Authored by Ben Rabinowitz – Founder and Managing Partner at AMITI

We see technology driven trends that make us even more bullish about early-stage Israeli Tech investing than two years ago. When it comes to embracing or further innovating the leading technologies of the 2020s, Israeli Tech (start-ups, digital native companies, and recent unicorns) and of course US companies are leading the way and leaving everyone else to play catch up.

However, our sense on why to be bullish in early-stage investing is driven even more by what we feel started over the last few years, with Israeli entrepreneurs and companies embracing, early on, new edge technologies and architectures such as Kubernetes, microservices, new “shift left” software development tools and machine learning (ML) and data analytics. This rapid embrace of these leading-edge technologies and architectures is now turning into a significant strategic advantage in Israel (and obviously also in the US as compared to other innovation hubs). The lead in know-how and ingenuity by Israeli start-ups from cyber security to microservices to ML, AI and data analytics is growing rapidly. This phenomenon once again makes the US and Israel the two best places to invest in software innovation, and each side brings its own advantages.

As many of you are aware, when it comes to cyber security, Israel is a market leader alongside the United States. This leadership position is driven by the leading-edge know-how that so many engineers gain from their service in the army. As the army protects the country from adversaries, it simultaneously encourages and teaches young engineers how to use the leading technologies, be innovative and creative, and most importantly to win. These engineers provide a constant stream of fresh and proven talent, with a winning attitude, to fill in the ranks of the many Israeli cyber security start-ups.

On the demand side, the cyber security market is big, getting bigger, and being disrupted. The global spend on Cyber security will continue to increase substantially in the years ahead by both enterprises and government as the threats are dramatically increasing. One of the Big 4 accounting firms claims that 80% of their public companies have faced serious breaches and attacks in the last twelve months. In addition, cyber security is in a period of disruption due to the fast transition to cloud, microservices, SaaS, work-from-home, shift-left, open source, Big Data and AI, IOT, among others. All these trends are dramatically changing the cyber tools needed to defend companies and Israeli start-ups are providing these tools.

What we were bullish about previously but are even now more excited about is the growing trend of Israeli entrepreneurs and start-ups looking more to the growth or cost efficiency side of business. We see many opportunities in markets that are, relatively speaking, still just getting started, and are big and getting much bigger. These markets are increasingly being disrupted and this disruption is enabled by Israeli companies that are providing tools, infrastructure, and added capabilities to help companies generate more revenue, be more nimble, faster, and more efficient.

To put it in baseball terms, the transition to cloud is maybe in the third inning, machine learning and AI including tools and data democratization are maybe in the second inning, and the momentum to microservices is somewhere in the first inning. In our view, we will see a lot of innovation and huge growth in these areas and with a few exceptions, most of the innovation will come from the US and Israel. This is indeed very exciting to have a front row seat as software, cloud, data analytics and AI enters a major disruptive change. Why is this a big deal? Because software is going from monolithic development to breaking it down to microservices, where small teams can rapidly introduce new features and functionality. Microservices are fundamentally changing the world of software development and we believe it will continue to grow exponentially.

Kubernetes enables the fast transition to microservices environments. It is essentially the Cloud OS (operating system) for cloud native software applications and like many others, we believe it is early in a hyper growth stage. Moreover, many companies are increasingly embracing SaaS cloud based 3rd party application environments.

The transition to SaaS is expected to grow from roughly $149 billion annually to $412 billion by 2025, with an overall annual addressable market of $1.2 trillion according to Goldman Sachs. They also expect the cloud-based DevOps budget to increase 4x in the next five years. While market data on microservices and machine learning and AI varies widely from report to report given that the market is so young, we feel very confident that we are in just the beginning of a revolution. From an Amiti perspective, whether we are discussing microservices, machine learning or business intelligence, the name of the game is helping enterprises, industries and governments gain efficiency, speed and scale.

While Big Tech (Google, Facebook, Microsoft, Amazon, etc) are leading these trends, when it comes to start-ups, Israel and Silicon Valley are by far the leaders in this space. While there are exceptions to this rule, most likely you will find in Israel and in the Valley the start-ups that are being the first to embrace and then push forward every innovation in these areas from microservices to ML, Data analytics and BI.

In off-the-record discussions we had with the big cloud providers, Israel outspends in cloud services nearly all of the European countries in spending by country. More importantly, we were told, every new innovation that the cloud providers introduce, Israeli start-ups are typically the first to embrace it and implement in their development process. Indeed, in our discussions we learned that as a rule of thumb, if a new cost efficiency feature is introduced by a cloud vendor they will assume that about 1% of customers globally will try it in the first year, while in Israel, typically 5-10% of the customer base will not just try it, but adopt it. This may be just very anecdotal, but still insightful.

The cloud providers provide similar feedback when it comes to using Machine learning tools. Cloud spend and adoption of the most innovative features are important indicators that show how quickly Israeli start-ups adopt innovation and then push these innovations further in the symbiotic relationship between Israel and Silicon Valley.

Moreover, Israeli start-ups are in a race to create value fast and get to design partners and win customers. This is also where the army experience and network helps. The many recent unicorns and growing number of digital native companies in Israel know they must remain fast and flexible and embrace these start-ups. Being design partners is how they stay ahead and continue to lead. In this advantageous local ecosystem, these design partners are open minded and willing to listen, which creates fresh territory for entrepreneurs to come up with an innovation and try it with a design partner before even approaching a VC for funding.