Start-up Nation

Conclusion Farmers of High Tech

AS WE WAITED IN ONE OF THE ANTEROOMS of the President’s House, we were not sure how much time we would get with President Shimon Peres. At eighty-five, Peres is the last member of the founding generation still in high office. Peres began his career as a twenty-five-year-old sidekick to David Ben-Gurion and went on to serve in almost every ministerial post, including two stints as prime minister. He also picked up a Nobel Peace Prize along the way.

Abroad, he is one of the most admired Israelis. At home, his reputation is more controversial. Peres is known primarily as the father of the 1993 Oslo accords, which were famously instituted with a handshake between Yitzhak Rabin and Yasir Arafat in the presence of Bill Clinton on the White House lawn, but which came to symbolize, to many Israelis, false hopes, terrorism, and war.

It is hard to exaggerate Peres’s impact on Israel’s diplomacy, but this is not what we were primarily interested in talking to him about. Less well known, but no less significant, was his role as a serial entrepreneur of a very unique sort—a founder of industries. He never spent a day of his life in business. In fact, he told us that neither he nor Ben-Gurion knew anything about economics. But Peres’s approach to government has been one of an entrepreneur launching start-ups.

Peres grew up on a kibbutz before the founding of the state. It wasn’t just the social and economic structure of this Israeli invention that was innovative; its very means of sustenance represented a huge departure. “Agriculture is more revolutionary than industry,” Peres was quick to point out as we finally settled into his book-lined office, surrounded by mementos from Ben-Gurion and world leaders.

“In twenty-five years, Israel increased its agricultural yields seventeen times. This is amazing,” he told us. People don’t realize this, Peres said, but agriculture is “ninety-five percent science, five percent work.”

Peres seemed to see technology everywhere, and long before Israelis themselves thought in such terms. This may have been one of the reasons Ben-Gurion backed Peres so strongly; the “Old Man” was also fascinated by technology, he told us. “Ben-Gurion thought the future was science. He would always say that in the army it’s not enough to be up to date; you have to be up to tomorrow,” Peres recalled.

So Ben-Gurion and Peres became a technological tag team. Peres and American swashbuckler Al Schwimmer started dreaming up an aeronautics industry while flying over the Arctic in 1951. But when they got back to Israel, they were met with stiff opposition. “We can’t even make bicycles,” ministers told Peres, in days in which a nascent bicycle industry was indeed failing, refugees were continuing to flood into the country, and basic foodstuffs were still being rationed. But with Ben-Gurion’s backing, Peres was able to prevail.

Later on, Peres’s idea of starting a nuclear industry was similarly written off. It was seen as too ambitious, even by Israeli scientists in the field. The finance minister, who believed that the Israeli economy should focus on textile exports, told Peres, “It’s very good you came to me. I shall make sure you won’t get a penny.” So with typical disregard for the rules, Ben-Gurion and Peres somehow funded the project off-budget and Peres went around the established scientists, turning instead to students at the Technion, some of whom he sent to France for training.

The result was the nuclear reactor near Dimona, which has operated since the early 1960s without mishap and has reportedly made Israel a nuclear power. As of 2005, Israel was the world’s tenth-largest producer of nuclear patents.[223]

But Peres didn’t stop there. As deputy minister of defense, he pumped money into defense R&D, to the dismay of the military leadership, which, perhaps understandably, was more concerned about chronic shortages of weapons, training, and manpower.

Today, Israel leads the world in the percentage of its GDP that goes to research and development, creating both a technological edge critical to national security and a civilian tech sector that is the main engine of the economy. The key, however, is the way the entrepreneurial nation building Peres embodies has morphed into a national condition of entrepreneurship.

This transformation was not easy, planned, or foreseen. It came later than Israelis would have liked—there was a “lost decade” of low growth and hyperinflation between the founders’ era of high growth and the current era of high tech. But it came, and a thread runs through the founders’ time of draining swamps and growing oranges to today’s era of start-ups and chip designers.

Today’s entrepreneurs feel the tug of this thread. While the founders’ milieu was socialist and frowned on profit, now “there’s a legitimate way to make a profit because you’re inventing something,” says Erel Margalit, one of Israel’s top entrepreneurs. “You’re not just trading in goods, or you’re not just a finance person. You are doing something for humanity. You are inventing a new drug or a new chip. You feel like a falah [“farmer” in Arabic], a farmer of high tech. You dress down. You’re with your buddies from the army unit. You talk about a way of life—not necessarily about how much money you’re going to make, though it’s obviously also about that.” For Margalit, innovation and technology are the twenty-first-century version of going back to the land. “The new pioneering, Zionist narrative is about creating things,” he says.

Indeed, what makes the current Israeli blend so powerful is that it is a mashup of the founders’ patriotism, drive, and constant consciousness of scarcity and adversity and the curiosity and restlessness that have deep roots in Israeli and Jewish history. “The greatest contribution of the Jewish people in history is dissatisfaction,” Peres explained. “That’s poor for politics but good for science.

“All the time you want to change and change,” Peres said, speaking of both the Jewish and the Israeli condition. Echoing what we heard from almost every IDF officer we interviewed, Peres said, “Every technology that arrives in Israel from America, it comes to the army and in five minutes, they change it.” But the same thing goes on outside the IDF—an insatiable need to tinker, invent, and challenge.

This theme can be traced to the very idea of Israel’s founding. The modern state’s founders—or national entrepreneurs—were building what might be called the first “start-up nation” in history.

Many other nations, of course, have emerged from scratch, at the stroke of a departing colonial power’s pen. Neighboring Jordan, for example, was created in 1921 by Winston Churchill, who decided to hand the Hashemite clan a kingdom.

Other countries, like the United States, were the product of a truly entrepreneurial or revolutionary process, rather than a national amalgamation that had accrued slowly over centuries, such as England, France, and Germany. None, however, were the result of such a conscious effort to build from scratch a modern reincarnation of an ancient nation-state.

Some modern countries, of course, can trace their heritage back to ancient empires: Italy to the Romans, Greece to the Greeks, and China and India to peoples who lived in those areas for thousands of years. But in all these other cases, either the original commonalty continued in an unbroken chain from the ancient generations to the modern one, without ever completely losing control of its territory, or the ancient people simply disappeared, never to be heard from again. Only Israel’s founders had the temerity to try to start up a modern first-world country in the region from which their ancestors had been exiled two thousand years earlier.

So what is the answer to the central question of this book: What makes Israel so innovative and entrepreneurial? The most obvious explanation lies in a classic cluster of the type Harvard professor Michael Porter has championed, Silicon Valley embodies, and Dubai has tried to create. It consists of the tight proximity of great universities, large companies, start-ups, and the ecosystem that connects them—including everything from suppliers, an engineering talent pool, and venture capital. Part of this more visible part of the cluster is the role of the military in pumping R&D funds into cutting-edge systems and elite technological units, and the spillover from this substantial investment, both in technologies and human resources, into the civilian economy.

But this outside layer does not fully explain Israel’s success. Singapore has a strong educational system. Korea has conscription and has been facing a massive security threat for its entire existence. Finland, Sweden, Denmark, and Ireland are relatively small countries with advanced technology and excellent infrastructure; they have produced lots of patents and reaped robust economic growth. Some of these countries have grown faster for longer than Israel has and enjoy higher standards of living, but none of them have produced anywhere near the number of start-ups or have attracted similarly high levels of venture capital investments.

Antti Vilpponen is a Finnish entrepreneur who helped found a “start-up movement” called ArcticStartup. Finland is home to one of the great technology companies of the world, Nokia, the cell phone maker. Israelis often look to Finland and ask themselves, “Where’s our Nokia?” They want to know why Israel hasn’t produced a technology company as large and successful as Nokia. But when we asked Vilpponen about the start-up scene in Finland, he lamented, “Finns produce lots of technology patents but we have failed to capitalize on them in the form of start-ups. The initial investment in Finland into a start-up is around three hundred thousand euros, while it’s almost ten times higher in Israel. Israel also produces ten times more start-ups than Finland and the turnover of these start-ups is shorter and faster. I’m sure we’ll see a lot of growth, but so far we’re way behind Israel and the U.S. in developing a start-up culture.”[224]

While the high turnover of start-ups concerns Israelis, Vilpponen sees them as an asset. What is clear is that Israel has something that’s sought by other countries—even countries that are considered on the forefront of global competitiveness. In addition to the institutional elements that make up clusters—which Finland, Singapore, and Korea already possess—what’s missing in these other countries is a cultural core built on a rich stew of aggressiveness and team orientation, on isolation and connectedness, and on being small and aiming big.

Quantifying that hidden, cultural part of an economy is no easy feat, but a study by professors comparing the cultures of fifty-three countries captured part of it. The study tried to categorize countries according to three parameters that particularly affect the workplace: Are they more hierarchical or more egalitarian, more assertive or more nurturing, more individualist or more collectivist?[225]

The study found in Israel a relatively unusual combination of cultural attributes. One might expect that a country like Israel, where people are considered individualistic, would accordingly be less nurturing. Personal ambition might be expected to conflict with teamwork. And one would also anticipate that such a type A–driven society would be more hierarchical. In fact, Israel scored high on egalitarianism, nurturing, and individualism. If Israelis are competitive and aggressive, how can they be “nurturing”? If they are so individualistic, how does that reconcile with the lack of hierarchies and “flatness”?

In Israel, the seemingly contradictory attributes of being both driven and “flat,” both ambitious and collectivist make sense when you throw in the experience that so many Israelis go through in the military. There they learn that you must complete your mission, but that the only way to do that is as a team. The battle cry is “After me”: there is no leadership without personal example and without inspiring your team to charge together and with you. There is no leaving anyone behind. You have minimal guidance from the top and are expected to improvise, even if this means breaking some rules. If you’re a junior officer, you call your higher-ups by their first names, and if you see them doing something wrong, you say so.

If you stood out in high school for your leadership skills, scientific test scores, or both, you will be snapped up by one of the IDF’s elite units, which will turbocharge your skills with intensive training and the most challenging possible on-the-job experience. In combat, you will be given command of dozens of people and millions of dollars’ worth of equipment and be expected to make split-second life-and-death decisions. In the elite technology units, you will be put in charge of development projects for cutting-edge systems, giving you experience that someone twice your age in the private sector might not have.

And when you complete your military service, everything you need to launch a start-up will be a phone call away, if you have the right idea. Everyone knows someone in his or her family, university, or army orbit who is an entrepreneur or understands how to help. Everyone is reachable by cell phone or e-mail. Cold-calling is acceptable but almost never fully cold; almost everyone can find some connection to whomever he or she needs to contact to get started. As Yossi Vardi told us, “Everybody knows everybody.”

Most importantly, launching a start-up or going into high tech has become the most respected and “normal” thing for an ambitious young Israeli to do. Like the stereotypical Jewish mother, an Israeli mother might be satisfied with a child who becomes a doctor or a lawyer, but she will be at least as proud of her son or daughter “the entrepreneur.” What in most countries is somewhat exceptional in Israel has become an almost standard career track, despite the fact that everyone knows that, even in Israel, the chances of success for start-ups are low. It’s okay to try and to fail. Success is best, but failure is not a stigma; it’s an important experience for your résumé.

The secret, then, of Israel’s success is the combination of classic elements of technology clusters with some unique Israeli elements that enhance the skills and experience of individuals, make them work together more effectively as teams, and provide tight and readily available connections within an established and growing community. For outside observers, this raises a question: If the Israeli “secret sauce” is so unique to Israel, what can other countries learn from it?

Luckily, while innovation is scarce, it is also a renewable resource. Unlike finite natural resources, ideas can spread and benefit whichever countries are best positioned to take advantage of them, regardless of where they were invented. George Bernard Shaw wrote, “If you have an apple and I have an apple and we exchange apples, then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.”[226]

While innovation is in principle an unlimited resource, and one that spreads on its own, almost every company wants to obtain the maximum benefit from this process. The world’s major companies learned long ago that the simplest way to benefit from Israeli innovations is to buy an Israeli start-up, set up an Israeli R&D center, or both. With our increasingly global world and the movement toward open sourcing, there is little need for multinational companies to try to duplicate the business environments of countries that have a comparative advantage in manufacturing, innovation, or regional market access.

That said, most major companies understand that in a global market where change is the only constant, innovation is one of the foundations of long-term competitiveness. Further, while it is possible for countries and companies to take advantage of innovation that originates elsewhere, there are also corporate and national advantages to being the source of innovation.

For this purpose, it may be possible to simulate an “Israeli” environment. Intel Israel’s Dov Frohman, for example, found it necessary to do this even in Israel itself. His original guiding slogan for Intel Israel was that it would be “the last Intel plant to close in a crisis.” When his employees found this description to be too negative, he changed his slogan to “survival through success”—meaning that the goal was success but the motivation was survival, which could never be taken for granted. For Frohman, the key to the success of a large company was “maintaining the atmosphere of a precarious start-up.”[227]

Further, while other democracies have no reason to institute a military draft like Israel’s, a mandatory or voluntary national service program that is sufficiently challenging could give young college-age people—before they begin college—something like the leadership, teamwork, and mission-oriented skills and experience Israelis receive through military service. Such a program would also increase social solidarity and help inculcate the value of serving something larger than oneself, whether a family, a community, a company, or a nation. And when U.S. military men and women, for example, are transitioning to civilian life, they should not be advised to deemphasize their military experience when applying for a job.

For any nation and, indeed, for the world, the stakes of increasing innovation are tremendous. Paul Romer, considered one of the leading economists of “new growth theory,” points out that the average annual growth rate of the United States between 1870 and 1992 was 1.8 percent—about half a percent higher than in the United Kingdom. He believes that this competitive edge has been maintained by America’s “historical precedent for creating institutions which lead to better innovation.”[228] Romer suggests that subsidizing graduate and undergraduate studies in science and engineering could boost economic growth. In addition, a system of “portable fellowships,” which students could bring to any institution, would encourage lab directors and professors to compete over meeting the research and career needs of students, not just their own.

Romer points out that the biggest leaps in growth and productivity were produced by “meta-ideas” that increased the generation and spread of ideas. Patents and copyrights were a critical meta-idea invented by the British in the seventeenth century, while Americans introduced the modern research university in the nineteenth century and the peer-reviewed competitive research grant system in the twentieth century.

“We do not know what the next major idea about how to support ideas will be. Nor do we know where it will emerge,” writes Romer. “There are, however, two safe predictions. First, the country that takes the lead in the twenty-first century will be the one that implements an innovation that more effectively supports the production of new ideas in the private sector. Second, new meta-ideas of this kind will be found.”[229]

About an hour and a half into our meeting with President Peres, we ran out of time. His next scheduled appointment had arrived, and we prepared to say our good-byes. But as we stood to do so, he paused for a moment and said, “Why don’t you come back in half an hour and we can continue?” So we did, and he previewed what his message would be for Israel’s entrepreneurs and policymakers in the coming years: “Leave the old industries. There are going to be five new industries. Tremendous—new forms of energy, water, biotechnology, teaching devices—there’s a shortage of teachers—and homeland security to defend against terrorism.” Nanotechnology research, for which Peres has also been instrumental in establishing funding, he predicted, would cut across all of these new industries and others as well.

We don’t know whether Peres has picked the right industries, but that’s not the point. At eighty-five, he still has the chutzpah to think up and advocate new industries. As they do in Israeli society (and have throughout Israel’s history), the pioneering and innovative impulses merge into one. At the heart of this combined impulse is an instinctive understanding that the challenge facing every developed country in the twenty-first century is to become an idea factory, which includes both generating ideas at home and taking advantage of ideas generated elsewhere. Israel is one of the world’s foremost idea factories, and provides clues for the meta-ideas of the future. Making innovation happen is a collaborative process on many levels, from the team, to the company, to the country, to the world. While many countries have mastered the process at the level of large companies, few have done so at the riskiest and most dynamic level of the process, the innovation-based start-up. Accordingly, while Israel has much to learn from the world, the world has much to learn from Israel. In both directions, the most careful thing, as Peres told us, is to dare.