Calculated Risk: The (Surprising) Common Denominator of Israeli Unicorns

This is a post by Symbol's founder & GP Yuval Ariav, elaborating why a risk-thinking approach is the underlying driver of many successful Israeli startups, and how it can shape the future.

If we rewind the clock to late 2021, the year Symbol was founded, there were ~1,200 unicorns in the world. About 9% of them were founded by Israeli founders. If we broke down the list of Israeli unicorns by space, some would find it surprising that the biggest group wasn’t cybersecurity or enterprise infrastructure software, things that the Israeli tech ecosystem is best known for, but rather fintech and financial services.

This, to me, was nontrivial.

And it begged the question: “why are Israelis so good at creating fintech companies?” As a fintech founder myself, I was particularly curious about figuring this out. Israel’s financial system is solid, but it’s not nearly as sophisticated as the one in the US, the market most of these Israeli-founded companies are built for, or as big. And almost none of these founders come from a financial background.

So why?

My working theory is that this is because Israelis are fundamentally very good at building products and systems that measure, analyze, and manage risk. And that the Israeli fintech phenomenon is a result of the market’s filter function, which weeds out companies that can’t take on the risk associated with the products or services, which limits their growth.

As the co-founder of Fundbox, I know for a fact this was true for us: figuring out SMB credit risk underwriting and management at scale was a key advantage over our competitors, mostly American companies, a market we knew nothing about before starting the company. And I suspect this is true for other Israeli fintechs as well, in insurance, payments, payroll, trade fraud, and beyond.

Israeli tech and risk management

So why is this the case? Why do Israelis have an unfair advantage in building these products and systems?

In my analysis, there are several factors:

1. Israeli culture. Growing up in the Middle East is an experience with unique opportunities and threats, as October 2023 reminded us. Israelis absorb the need to think in risks at a very young age, which later informs their thinking about life in general and business problems specifically.
2. Leadership experience. Regardless of your military assignment, assuming a command role as an officer or an NCO forces you to adopt risk thinking. It’s not just that formal command training emphasizes this kind of thinking, it’s also that managing people in a military environment, shoestring budgets, and high degrees of uncertainty develop it.
3. Military and civilian intelligence. Many (though not most) Israeli founders spent their mandatory army service at military or civilian intelligence organizations. By its nature, the field of intelligence gathering and analysis is an exercise in risk management, in terms of thinking, methodologies, and systems building. Enough said…
4. Professional tradition. Since its inception, the Israeli tech ecosystem has birthed companies dealing with risk management. Companies directly specializing in risk, such as FraudSciences, have been around since the early 2000s, meaning hundreds of product professionals, software engineers, and others, have been on the risk path for years..

All of these factors mean that the talent pool in Israel is uniquely suited to start and scale companies that specialize in risk and risk management.

The past and future of Israeli tech

Once you put on risk-colored glasses, many things fall into place in terms of the early days of Israeli tech.

Cybersecurity is all about deeply understanding threats and having the technical acumen to build products up and down the stack, but at their heart, cyber detection and prevention products are quantifying and acting based on risk assessment.

Likewise, many of Israel’s early successes were adtech companies, which built and operated engines that had to make risk-based determinations about specific ad-related transactions frequently and at scale.

As an investor, one of the trends I’ve been seeing in recent years is how this practice of risk management is slowly bleeding into other sectors and markets: you see it in healthcare companies building proactive disease management and patient risk stratification products. In the supply chain field — supply chain planning is one big exercise in risk management and mitigation. And multiple other examples exist in fields like commerce, HR, and others.

I believe that the next big wave of Israeli-founded startups will be companies that apply this risk-thinking approach to the risk pools that exist out there in the world.

In my analysis, these pools fall into two broad categories.

Classic and modern risk categories

Classic risk categories have existed for decades, even centuries. While their growth rate is moderate, they tend to be absolutely huge in terms of volume. And they are still mostly managed using dated tooling and data practices.

For example, one of Symbol’s portfolio companies, Breeze, is focused on workflows and models that manage the ~$50B cargo insurance risk. Another example is Assured Allies, which helps insurers manage their longevity risk exposure, a risk pool of several $100B annually.

The play with classic risk pools is often replacing or augmenting existing tooling to create superior risk management capabilities, at either the underwriting, monitoring, or visibility levels.

Modern risk categories are newer, and while small relative to their classic counterparts, they’re growing at very high rates. Because they are still new and small, they typically don’t have tooling, workflows, and sometimes not even methodologies to manage them.

For example, healthcare fraud is a well known classic risk pool worth over $100B annually. In contrast, telehealth fraud is still small — only ~$10B annually, but growing at a rate of 20%. As opposed to classic healthcare fraud, where tools, methodologies, and even regulations exist to govern and manage them, telehealth fraud is still very much a blue ocean in this respect.

Given how new these risk categories are, the play here is to build tooling for the variety of stakeholders involved with them.

As you can see, I’m quite excited about Israeli companies that innovate around risk categories. If you’re founders looking at revolutionizing classic risk categories or shaping modern ones, I’d love to chat with you.