed for the IDF and the Israeli government can later be scaled up and adapted for large private corporations.
A positive feedback loop: from snowball to AI avalanche
Israel thus secured several comparative advantages that cannot easily be replicated elsewhere. The country blossomed on the back of booming global demand for cybersecurity and software development.
Other security organizations often employ their staff until retirement, thereby removing them from the labour market. Afterwards, many sit on the supervisory boards of large corporations or work as consultants, and only a few have the drive to start their own companies. In Israel, by contrast, conscripts leave the army after completing their mandatory service; many are highly motivated and bring new ideas and contacts with them.
In this way, the army creates fertile ground for a vibrant start‑up ecosystem. This set in motion a path‑dependent feedback loop with positive reinforcement: start‑ups created demand, and other start‑ups stepped in to meet it. Early on, they complemented one another, and the young companies grew in parallel. By around 2000, this had produced the world’s most successful start‑up ecosystem.
Israel’s military as a source of civilian industry
The Israeli army drew on this know‑how and adapted it in rapid iterations to its own needs. After just a few years, it released many of these people back into the tech world – now equipped with highly practical training and experience.
From the turn of the millennium, Google and Facebook opened their first R&D centres outside the United States in Israel. They wanted to tap the small Middle Eastern country’s potential: the dense networks formed within the Israeli army that permeated the country’s ICT sector.
Although microelectronics manufacturing remained an important pillar, the export of ICT services became the engine of Israel’s economic development. In 2015, Israel is estimated to have spent between 1 and 1.5 percent of its GDP on defence‑related research and development. Around five percent of the workforce is employed in the ICT sector, compared with an OECD industrial‑country average of just 3.7 percent.
This pushed Israel to the forefront of AI application and development. According to the OECD, the country ranks ninth worldwide in AI investment, innovation and implementation, putting it once again on a par with much larger nations such as Germany, France or Korea.
AI has become the core of new high‑tech activity in the country. Almost half of all high‑tech start‑ups and funding rounds are AI‑related, and AI now drives 53 percent of Israel’s exports, with cybersecurity remaining at the centre of this development and tightly interwoven with the country’s defence sector.
A repeat of past successes is only faintly on the horizon
Israel’s ICT sector is following a logical trajectory. Specialization in AI is opening up new industries, including digital health and the digitalization of mobility, which could replace the traditional car‑ownership model.
Both fields in turn require specific ICT capabilities that Israel can draw on. Intel, for example, acquired the Israeli company Mobileye for 15.3 billion US dollars in order to develop autonomous vehicles together with BMW.
In its bid to reinvent itself, Israel’s public authorities are awarding fast‑track grants, especially to early‑stage start‑ups. The aim is to give young companies in a high‑risk region like the Middle East a chance to grow over the long term in the first place.
Israel is also expanding its AI infrastructure. When it comes to computing power in particular, the country faces significant gaps. Companies have to purchase computing capacity and cloud services from abroad. Yet computing power is highly energy‑intensive: training OpenAI’s GPT‑4 is estimated to have consumed 60 gigawatt hours of electricity – as much as 6,000 Israeli households use in a year. Here, Israel has no competitive advantage.
Other problems likewise fuel doubts about whether past success can be replicated. Even Israel’s famously risk‑tolerant venture‑capital scene now appears saturated, especially in cybersecurity, where there is an overwhelming flood of projects.
Many promising ideas migrate to the United States: to the West Coast, with its welcoming start‑up culture, or to the East Coast, with its deep‑pocketed institutions such as the Pentagon. Europe sees little of this deal flow.
Labour shortages slow the pace of innovation
The biggest gap remains the shortage of skilled workers. The earlier influx of highly qualified STEM graduates from the former Soviet Union has been exhausted. According to the OECD, the country should invest more in education and advanced degrees. Two thirds of people working internationally in AI‑related fields hold a doctorate, whereas in Israel only about 12 percent of software developers do.
This suggests that even the army, with its on‑the‑job training model, can no longer meet demand. The shortage is driving up wages, which for machine‑learning experts and data scientists sometimes exceed U.S. levels.
Close integration with the United States exacerbates the problem, as many top engineers are poached. The number of Israeli computer scientists in the U.S. is roughly one third of those at Israeli research institutions.
To counter this brain drain, policymakers are seeking to mobilize Israeli Arabs and ultra‑Orthodox Jews. These groups make up around 30 percent of the population but remain massively under‑represented in the tech sector. Of the roughly 250,000 to 300,000 people employed in high tech, only about 6,000 are ultra‑Orthodox Jews and 2,700 are Arabs.
Since 2008, the number of Arabs in the sector has risen by 670 percent. But given the low starting point, the absolute figures are still far from sufficient to close the gap. Many also lack access to the networks opened up by military service and elite tech units, since they typically do not serve in the army.
As hard as it may be to believe amid ongoing war, the labour shortage is also creating opportunities for Palestinians. An enclave has formed in Ramallah, where Palestinian ICT companies carry out outsourced work for the Israeli branches of Cisco, Microsoft, HP and Intel. The ICT sector’s share of Palestine’s GDP rose from less than one percent in 2008 to five percent by 2010.
The greatest hopes, however, rest on women. In medicine and law they already constitute a clear majority, but they remain scarce in STEM fields – and their numbers there are actually declining.
Dark sides of rapid development
The rapid rise of Israel’s tech industry has also produced darker aspects. High wages in the tech sector, driven by surging demand, have exacerbated income inequality.
Success has swept over much of the rest of the economy. While Israel’s tech sector is far ahead of that in many countries, traditional industry is often less digitalized and more old‑fashioned than in other industrialized states. Many firms simply could not afford to implement new technologies.
As a result, interactions and spillover effects remained limited. The high‑tech sector produced mainly for export, and traditional businesses benefited only marginally. Knowledge therefore did not diffuse broadly across the economy.
The terrorist attacks of 7 October 2023 are also forcing the intelligence services to rethink their approach. Although the attack plans were reportedly known, warnings by an agent known as “V” were ignored.
This systemic failure has had far‑reaching consequences. A high degree of technological reliance made the agencies too dependent on digital surveillance methods, while they neglected classical intelligence gathering.
Once again, Israel has to reinvent itself and mobilize its entrepreneurial spirit. The country plans to leave less in the hands of machines and algorithms and place greater emphasis on human intelligence. Once more, Israel could become a pioneer – and once more, the stakes are nothing less than the survival of the nation.
Read More
Cheng, E., & Sun, Y. (2015). Israeli Kibbutz: A Successful Example of Collective Economy. World Review of Political Economy, Vol. 6, No. 2, S. 160-175.
OECD. (2025). OECD Economic Surveys: Israel 2025. Paris: OECD.
Singer, S., & Senor, D. (2009). Start-Up Nation. The Story of Israel's Economic Miracle. New York: Twelve.
Drone warrior Natan Khazin: an Israeli spin‑off in Ukraine
Natan Khazin was born in 1975 in Odessa on the Black Sea. Although he initially pursued a religious education at a yeshiva, he later served in the Givati Brigade of the Israeli army, where he also fought in the Gaza Strip.
During this time he is likely to have absorbed key features of Israeli military culture: flat hierarchies in which even 18‑year‑old conscripts are allowed to question their superiors and are expected to develop their own solutions.
In 2014, Khazin returned to his homeland. There he fought as commander of the Jewish Hundred volunteer battalion on the Euromaidan. As a former officer with extensive urban‑combat experience, he contributed to the success of the revolution.
Shortly afterwards, he founded another volunteer unit together with the notorious Azov Battalion. This force went on to fight Eastern Ukrainian insurgents at a time when the regular army had effectively collapsed.
With Aerozvidka, founded in 2014, Khazin explicitly created a war start‑up. He recounts how he literally pulled software developers out of the trenches, because, in his telling, generals with a Soviet mindset knew no better use for them than to have them digging.
These programmers now worked for him, adapting commercial off‑the‑shelf drones because those supplied by the United States were unusable. He financed the drones through crowdfunding among the Ukrainian population, as state structures were too sluggish. Much like Israeli units, the volunteer battalions became innovation labs for warfare.
Khazin was later integrated into the regular army structures, where he continued to refine his concepts. He brought with him the Israeli model of the informed soldier – someone who, with chutzpah, questions orders and devises independent solutions. Teams upgraded drones and other technologies on a weekly basis instead of over years‑long procurement cycles.
Khazin’s work triggered a systematic transformation of Ukrainian defence innovation. With the Ukrainian government’s Brave1 programme, the creation of defence‑tech start‑ups accelerated, explicitly emulating Israeli incubator models.
Hundreds of start‑ups emerged, combining the comparative advantages of well‑trained software developers with the experience of engineers and scientists from the Soviet weapons industry – like a 1990s Israel in miniature.
When the Russian army invaded in February 2022, it encountered a nasty surprise. Veterans of the war in Eastern Ukraine regrouped into volunteer formations and slowed the advance. Aerozvidka also re‑entered the field, having modified agricultural drones so they could drop anti‑tank munitions.
In addition, they developed the AI‑supported Delta battlefield management system, which integrates geodata, frontline reports, satellite images and other sources into a single digital situation map. The goal is a real‑time operational picture that improves coordination and accelerates decision‑making.
