Israel Admits: The Richer You Are, the More Likely You'll Open a Startup

A Finance Ministry report found that parental education and financial security were key factors in entrepreneurial success, and that the exalted universe of Israeli startups is far from meritocratic

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The offices of the Israeli start-up Zencity, February 16, 2020
The offices of the Israeli start-up Zencity, February 16, 2020Credit: Oren Kan

Very few people can make it as technology entrepreneurs, have an impact on the world and get rich in the process. Not only because most startups fail, but because very few people have what it takes to enter the field in the first place.

A new report by the Finance Ministry’s chief economist’s department proves what many people already suspected: The more well-off your family is, the more likely you’ll be able to succeed as a high-tech entrepreneur.

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Financial stability has a much greater impact on whether a young person will become an entrepreneur than academic success, the report by Yona Hackett found. Talented young people, who presumably would be suited to entrepreneurship, are less likely to enter the field than their less talented but wealthier peers.

Having parents with a technological or science background also plays a large role.

The report found that academic success was not a good predictor of technology entrepreneurship. Among startup workers, academic skill explained 20% of the disparity among people of different economic backgrounds in being an employee — nearly twice the effect attributed to skill in the likelihood of being an entrepreneur. For entrepreneurs, it explained only 11% of the disparity.

At established high-tech companies, generally companies based abroad, academic success explains 33% of the disparity in hiring. The implication is that getting hired for a job in high-tech is more likely to based on skill than working at a startup, and founding a startup is even less likely to be a matter of skill.

Hackett notes that founding a startup requires an initial cash investment, as well as a financial security net that enables the founders to go for a while without income and have a financial safety net should the startup fail.

Startup workers in Beijing Credit: Bloomberg

In addition, children from more prosperous backgrounds typically go to better schools, and their parents are better able to help them acquire skills, such as by hiring private tutors.

The report divided up young people into highly skilled and less skilled, based on their eight-grade math scores in the Meitzav standardized test. It also divided them up based on their parents’ income. The relationship between academic success and the likelihood of becoming an entrepreneur increased as their parents’ income increased.

Pupils who did poorly on the standardized test but whose parents were in the top two deciles of wage earners were more likely to become entrepreneurs than people with the highest scores but whose parents were in the bottom three deciles of wage earners.

The research also judged skill based on which adults had completed the highest level of math on the matriculation exam, and matriculation eligibility in general.

In the report, Hackett concludes that human capital is not being efficiently distributed. The young people with the most potential do not necessarily manage to raise the funding needed to become entrepreneurs. People from poorer backgrounds may be less likely to enter high-tech in general and tech entrepreneurship in particular, and this could be due to factors such as less exposure to relevant knowledge and fewer role models.

The ministry team sought to examine whether parents’ education levels had an impact on the children’s decision, even after controlling for the parents’ income. They found that young people were 64% more likely to found a startup if one of their parents had a college degree, and 91% more likely if the degree was in a STEM field.

The researchers speculated that parental education levels had an impact that went beyond household income and the youths’ own academic success because it imparted skills that were not expressed by standard academic measures, such as management skills or financial fluency. Another possible explanation is that parental education correlates with a willingness for risk-taking.

The report was based on data from all Israelis born between 1970 and 1995, and included demographic data, the parents’ education and income, the individuals’ standardized test scores and matriculation scores, data from their schools, and their income and field of occupation.

They also used annual data from all the startups where these individuals worked between 2003-2016. It looked at the period when these people were between the ages of 26-35, the most common age range for founding startups.

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