Despite the boom of work from everywhere during the pandemic, where a startup is still matters. That’s because, as I wrote in Startup Cities, regions of the world differ in the vitality of their local Startup Commons — a collection of regional resources that at best exert an irresistible pull on capital and talent, or at worst repel both.

This comes to mind when looking at the flow of venture capital around the world in 2021. A striking conclusion is that per capita capital flows to Israel were as much as 28 times greater than those in the US.

To be sure, venture capital flow to the U.S. in 2021 was much higher — at 154 percent in 2021 to $330 billion — than to Israel — 136 percent higher to $25.4 billion, according to NoCamels.

But Israel’s population of about nine million is a fraction of the US’s 330 million. Hence, Israel’s $28,000 of venture capital invested per capita in 2021 is well above the US’s $1,000.

While other parts of Israel are attracting venture capital — in 2019 $233 million (3% of Israel’s total VC of $8.3 billion) was invested in startups in Jerusalem — the lion’s share goes to Tel Aviv.

Why is Tel Aviv Israel’s Most Vibrant Startup Scene? Capital wants to invest in talent that can build fast-growing companies — and that talent wants to be in Tel Aviv. And rapid growth usually produces exits that enrich investors.

Such exits peaked for Israeli startups last year. In 2021, 57 Israeli companies went public and raised a total of $4 billion — nearly three times the 22 IPOs of 2020, which raised $1.7 billion.

The 2021 IPOs involved four Tel Aviv companies — “cybersecurity firm SentinelOne” [based Silicon Valley with offices in Tel Aviv]project management software Monday.com, game and app developer IronSource and digital adoption SaaS company WalkMe,” said NoCamels.

In my opinion, the Tel Aviv startup scene has succeeded because it has overcome many types of scarcity, including these four.

1. Lack of local venture capital.

Israel overcame this with a government program called Yozma – launched in 1983 – that matched any outside venture capital investment in an Israeli startup. In return, the Israeli government asked the venture firm to repay its investment if the company had a successful exit – leaving the excess returns for the VC.

In addition, Israeli startup founders moved their headquarters to Boston, New York and Silicon Valley to attract local investment. In addition, many US venture capital firms opened offices in Israel.

2. Lack of exit markets for investors.

To make themselves attractive to VCs, Israeli companies had to find a way out. To that end, Israeli startups usually went to NASDAQ or sold to major US tech companies such as Microsoft and Google.

3. Lack of entrepreneurs with experience running publicly traded companies.

Initially, Israeli entrepreneurs excelled at turning an idea into a startup that could raise capital and grow to be acquired by a publicly traded company.

Over time, those founders stayed with the publicly traded acquirer and gained an understanding of the skills needed to run a publicly traded company. As a result, they were more comfortable leaving the nest, starting another business, taking it public and continuing after the IPO.

4. Small local markets and major security risks.

Since its founding, Israel had not had enough water to feed itself locally, so it developed a world-renowned expertise in drip irrigation. Israel also did not have large local markets because Israel had a relatively small population and most of its neighbors did not recognize its right to exist. In response to these challenges, Israeli startups are born globally – meaning they open offices and/or develop partnerships so they can sell their products around the world.

More fundamentally, Israel required its citizens to serve in the military and sent its most STEM talented high school students to elite cybersecurity units like the 8200. This produced a steady stream of world-class cybersecurity founders with a ready network of talent for their founding teams.

The startup success of a region creates new challenges. Tel Aviv, for example, is ranked as the most expensive place to live in the world, according to the Economist Intelligence Unit. Such high costs mean that local startups need more capital to hire local talent – ​​and it puts pressure on founders to find cheaper locations to hire world-class talent.

The lessons of Tel Aviv’s startup success for local policymakers are clear. First, you need to understand your weaknesses and turn them into strengths. By doing so, your growth will create new challenges that you must solve effectively to support the growth of your region.

The opinions expressed here by Inc.com columnists are their own, not Inc.com’s.

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