Origins of Israel's Tech Miracle

The Origins of Israel's Tech Miracle
05 Nov 2009 08:57 am
Dan Senor and Saul Singer, the authors of the new, best-selling Start-Up Nation, have done the impossible: They've written a book that doesn't examine Israel through the prism of its conflict with the Arabs. Instead, they've produced a fascinating and illuminating look at the reasons Israel has become one of the world's prime incubators of technological innovation. This is a story about Israel, of course, but it's a story with universal implications. "Start-Up Nation" is, among other things, an indispensable business book. I wish I had thought to write it. I spoke with Dan Senor by phone last week, and here is an edited version of our discussion.

Jeffrey Goldberg: This book is a reminder that Israel, despite its many problems --  many of them inflicted from the outside, some self-inflicted -- is a remarkable success story, and I'm wondering what sparked your curiosity about Israel's technological achievements.

Dan Senor: Originally the idea was not to do a book -- when I was in my second year of Harvard Business School in 2001, I took a group of thirty students to Israel, three of them were Jewish, twenty-seven were not, and had no connection to Israel. The idea was to look at the economic opportunities in Israel and also study the history and the politics. It was at a pretty depressing time -- there was a good entrepreneurial economy story there, but it was during the Second Intifada. And I took all these students - to their credit, none of them pulled out even though literally the day we were leaving things were blowing up -- and my classmates were all saying to me, "I get it. There's huge economic opportunity here for people who are willing to invest here and do business here." But even more than that, I was struck by the question of how they pulled it off.  It's a very young country, very difficult environment, there are no natural resources, no access to regional capital or regional markets. If you were to paint a picture of the circumstances under which you're not going to have a successful economic developing country, it would be Israel.

JG: One thing about the book that's interesting to me is that it seems that you're trying very hard not to say, 'Well, of course if you put a bunch of Jews in a room, that weird Jewish brain will create something."

DS: We were very self-conscious about that.

JG: Because it's wrong? Because it's stereotypical? Because you don't believe it?

DS: We believe that there are lessons that developing and developed economies can learn from Israel, and that there are prescriptions for the U.S. that can be taken from Israel, and if it is simply about the fact that Jews are smart, well-educated and good at business, it completely undermines the notion that there is anything transferable. We really believe that. We're not naïve; there are certain dynamics that are unique to Israel that cannot be, and should never be, tried elsewhere.

JG: Judaism: Don't try this at home.

DS: Exactly, but we think that's only part of it. There are many elements that absolutely are prescriptive and the moment it becomes about 'Jews are smart,' no one's going to pay attention to the other part. And the other parts are extremely important. For example, we're writing the book, it's September of last year, Lehman blows up, and there's a big debate among economists about productivity gains and how all our economic growth over the last five or ten years was not at all about productivity gains -- it was all about speculative credit, near-zero interest rates -- and we were watching a reversion back to a discussion on the need for basic innovation as the juice for economic growth. And, by the way, the only way you get true innovation into the economy is if it's dominated by small enterprises. And we were struck by this debate, because that's exactly what we were writing about.

JG: One of your arguments is that it's not necessarily Jewish culture that created this, but Israel Defense Force culture, that many of the great entrepreneurs and innovators come out of the Air Force, out of the technical branches of the IDF. And that this is replicable. Is that fair to say?

DS:  One, we believe in an anti-hierarchical tolerance for self-criticism -- not only tolerance, almost encouragement.

JG: By the way, it's a well-known Jewish trait.

DS: Shimon Peres told us that Jews have a tendency throughout our history to be dissatisfied. That's a big theme, so this is obviously a big part of IDF culture. I'm of two minds on how applicable this is to the American military. On the one hand, I feel that the Israeli military is just a more entrepreneurial military than any military I know of or that we've studied. I mean, it's just so much more built around improvisation. The fact that when you're being promoted in the Israeli military, your subordinates have input, or can have input, in those decisions. So it's a very entrepreneurial, start-up military. There are very few bosses.  The only way you can cultivate that culture and ethos is if you have very few bosses, because the moment you have a lot of bosses, you have a lot of people who need to justify their existence, and they justify their existence by giving commands. I saw this on military bases I've worked on and when I've been in government --  the U.S. military is top-heavy, and you have a lot of people standing around giving orders to sort of justify their existence. We do believe, though, that the American military is changing, it is becoming more entrepreneurial -- not nearly as much as the Israelis, and quite frankly it should never be as entrepreneurial as the Israelis because the Americans have to fight different kinds of wars than the Israelis. Israelis fight all their wars in their own neighborhood, it's a different dynamic. You really need Fed-Ex logistics more than you need Fraud Sciences, which is one of the start-ups we profiled.

JG: We know that Israel excels at innovation, but why is there no Nokia in Israel, a huge manufacturer of hi-tech products?
DS: This is a big debate within the Israeli business world, where's our Nokia?

JG: Why can't they seem to scale-up?

DS: Some people say it's a real problem in Israel, that they've created this sort of radical, very experiment-oriented business community, but they're not training serious, senior, high-level managers who can build not just start-ups that pop into Nasdaq or get bought by some American company, but can actually become an institution over the long run. Some people argue, who cares? Why do we need it? We're doing well. If you do what you're good at it--

JG: From your personal perspective, which is better for Israel? To have the thousand little innovators?

DS: Absolutely. You're in a constant mode of creative destruction and it's such a perfect fit for the Israeli culture.

JG: Spontaneity is an appropriate word. You tell the joke in your book about the Israeli who asks a girl out, and she says, "'What time?" The assumption in Israel is that everything is meant to happen today.

DS: This is a very big part of why we believe the Israelis survived and navigated so well the crisis of 2008. If you think about it, one could have argued that 2008 should have been a disaster for Israel because two things happened: one, export markets -- which is the entire Israeli economy, because there is no domestic market -- basically shut down. And two, so much of the Israeli economy has been fueled by global venture capital, which shrunk dramatically.  A lot of venture capital just dried up. Loss of export markets and loss of access to venture capital should have basically destroyed the Israeli economy. But Israelis survived for a number of reasons, but most important was the fact that they wake up every day and say, "Alright, we're not quitting." These start-ups were working for nothing, and saying, "We'll figure it out, we'll get through this. They wake up every day and say, "Let's solve new problems and let's be resilient."

JG: Can the hi-tech industry solve the problem of the economic disenfranchisement of Arab citizens of Israel? Did you find much integration of Arabs into this high-tech industry? If not, is there a way to bring them in?

DS: There's not a lot of it happening.

JG: Because a lot of these human capital networks are built in the army?

DS: We found a few really interesting stories of Israeli-Arab doctors and researchers who are  working with Israeli. Where it's happening, it's pretty amazing. There was one amazing story in nanotechnology happening at Hebrew University that I wanted to write about, it was a great start-up between an Israeli-Arab and an Israeli-Jew, but for security reasons for the Israeli-Arab, we couldn't write about it. We talked about changing his name, but people would have been able to piece his identity together.

The bigger problem is that there's a level of discrimination, let's be honest. But an even bigger problem is they just don't have the network and the entrepreneurial training that one gets in the IDF and they don't have the IDF-based network. So it's a major impediment.

JG: There was a fascinating statistic you have in the book, about how many more thousands of patents get awarded to Israel than to most Arab states, which accumulate very small numbers of patents. What explains that?

DS: In the Gulf, they're spending a lot of money to try to create this atmosphere of innovation.  Whenever I go to the Gulf, it's all they want to talk about, they're so intrigued by the Israeli model. But everything about the economic strategy of these Gulf countries is about spending money. It's all about building fancy schools. Yes, Israel spends a lot on research and development, but they've also developed some very interesting ways to focus companies and universities on how to absorb R&D money. It's not just about throwing money at the companies and throwing money at the universities, but it's about teaching these institutions how to absorb it. Ricardo Hausmann, a former Venezuelan development minister who's now at Harvard, is the author of this Leap Frog theory about how developing economies truly do take off, and Israel is one of his case studies. He said that the key to economies that do take off is that they are innovation-based.  How do you teach people to use money smartly, how to take well-thought-out gambles?

JG: The implication is that the Arab state-system suppresses development and creativity.

DS: Absolutely. I would say there are two issues we try to deal with that often get conflated. There's innovation and there's entrepreneurialism, and people mix them up. There are many parts of the world, many countries in the world, that are very entrepreneurial--

JG: But they're selling somebody else's things.

DS: Right, or they're bazaars. And then there are many parts of the world that are very innovative, and not entrepreneurial at all, and so what's unique about Israel is this combination of entrepreneurialism and innovation. That's the turbo charge, because you have a combination of these very scrappy, small start-ups that are coming up with ideas to turn industries upside-down. Now, in the Arab world, I actually think there's as much of an entrepreneurial culture as there is anywhere, but there are no seeds of innovation because for innovation, you need some basic things that are missing. One, women. You just can't compete if you're immediately losing half of your brains, so that's a killer. Two, immigrants. I don't mean temporary laborers from South Asia. These are people who can never truly participate in every aspect of the society. Even elite academics who are brought in, they're writing big checks to them, but these academics are depressed because they're treated like second-class citizens. The third thing is a tolerance for questioning. There's no tolerance for experimentation in these countries.

JG:  In a way you're talking about the rougher side of Israeli society, a high tolerance for insults and offense.

DS: I have a friend in New York who's an executive of a major commercial real estate company, and they were involved in a potential transaction that was huge. And they lost it, they got outbid and outmaneuvered by a competitor, and my friend happened to be reading the galleys for our book when this happened, and he said to his colleagues, you know, let's do something we've never done before, let's actually do a debrief. It didn't hit him until he read how many American companies, large and small, just don't do that, sit down and be really critical, not for the purposes of having it documented, for deciding whose fault it was, but figuring out how to make it better.

JG: Go to one final thing, something that struck me when I was reading this book.  You have a boycott movement in Europe, but in the U.S., too, you have forces that want to delegitimize Israel. I realized in reading this that it would be quite something to go tell Intel or Google or IBM to divest from Israel.

DS: They'll never do it. I mean, it's impossible. What various companies told us is that if they had to shut down operations in India tomorrow, they could survive because it's basically a lot of outsourcing and a lot of call centers. They said if we had to shut down our operations in Ireland, we could survive. But what one person after another told us is that the one place in the world that would devastating for them to have shut down would be Israel, because they put so much of their mission-critical work  and R&D in Israel.  The Intel story we tell is amazing, this key chip that was central to Intel taking off was designed and then manufactured in Israel, so it would be devastating to these companies to lose Israel. And one more thing -- the most interesting data point on all of this is that European venture capitalists invest more in Israel than they do in any single European economy.

JG: Is that true?

DS: Yes and, to me, that says it all. For all the ranting from Europe about boycotts and attempts at boycotts, that's not what European capital is doing. In terms of the U.S., this is even more true. I don't want to oversimplify, but who do think is more important to Barack Obama: The head of J Street or Eric Schmidt at Google? And if Eric Schmidt said that his company would be devastated if Israel came off-line -- and we interviewed Schmidt and he talked about the importance of Israel -- then I think I know the answer.

JG:  But people can move away from Israel. Isn't this one of the root fears of an Iranian bomb, not that Iran will drop a bomb on Israel, but that investors, thinking that Israel lives under this Iranian nuclear threat, might think twice about coming to Israel.

DS: That's one fear, and another fear is that a lot of these Israeli talents will say, 'What do I need this for? Why do I need to be living under a nuclear cloud? That just may be the tipping point for a real brain-drain.

JG: I had this conversation once with Ehud Barak, in which he said that he hoped that the brightest young American Jews will look to Israel not as a place to go on a free trip or a place to bring their kid eventually for a Bar Mitzvah, but as a place to invest in and a place to even come and work because the opportunities are so great.

DS: For the longest time, American Jews would not invest in Israeli start-ups. They would give to UJA and they'd give to all these other philanthropic organizations, but they kept a firewall up between their business activities and their philanthropic activities. I think for the last three to five years you are, for the first time, really seeing American Jewish investors investing in Israel.
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