Start-up Nation (5 page)

Thompson went to eBay’s
CEO
, Meg Whitman, to bring her into the loop. “I told Scott that it was impossible,” Whitman related. “We’re the market leader.
Where on earth did this tiny little company come from?” Thompson and his team of PhDs walked her through the results. She
was astounded.

Now Thompson and Whitman had a truly unexpected problem on their hands. What could they tell Shvat? If Thompson told this
start-up’s
CEO
that he had handily beaten the industry leader, the start-up’s team would realize they were sitting on something invaluable.
Thompson knew that PayPal had to buy Fraud Sciences, but how could he tell Shvat the test results without jacking up the company’s
price and negotiating position?

So he stalled. He responded to Shaked’s anxious e-mails by saying PayPal needed more time for analysis. Finally, he said he
would share the results in person the next time the Fraud Sciences team was in San Jose, hoping to buy more time. Within a
day or two, Shaked was on Thompson’s doorstep.

What Thompson did not know, however, was that the Fraud Sciences founders—Shaked and Saar Wilf, who served together in Israel’s
elite army intelligence unit, called 8200—were not interested in selling their company to PayPal. They just wanted Thompson’s
blessing as they proceeded down a checklist of due diligence requirements for Benchmark Capital.

Thompson went back to Meg: “We need to make a decision. They’re here.” She gave him the go-ahead: “Let’s buy it.” After some
valuation work, they offered $79 million. Shaked declined. The Fraud Sciences board, which included the Israeli venture firm
BRM
Capital, believed the company was worth at least $200 million.

Eli Barkat, one of the founding partners of
BRM
, explained to us his theory behind the company’s future value: “The first generation of technology security was protecting
against a virus invading your PC. The second generation was building a firewall against hackers.” Barkat knew something about
both these threats, having funded and built companies to protect against them. One of them, Checkpoint—an Israeli company
also started by young alumni from Unit 8200—is worth $5 billion today, is publicly traded on the NASDAQ, and includes among
its customers the majority of Fortune 100 companies and most national governments around the world. The third generation of
security would be protecting against hacking into e-commerce activity. “And this would be the biggest market yet,” Barkat
told us, “because up until then, hackers were just having fun—it was a hobby. But with e-commerce taking off, hackers could
make real money.”

Barkat also believed that Fraud Sciences had the best team and the best technology to defend against Internet and credit card
fraud. “You’ve got to understand the Israeli mentality,” he said. “When you’ve been developing technology to find terrorists—when
lots of innocent lives hang in the balance—then finding thieves is pretty simple.”

After negotiations that lasted only a few days, Thompson and Shaked agreed on $169 million. Thompson told us that the PayPal
team thought it could get away with a lower price. When the negotiating process began and Shaked stuck to the higher number,
Thompson assumed it was just a bluff. “I figured I’d never seen such a convincing poker face. But what was really going on
was that the Fraud Sciences guys had a view of what their company was worth. They were not sales guys. They weren’t hyping
it. Shaked just played it straight. He basically said to us, ‘This is our solution. We know it is the best. This is what we
think it’s worth.’ And that really was the end of it. There was a matter-of-factness that you just don’t see that often.”

Soon after, Thompson was on a plane to visit the company he had just purchased. During the last leg of the twenty-hour flight
from San Francisco, about forty-five minutes before landing, as he sipped his coffee to wake up, he happened to glance at
the screen in the aisle that showed the plane’s trajectory on a map. He could see the little airplane icon at the end of its
flight path, about to land in Tel Aviv. That was fine, until he noticed what else was on the map, which at this point showed
only places that were pretty close by. He could see the names and capitals of the countries in the region, arrayed in a ring
around Israel: Beirut, Lebanon; Damascus, Syria; Amman, Jordan; and Cairo, Egypt. For a moment, he panicked: “I bought a company
there? I’m flying into a war zone!” Of course, he’d known all along who Israel’s neighbors were, but it had not quite sunk
in how small Israel was and how closely those neighbors ringed it. “It was as if I were flying into New York and suddenly
saw Iran where New Jersey was supposed to be,” he recalled.

It didn’t take long after he stepped off the plane, however, before he was at ease in a place that was not shockingly unfamiliar,
and that treated him to some pleasant surprises. His first big impression was in the Fraud Sciences parking lot. Every car
had a PayPal bumper sticker on it. “You’d never see that kind of pride or enthusiasm at an American company,” he told us.

The next thing that struck Thompson was the demeanor of the Fraud Sciences employees during the all-hands meeting at which
he spoke. Each face was turned raptly to him. No one was texting, surfing, or dozing off. The intensity only increased when
he opened the discussion period: “Every question was penetrating. I actually started to get nervous up there. I’d never before
heard so many unconventional observations—one after the other. And these weren’t peers or supervisors, these were junior employees.
And they had no inhibition about challenging the logic behind the way we at PayPal had been doing things for years. I’d never
seen this kind of completely unvarnished, unintimidated, and undistracted attitude. I found myself thinking, Who works for
whom?”

What Scott Thompson was experiencing was his first dose of Israeli chutzpah. According to Jewish scholar Leo Rosten’s description
of Yiddish—the all-but-vanished German-Slavic language from which modern Hebrew borrowed the word—
chutzpah
is “gall, brazen nerve, effrontery, incredible ‘guts,’ presumption plus arrogance such as no other word and no other language
can do justice to.”
²
An outsider would see
chutzpah
everywhere in Israel: in the way university students speak with their professors, employees challenge their bosses, sergeants
question their generals, and clerks second-guess government ministers. To Israelis, however, this isn’t
chutzpah
, it’s the normal mode of being. Somewhere along the way—either at home, in school, or in the army—Israelis learn that assertiveness
is the norm, reticence something that risks your being left behind.

This is evident even in popular forms of address in Israel. Jon Medved, an entrepreneur and venture capital investor in Israel,
likes to cite what he calls the “nickname barometer”: “You can tell a lot about a society based on how [its members] refer
to their elites. Israel is the only place in the world where everybody in a position of power—including prime ministers and
army generals—has a nickname used by all, including the masses.”

Israel’s current and former prime ministers Benjamin Netanyahu and Ariel Sharon are “Bibi” and “Arik.” A former Labor Party
leader is Binyamin “Füad” Ben-Eliezer. A recent Israel Defense Forces (IDF) chief of staff is Moshe “Bogey” Yaalon. In the
1980s, the legendary
IDF
chief was Moshe “Moshe VeHetzi” (Moshe-and-a-Half) Levi—he was six foot six. Other former
IDF
chiefs in Israeli history were Rehavam “Gandhi” Zeevi, David “Dado” Elazar, and Rafael “Raful” Eitan. The Shinui Party founder
was Yosef “Tommy” Lapid. A top minister in successive Israeli governments is Isaac “Bugie” Herzog. These nicknames are used
not behind the officials’ backs but, rather, openly, and by everyone. This, Medved argues, is representative of Israel’s level
of informality.

Israeli attitude and informality flow also from a cultural tolerance for what some Israelis call “constructive failures” or
“intelligent failures.” Most local investors believe that without tolerating a large number of these failures, it is impossible
to achieve true innovation. In the Israeli military, there is a tendency to treat all performance—both successful and unsuccessful—in
training and simulations, and sometimes even in battle, as value-neutral. So long as the risk was taken intelligently, and
not recklessly, there is something to be learned.

As Harvard Business School professor Loren Gary says, it is critical to distinguish between “a well-planned experiment and
a roulette wheel.”
³
In Israel, this distinction is established early on in military training. “We don’t cheerlead you excessively for a good
performance, and we don’t finish you off permanently for a bad performance,” one air force trainer told us.
⁴

Indeed, a 2006 Harvard University study shows that entrepreneurs who have failed in their previous enterprise have an almost
one-in-five chance of success in their next start-up, which is a higher success rate than that for first-time entrepreneurs
and not far below that of entrepreneurs who have had a prior success.
⁵

In
The Geography of Bliss
, author Eric Weiner describes another country with a high tolerance for failure as “a nation of born-agains, though not in
a religious sense.”
⁶
This is certainly true for Israeli laws regarding bankruptcy and new company formation, which make it the easiest place in
the Middle East—and one of the easiest in the world—to birth a new company, even if your last one went bankrupt. But this
also contributes to a sense that Israelis are always hustling, pushing, and looking for the next opportunity.

Newcomers to Israel often find its people rude. Israelis will unabashedly ask people they barely know how old they are or
how much their apartment or car cost; they’ll even tell new parents—often complete strangers on the sidewalk or in a grocery
store—that they are not dressing their children appropriately for the weather. What is said about Jews—two Jews, three opinions—is
certainly true of Israelis. People who don’t like this sort of frankness can be turned off by Israel, but others find it refreshing,
and honest.

“We did it the Israeli way; we argued our case to death.”
⁷
That’s how Shmuel “Mooly” Eden (he has a nickname, too) glibly sums up a historic showdown between Intel’s top executives
in Santa Clara and its Israeli team. It, too, was a case study in
chutzpah
.

The survival of Intel would turn on the outcome. But this fierce, months-long dispute was about more than just Intel; it would
determine whether the ubiquitous laptop computer—so much taken for granted today—would ever exist.

Eden is a leader of Intel’s Israeli operation—the largest private-sector employer in the country—which today exports $1.53
billion annually.
⁸
He told us the story of Intel in Israel, and Intel’s battles with Israel.

Throughout most of the history of modern computing, the speed of data processing—how much time it takes your computer to do
anything—was determined by the speed of a chip’s transistors. The transistors flipped on and off, and the order in which they
did so produced a code, much like letters are used to make words. Together, millions of flips could record and manipulate
data in endless ways. The faster the transistors could be made to flip on and off (the transistor’s “clock speed”), the more
powerful the software they could run, transforming computers from glorified calculators to multimedia entertainment and enterprise
machines.

But until the 1970s, computers were used predominantly by rocket scientists and big universities. Some computers took up whole
rooms or even buildings. The idea of a computer on your office desk or in your home was the stuff of science fiction. All
that began to change in 1980, when Intel’s Haifa team designed the 8088 chip, whose transistors could flip almost five million
times per second (4.77 megahertz), and were small enough to allow for the creation of computers that would fit in homes and
offices.

IBM
chose Israel’s 8088 chip as the brains for its first “personal computer,” or PC, launching a new era of computing. It was
also a major breakthrough for Intel. According to journalist Michael Malone, “With the
IBM
contract, Intel won the microprocessor wars.”
⁹

From then on, computing technology continued to get smaller and faster. By 1986, Intel’s only foreign chip factory was producing
the 386 chip. Built in Jerusalem, its processing speed was 33 megahertz. Though a small fraction of today’s chip speeds, Intel
called it “blazing”—it was almost seven times faster than the 8088. The company was solidly on the path imagined by one of
its founders, Gordon Moore, who predicted that the industry would shrink transistors to half their size every eighteen to
twenty-four months, roughly doubling a chip’s processing speed. This constant halving was dubbed “Moore’s law,” and the chip
industry was built around this challenge to deliver faster and faster chips.
IBM
, Wall Street, and the business press all caught on, too—clock speed and size was how they measured the value of new chips.

This was proceeding well until about 2000, when another factor came into the mix: power. Chips were getting smaller and faster,
just as Moore had predicted. But as they did, they also used more power and generated more heat. Chips overheating would soon
become a critical problem. The obvious solution was a fan, but, in the case of laptops, the fan needed to cool the chips would
be much too big to fit inside. Industry experts dubbed this dead end the “power wall.”

Intel’s Israeli team was the first group within the company to see this coming. Many late nights at Intel’s Haifa facility
were dedicated to hot coffee, cold takeout, and ad hoc brainstorming sessions about how to get around the power wall. The
Israeli team was more focused than anyone on what the industry called “mobility”—designing chips for laptop computers and,
eventually, for all sorts of mobile devices. Noticing this tendency, Intel put their Israeli branch in charge of building
mobility chips for the whole company.