Start-up Nation (27 page)

The royal family’s next generation—led by Sheikh Mohammed—took the free-zone model even further, with the creation of business
parks dedicated to specific industrial sectors. The first of these was Dubai Internet City (DIC), designed with the help of
Arthur Andersen and McKinsey & Company.

DIC
provided an ideal base for any technology company doing business in the Middle East, the Indian subcontinent, Africa, or
the former Soviet republics—collectively a potential market of 1.8 billion people with a total
GDP
of $1.6 trillion. In no time 180 companies signed up as tenants, including Microsoft, Oracle, HP,
IBM
, Compaq, Dell, Siemens, Canon, Logica, and Sony Ericsson.

In one sense,
DIC
was a remarkable success: by 2006, one-quarter of the world’s top five hundred companies had a presence in Dubai. Dubai then
tried to replicate that success story, founding Dubai Healthcare City, Dubai Biotechnology and Research Park, Dubai Industrial
City, Dubai Knowledge Village, Dubai Studio City, and Dubai Media City (where Reuters,
CNN
, Sony, Bertelsmann,
CNBC
,
MBC
, Arabian Radio Network, and other media companies all have a major presence).

DIC’s director of marketing, Wadi Ahmed, a British citizen of Arab origin, explains, “We have made Porter’s [cluster] theory
a reality. If you bring all the companies from the same segment together . . . opportunities materialize. It’s real-life networking.
It is bringing the integrator together with the software developers. Our cluster includes six hundred companies working within
two kilometers of each other. . . . Silicon Valley has some similarities but it is an area, not a single managed entity.”
³

It is true that Dubai had at first posted impressive growth rates and that it turned itself into an important commercial hub
in a short time. But there was never any comparability between the number of start-ups in Israel and in Dubai, or the amount
of venture capital Dubai has been able to attract compared to Israel, not to mention the number of new inventions and patents.
So what makes Israel and Dubai different in this way?

Drill down a bit into what is going on in Dubai’s Internet City, for example, and the answer begins to emerge. In
DIC
you will not find any R&D or new innovation-based companies. Dubai opened its doors to innovative global companies, and many
have come. But they have come to spread innovations made elsewhere to a particular regional market. Dubai, therefore, has
not created any thriving innovative clusters; rather, it has built large, successful service hubs. So when Mohammed Al Gergawi
was handpicked by Sheikh Mohammed to help catalyze Dubai’s economic miracle, the job was to grow and manage this exciting,
but not necessarily innovation-generating, venture.

In Israel the story is different. Margalit is one of tens of thousands of serial entrepreneurs. No one picked him; he picked
himself. All of his success came from creating innovative companies and hooking into a global venture and tech ecosystem that
is constantly searching for new products and markets. And while the physical infrastructure that facilitated this process
in Israel may have been inferior to Dubai’s, the cultural infrastructure has proved to be vastly richer soil on which to cultivate
innovation.

Attracting new members to a cluster by offering a less expensive way to do business might be sufficient to create a cluster,
but not to sustain it. If price is a cluster’s only competitive edge, some other country will always come along to do it more
cheaply. The other qualitative elements—such as tight-knit communities whose members are committed to living and working and
raising families in the cluster—are what contribute to sustainable growth. Crucially, a cluster’s sense of shared commitment
and destiny, which transcends day-to-day business rivalries, is not easy to manufacture.

The obstacles for Dubai, in this sense, are profound. Foreign nationals—European and Persian Gulf business adventurers or
South Asian and Arab temporary laborers—are there to make money, period. Once they’ve done so, they have typically returned
home or moved on to their next adventure. They have a transactional relationship with Dubai; they are not part of a tight-knit
community, and they are not collectively laying roots or building anything new. They evaluate their standing and accomplishments
vis-à-vis the communities in their home countries, not those in Dubai. Their emotional commitment and sense of rootedness
lie elsewhere. This, we believe, is a fundamental obstacle to a fully functioning cluster, and it may also be an impediment
to cultivating a high-growth entrepreneurial economy.

“If there is an Internet bubble in Israel, then Yossi Vardi is the bubble.”
⁴
So says Google cofounder Sergey Brin, referring to Vardi’s role in helping to rebuild Israel’s Internet sector from the ashes
of the global technology market crash of 2000. Vardi’s name has become synonymous with the world of Israeli Internet start-ups.
He is best known for ICQ, the Internet chat program founded by his son Arik Vardi and three pals when they were in their early
twenties. Isaac Applbaum of The Westly Group says that ICQ—once the world’s most popular chat program—was one of a handful
of companies that “transformed technology forever,” along with Netscape, Google, Apple, Microsoft, and Intel.

ICQ
(a play on “I seek you”) was introduced in November 1996, with seed funding from Vardi. It was the first program to allow
Windows users to communicate with one another live. America Online (AOL) invented its own chat program, called Instant Messenger
(AIM), at about the same time, but at first AOL’s program was available only to its subscribers.

The Israeli program spread much faster than AOL’s. By June 1997, close to half a year after ICQ’s launch—when only 22 percent
of American homes had Internet access—
ICQ
had over a million users. In six months the number of users had jumped to 5 million, and ten months later to 20 million.
By the end of 1999,
ICQ
had a total of 50 million registered users, making it the largest international online service.
ICQ
became the most downloaded program in the history of
CNET
.com, with 230 million downloads.

Back in mid-1998, when
ICQ
hit about 12 million users,
AOL
bought the start-up for what at the time was the largest amount paid for an Israeli tech company: $407 million. (They wisely
insisted on taking all cash instead of stock.)

Though Israel was already well into its high-tech swing by then, the
ICQ
sale was a national phenomenon. It inspired many more Israelis to become entrepreneurs. The founders, after all, were a group
of young hippies. Exhibiting the common Israeli response to all forms of success, many figured,
If these guys did it, I can do it better.
Further, the sale was a source of national pride, like winning a gold medal in the world’s technology Olympics. One local
headline declared that Israel had become an Internet “superpower.”
⁵

Vardi invests in Internet start-ups because he believes in them. But his dogged focus on the Internet when almost everyone
else was in either classic “Israeli” sectors, such as communications and security, or hot new areas, like cleantech and biotech,
is not attributable just to profit calculation. For one, Israel is his cluster, and he is conscious of his status as an “insider”
in this community—a community that he wants to succeed. And with that commitment, he is also conscious of his role in sustaining
this sector through a dry spell. Investing with a personal as well as a national purpose has been called “profitable patriotism,”
and has been getting renewed attention of late.

More than a century ago, prominent banker J. P. Morgan almost single-handedly stabilized the U.S. economy during the Panic
of 1907. At a time when there was no Federal Reserve, “Morgan was not only committing some of his own money but also organizing
the entire financial community to join in the rescue,” said Ron Chernow, a business historian and biographer.
⁶

When the crisis of 2008 hit, Warren Buffett seemed to play a similar role, pumping $8 billion into Goldman Sachs and General
Electric over just two weeks. As the panic deepened, Buffett knew that his decision to make massive investments might signal
to the market that he, America’s most respected investor, was not waiting for shares to plunge further and believed that the
economy was not going to collapse.

Vardi’s interventions are not on nearly as large a scale, of course, but even so, he has had an impact on the mix of Israeli
start-ups by playing a leadership role in keeping the Internet segment of the pie afloat. His mere presence and steadfastness
in a sector that everyone was writing off helped turn it around.

At the 2008 TechCrunch, an influential conference that singled out the fifty-one most promising start-ups in the world,
seven
of them were Israeli, and many of those had raised capital from Yossi Vardi. TechCrunch founder Michael Arrington is a strong
supporter of Vardi’s: “You [Israel] should build a statue of Yossi Vardi in Tel Aviv,” he says.
⁷

In the best-selling book
Built to Last
, business guru James Collins identifies several enduring business successes that all have one thing in common: a core purpose
articulated in one or two sentences. “Core purpose,” Collins writes, “is the organization’s fundamental reason for being.
[It] reflects the importance people attach to the company’s work . . . beyond just making money.” He lists fifteen examples
of core purpose statements. All of them are by companies—including Wal-Mart, McKinsey, Disney, and Sony—with one exception:
Israel. Collins describes Israel’s core purpose as “to provide a secure place on Earth for the Jewish people.” Building Israel’s
economy and participating in its cluster—which are interchangeable—and pitching it to the most far-flung places in the world
are what in part motivates Israel’s “profitable patriots.”
⁸
As historian Barbara Tuchman observed before Israel’s tech boom, “With all its problems, Israel has one commanding advantage:
a sense of purpose. Israelis may not have affluence . . . or the quiet life. But they have what affluence tends to smother:
a motive.”
⁹

The absence of motive is a problem in a number of the states of the Gulf Cooperation Council (GCC), which is composed of the
UAE
, Saudi Arabia, Bahrain, Kuwait, Qatar, and Oman. In the case of Dubai, one of the emirates in the
UAE
, most of the entrepreneurs that come from elsewhere are motivated by profit—which is important—but they are not also motivated
by building the fabric of community in Dubai. And as we have seen in examining Michael Porter’s cluster theory, a profit motive
alone will get a national economy only so far. When economic times are difficult, as has been the case in Dubai since late
2008, or security becomes dicey, those not committed to building a home, a community, and a state are often the first to flee.

In the other
GCC
economies, the problem is somewhat different. In our travels throughout the Arabian Peninsula, we have seen firsthand how
Saudi nationals—young and old—are proud of the economic and infrastructural modernization of their economy. Many Saudis have
a tribal lineage that traces back centuries, and building an advanced economy that is recognized globally is a matter of tribal
and national pride.

But all of these economies also face challenges that can stifle any potential for progress.

A number of business and government leaders throughout the Arab world have turned their attention to stimulating a high-growth
entrepreneurial economy, and some have been quietly studying Israel. “How else are we going to create eighty million jobs
in the next decade?” Riad al-Allawi asked us. Al-Allawi is a successful Jordanian entrepreneur who has done business all over
the region. Eighty million is the number we kept hearing from experts during our travels to Arab capitals.

The Arab economies of North Africa (Egypt, Algeria, Morocco, and Tunisia), the Middle East (Lebanon, Syria, Palestine, Iraq,
and Jordan), and the Persian Gulf (Saudi Arabia, the
UAE
, Qatar, Bahrain, Kuwait, and Oman) comprise approximately 225 million people, just over 3 percent of the world’s population.
And the total
GDP
of the Arab economies in 2007 was $1.3 trillion—almost two-fifths the size of China’s economy. But wealth distribution varies
widely: there are oil-rich economies with tiny populations (such as Qatar, with 1 million people and a per capita
GDP
of $73,100) and oil-poor economies with large, dense populations (such as Egypt, with 77 million people but a per capita
GDP
of just $1,700). Generalizations about development strategies for the region are risky since the sizes, structures, and natural
resources of the Arab economies vary widely.

But even with all the differences, the unifying economic challenge for the Arab Muslim world is its own demographic time bomb:
approximately 70 percent of the population is under twenty-five years old. Employing all of these people will require the
creation of eighty million new jobs by 2020, as al-Allawi told us.
¹⁰
Meeting this goal means generating employment at twice the U.S. job growth rate during the boom decade of the 1990s. “The
public sector isn’t going to create these jobs; big companies aren’t going to create these jobs,” says Fadi Ghandour, a successful
Jordanian entrepreneur. “The stability and future of the region is going to depend on our teaching our young people how to
go out and create companies.”
¹¹

But entrepreneurship has played only a negligible part in Arab world economies. Even before its economy imploded less than
4 percent of the UAE’s adult population was working in early-stage or small enterprises. So what are the barriers to an Arab
“start-up nation”? The answer includes oil, limits on political liberties, the status of women, and the quality of education.