Start-up Nation (31 page)

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.”
²

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?
³

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.”
⁴

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.”
⁵

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.”
⁶
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.”
⁷

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.

This book began as a long discussion between the two of us in April 2001, when Dan brought to Israel a group of twenty-eight
Harvard Business School classmates. The purpose was to explore Israel’s economy, politics, and history. It was at a time of
vast business opportunity in Israel but also, with the collapse of the peace process, of escalating insecurity.

Almost none of the students had any previous ties to Israel—in fact only three were Jewish. They came from a range of countries:
the United Kingdom, the United States, Canada, Spain, Italy, Portugal, and India. At the end of the week, many were asking
the same question: Where did all this innovation and entrepreneurship come from?

We realized that we did not have an answer.

Over the years since then, Saul would write
Jerusalem Post
editorials about the Israeli economy and Dan would come to Israel almost every other quarter to invest in start-ups and visit
family. As Dan would meet with an impressive Israeli entrepreneur or Saul would highlight one, our curiosity grew.