Start-up Nation
Dan Senor, Saul Singer
Copyright
Copyright © 2009 by Dan Senor and Saul Singer
All rights reserved. Except as permitted under the U.S. Copyright Act of 1976, no part of this publication may be reproduced, distributed, or transmitted in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.
Twelve
Hachette Book Group
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First eBook Edition: November 2009
ISBN: 978-0-446-55831-0
To Campbell Brown and Wendy Singer, who shared our enthusiasm for this story.
To James Senor and Alex Singer, who would have marveled at what they worked to create.
CONTENTS
COPYRIGHT
AUTHORS’ NOTE
MAPS
Introduction
Part I: The Little Nation That Could
Chapter 1: Persistence
Chapter 2: Battlefield Entrepreneurs
Part II: Seeding a Culture of Innovation
Chapter 3: The People of the Book
Chapter 4: Harvard, Princeton, and Yale
Chapter 5: Where Order Meets Chaos
Part III: Beginnings
Chapter 6: An Industrial Policy That Worked
Chapter 7: Immigration
Chapter 8: The Diaspora
Chapter 9: The Buffett Test
Chapter 10: Yozma
Part IV: Country with a Motive
Chapter 11: Betrayal and Opportunity
Chapter 12: From Nose Cones to Geysers
Chapter 13: The Sheikh’s Dilemma
Chapter 14: Threats to the Economic Miracle
Conclusion: Farmers of High Tech
ACKNOWLEDGMENTS
NOTES
BIBLIOGRAPHY
ABOUT THE AUTHORS
ABOUT THE TWELVE
AUTHORS’ NOTE
This is a book about innovation and entrepreneurship, and how one small country, Israel, came to embody both.
This is not a book about technology, even though we feature many high-tech companies. While we are fascinated by technology and its impact on the modern age, our focus is the ecosystem that generates radically new business ideas.
This book is part exploration, part argument, and part storytelling. The reader might expect the book to be organized chronologically, around companies, or according to the various key elements that we have identified in Israel’s model for innovation. These organizational blueprints tempted us, but we ultimately rejected them all in favor of a more mosaiclike approach.
We examine history and culture, and use selected stories of companies to try to understand where all of this creative energy came from and the forms in which it is expressed. We have interviewed economists and studied their perspectives, but we come at our subject as students of history, business, and geopolitics. One of us (Dan) has a background in business and government, the other (Saul) in government and journalism. Dan lives in New York and has studied in Israel and lived, worked, and traveled in the Arab world; Saul grew up in the United States and now lives in Jerusalem.
Dan has invested in Israeli companies. None of these companies are profiled in this book, but some people Dan has invested with are. We will note this where appropriate.
While our admiration for the untold story of what Israel has accomplished economically was a big part of what motivated us to write this book, we do cover areas where Israel has fallen behind. We also examine threats to Israel’s continued success—most of which will likely surprise the reader, since they do not relate to those that generally preoccupy the international press.
We delve briefly into two other areas: why American innovation industries have not taken better advantage of the entrepreneurial talent offered by those with U.S. military training and experience, in contrast to the practice in the Israeli economy; and why the Arab world is having difficulty in fostering entrepreneurship. These subjects deserve in-depth treatment beyond the scope of this book; entire books could be written about each.
Finally, if there is one story that has been largely missed despite the extensive media coverage of Israel, it is that key economic metrics demonstrate that Israel represents the greatest concentration of innovation and entrepreneurship in the world today.
This book is our attempt to explain that phenomenon.
Israel. © 2003–2009 Koret Communications Ltd. www.koret.com. Reprinted by permission.
Israel and the region. © 2003–2009 Koret Communications Ltd. www.koret.com. Reprinted by permission.
Introduction
Nice speech, but what are you going to do?
—SHIMON PERES to SHAI AGASSI
THE TWO MEN MADE AN ODD COUPLE as they sat, waiting, in an elegant suite in the Sheraton Seehof, high up in the Swiss Alps. There was no time to cut the tension with small talk; they just exchanged nervous glances. The older man, more than twice the age of the younger and not one to become easily discouraged, was the calmer of the two. The younger man normally exuded the self-confidence that comes with being the smartest person in the room, but repeated rejections had begun to foster doubt in his mind: Would he really be able to pull off reinventing three megaindustries? He was anxious for the next meeting to begin.
It was not clear why the older man was subjecting himself to this kind of hassle and to the risk of humiliation. He was the world’s most famous living Israeli, an erudite two-time prime minister and Nobel Prize winner. At eighty-three years old, Shimon Peres certainly did not need another adventure.
Just securing these meetings had been a challenge. Shimon Peres was a perennial fixture at the annual Davos World Economic Forum. For the press, waiting to see whether this or that Arab potentate would shake Peres’s hand was an easy source of drama at what was otherwise a dressed-up business conference. He was one of the famous leaders CEOs typically wanted to meet.
So when Peres invited the CEOs of the world’s five largest carmakers to meet with him, he expected that they would show up. But it was early 2007, the global financial crisis was not yet on the horizon, the auto industry was not feeling the pressure it would a year later, and the American Big Three—GM, Ford, and Chrysler—didn’t bother to respond. Another top automaker had arrived, but he’d spent the entire twenty-five minutes explaining that Peres’s idea would never work. He wasn’t interested in hearing about the Israeli leader’s utopian scheme to switch the world over to fully electric vehicles, and even if he had been, he wouldn’t dream of launching it in a tiny country like Israel. “Look, I’ve read Shai’s paper,” the auto executive told Peres, referring to the white paper Peres had sent with the invitation. “He’s fantasizing. There is no car like that. We’ve tried it, and it can’t be built.” He went on to explain that hybrid cars were the only realistic solution.
Shai Agassi was the younger man making the pitch alongside Peres. At the time, Agassi was an executive at SAP, the largest enterprise software company in the world. Agassi had joined the German tech giant in 2000, after it bought his Israeli start-up, TopTier Software, for $400 million. The sale had proved that though the tech bubble had just burst, some Israeli companies could still garner precrash values.
Agassi founded TopTier when he was twenty-four. Fifteen years later, he headed two SAP subsidiaries, was the youngest and only non-German member of SAP’s board, and had been short-listed for CEO. Even if he mis
sed the ring at thirty-nine, he could be pretty confident that someday it would be his.
Yet here Agassi was, with the next president of Israel, trying to instruct an auto executive on the future of the auto industry. Even he was beginning to wonder if this entire idea was preposterous, especially since it had begun as nothing more than a thought experiment.
At what Agassi calls “Baby Davos”—the Forum for Young Leaders—two years before, he had taken seriously a challenge to the group to come up with a way to make the world a “better place” by 2030. Most participants proposed tweaks to their businesses. Agassi came up with an idea so ambitious that most people thought him naive. “I decided that the most important thing to do was to figure out how to take a single country off of oil,” he told us.
Agassi believed that if just one country was able to become completely oil-independent, the world would follow. The first step was to find a way to run cars without oil.
This alone was not a revolutionary insight.
He explored some exotic technologies for powering cars, such as hydrogen fuel cells, but they all seemed like they would forever be ten years away. So Agassi decided to focus on the simplest system of all: battery-powered electric vehicles. The concept was one that had been rejected in the past as too limiting and expensive, but Agassi thought he had a solution to make the electric car not just viable for consumers but preferable. If electric cars could be as cheap, convenient, and powerful as gas cars, who wouldn’t want one?
Something about coming from an embattled sliver of a country—home to just one one-thousandth of the world’s population—makes Israelis skeptical of conventional explanations about what is possible. If the essence of the Israeli condition, as Peres later told us, was to be “dissatisfied,” then Agassi typified Israel’s national ethos.
But if not for Peres, even Agassi might not have dared to pursue his own idea. After hearing Agassi make his pitch for oil independence, Peres called him and said, “Nice speech, but what are you going to do?”1
Until that point, Agassi says, he “was merely solving a puzzle”—the problem was still just a thought experiment. But Peres put the challenge before him in clear terms: “Can you really do it? Is there anything more important than getting the world off oil? Who will do it if you don’t?” And finally, Peres added, “What can I do to help?”2
Peres was serious about helping. Just after Christmas 2006 and into the first few days of 2007, he orchestrated for Agassi a whirlwind of more than fifty meetings with Israel’s top industry and government leaders, including the prime minister. “Each morning, we would meet at his office and I would debrief him on the previous day’s meetings, and he’d get on the phone and begin scheduling the next day’s meetings,” Agassi told us. “These are appointments I could never have gotten without Peres.”
Peres also sent letters to the five biggest automakers, along with Agassi’s concept paper, which was how they found themselves in a Swiss hotel room, waiting on what was likely to be their last chance. “Up until that first meeting,” Agassi said, “Peres had only heard about the concept from me, a software guy. What did I know? But he took a risk on me.” The Davos meetings were the first time Peres had personally tested the idea on people who actually worked in the auto industry. And the first industry executive they’d met had not only shot down the idea but spent most of the meeting trying to talk Peres out of pursuing it. Agassi was mortified. “I had completely embarrassed this international statesman,” he said. “I made him look like he did not know what he was talking about.”
But now their second appointment was about to begin. Carlos Ghosn, the CEO of Renault and Nissan, had a reputation in the business world as a premier turnaround artist. Born in Brazil to Lebanese parents, he is famous in Japan for taking charge of Nissan, which was suffering massive losses, and in two years turning a profit. The grateful Japanese reciprocated by basing a comic-book series on his life.
Peres began to speak so softly that Ghosn could barely hear him, but Agassi was astounded. After the pounding they had just received in the previous meeting, Agassi expected that Peres might say something like, “Shai has this crazy idea about building an electric grid. I’ll let him explain it, and you can tell him what you think.” But rather than pulling back, Peres grew even more energetic than before in making the pitch, and more forceful.
Oil is finished, he said; it may still be coming out of the ground, but the world doesn’t want it anymore. More importantly, Peres told Ghosn, it is financing international terrorism and instability. “We don’t need to defend against incoming Katyusha rockets,” he pointed out, “if we can figure out how to cut off the funding that launches them in the first place.”
Then Peres tried to preempt the argument that the technology alternative just didn’t exist yet. He knew that all the big car companies were flirting with a bizarre crop of electric mutations—hybrids, plug-in hybrids, tiny electric vehicles—but none of them heralded a new era in motor vehicle technology.
Just then, again about five minutes into Peres’s pitch, the visitor stopped him. “Look, Mr. Peres,” Ghosn said, “I read Shai’s paper”—Agassi and Peres tried not to wince, but they felt they knew where this meeting was heading—“and he is absolutely right. We are exactly on the same page. We think the future is electric. We have the car, and we think we have the battery.”
Peres was almost caught speechless. Just minutes ago they’d received an impassioned lecture on why the fully electric car would never work and why hybrids were the way to go. But Peres and Agassi knew that hybrids were a road to nowhere. What’s the point of a car with two separate power plants? Existing hybrids cost a fortune and increase fuel efficiency by only 20 percent. They wouldn’t get countries off oil. In Peres and Agassi’s view, hybrids were like treating a gunshot wound with a Band-aid.
But they had never heard all this from an actual carmaker. Peres couldn’t help blurting out, “So what do you think of hybrids?”
“I think they make no sense,” Ghosn said confidently. “A hybrid is like a mermaid: if you want a fish, you get a woman; if you want a woman, you get a fish.”
The laughter from Peres and Agassi was genuine, mixed with a large dose of relief. Had they found a true partner for their vision? Now it was Ghosn’s turn to be worried. Though he was optimistic, all the classic obstacles to electric vehicles still remained: the batteries were too expensive, they had a range less than half that of a tank of gas, and they took hours to recharge. So long as consumers were being asked to pay a premium in price and convenience, clean cars would remain a niche market.
Peres said that he’d had all the same misgivings, until he had met Agassi. This was Agassi’s cue to explain how all these liabilities could be addressed using existing technology, not some miracle battery that wouldn’t be available for decades.
Ghosn’s attention shifted from Peres to Agassi, who dove right in.
Agassi explained his idea, as simple as it was radical: electric cars seemed expensive only because batteries were expensive. But selling the car with the battery is like trying to sell gas cars with enough gasoline to run them for several years. When you factor in operating costs, electric cars are actually much cheaper—seven cents a mile for electric (including both the battery and the electricity to charge it) compared to ten cents a mile for gas, assuming gas costs $2.50 a gallon. If the price of gas is as high as $4.00 per gallon, this cost gap becomes a chasm. But what if you didn’t have to pay for the battery when you bought the car and—as with any other fuel—spread the cost of the battery over the life of the car? Electric cars could become at least as cheap as gasoline cars, and the cost of the battery with the electricity to charge it would be significantly cheaper than what people were used to paying at the pump. Suddenly, the economics of the electric car would turn upside down. Furthermore, over the long run, this already sizable electric cost advantage would be certain to increase as batteries became cheaper.
Overcoming the price barrier was the
biggest breakthrough, but it wasn’t sufficient for electric vehicles to become, as Agassi called it, the “Car 2.0” that would replace the transportation model introduced by Henry Ford almost a century ago. A five-minute fill-up will last a gas car three hundred miles. How, Ghosn wondered, can an electric car compete with that?
Agassi’s solution was infrastructure: wire thousands of parking spots, build battery swap stations, and coordinate it all over a new “smart grid.” In most cases, charging the car at home and the office would easily be enough to get you through the day. On longer drives, you could pull into a swap station and be off with a fully charged battery in the time it takes to fill a tank of gas. He’d recruited a former Israeli army general—a man skilled at managing complex military logistics—to become the company’s local Israeli CEO and lead the planning for the grid and the national network of charging/parking spots.
The key to the model would be that consumers would own their cars, but Agassi’s start-up, called Better Place, would own the batteries. “Here’s how it works,” he later explained. “Think cell phones. You go to a cell provider. If you want, you can pay full price for a phone and make no commitment. But most people commit for two or three years and get a subsidized or free phone. They end up paying for the phone as they pay for their minutes of air time.”3
Electric vehicles, Agassi explained, could work the same way: Better Place would be like a cellular provider. You would walk in to a car dealer, sign up for a plan based on miles instead of minutes, and get an electric car. But the buyer wouldn’t own the car battery; Better Place would. So the company could spread the cost of the battery—and the car, too—over four or more years. For the price consumers are used to paying each month for gas, they could pay for the battery and the electricity needed to run it. “You get to go completely green for less than it costs to buy and run a gas car,” Agassi said.
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