Start-up Nation

by Dan Senor, Saul Singer

  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.

  Acknowledgments

  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 w
ere 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.

  We assumed there must be some book that explained what made the start-up scene so vibrant and seemingly impervious to the security situation. There wasn’t. So we decided to write one.

  We are indebted to many people who have helped us along the way. The greatest compliment we can pay to Jonathan Karp, the founder and force behind Twelve, is that he is a true innovator in the book world. Publishing only twelve books each year, he is the quintessential undiversified investor. Jon taught us many things, most important among them was to do less arguing and more storytelling.

  With energy and creativity, Cary Goldstein thought through who might be interested in this book and how to reach them. Colin Shepherd was meticulous in every phase of the book’s production and persistent as the deadline reminder. Dorothea Halliday was abundantly patient in the copyediting phase. Laura Lee Timko, Anne Twomey, Tom Whatley, and Giraud Lorber—also all part of Twelve’s team—were a huge help to us.

  It was never a dull moment working with Ed Victor, our agent. In promoting our proposal, as with everything he does, Ed was chock-full of chutzpah. Don Epstein and Arnie Hermann were trusted advisers, too.

  As a rare truly independent research institution in its field, the Council on Foreign Relations is a special place. It is an honor for Dan to have a home there. Richard Haass, CFR’s president, was immediately intrigued by the idea of a book on the Israeli economy. He contributed important insights and helped us draft expertise from CFR’s diverse scholars and members. We are also specifically grateful to CFR’s Isobel Coleman, author of the forthcoming book Paradise Beneath Her Feet: Women and Reform in the Middle East (Random House), for sharing her observations with us. Gary Samore, formerly of CFR, provided guidance early on. Jim Lindsay, CFR’s director of studies, made several important suggestions on improving the manuscript. The CFR staff is among the most professional of any organization we’ve dealt with in the private, academic, or public sectors; we would like to specifically thank Janine Hill for all her patient assistance, and Lisa Shields and her communications team.

  Part of our book was written in the eclectic Van Leer Institute in Jerusalem, which made an invaluable contribution by hosting Saul as a library fellow. Our thanks to director Gabriel Motzkin and librarians Yaffa Weingarten and Paul Maurer for all their gracious assistance.

  We are deeply indebted to our industrious and creative team of research assistants: Michal Lewin-Epstein was our lead researcher at the Council on Foreign Relations; Dani Gilbert spent a summer at CFR with us and then continued doing part-time research while at the London School of Economics; Joshua Kram joined our team for a stint after serving as an adviser to Hillary Clinton’s presidential campaign; Talia Gordis brought her own experience in IDF intelligence, and Ian Mitch and Anton Ornstein also helped at CFR as we began the project.

  A number of people we interviewed, as well as one of our researchers, came from Arab countries. We respect their request for anonymity, since association with this book could prevent them from working in the Arab world; and we are grateful for their contributions.

  With speed and deftness, our friend Judy Heiblum of Sterling Lord Literistic—and a Unit 8200 alumnus—made important suggestions on the structure of the manuscript.

  We thank all the friends and family who read the manuscript; your sharp and candid feedback sent us back to the drawing board. We are especially grateful to Dan Allen, Stephen Backer, Max Boot, Paul Bremer, Reed Dickens, Shane Dolgin, Jonathan Ehrlich, Annette Furst, Mark Gerson, Henry Gomez, Alan Isenberg, Terry Kassel, Roger Marrero, Roman Martinez, Jim Miller, Josh Opperer, Matt Rees, Helen Senor, Suzanne and Max Singer, Andrew Vogel, and Pete Wehner, who read the manuscript from cover to cover under considerable time pressure.

  Dale and Bill Fairbanks (Dan’s in-laws) provided a quiet writing refuge in their art studio in Pensacola, Florida, keeping him well fed, highly caffeinated, and intensely focused for a long stretch leading up to the publisher’s deadline.

  A group of Dan’s friends and business partners were extremely patient as this book was being written. Devon Archer, Dan Burrell, David Fife, Chris Heinz, and Jenny Stein deserve special thanks. Paul Singer, while never directly interviewed for this book, has been a teacher about macroeconomics without even realizing it. His very strong views about innovation economics impacted our thinking about the context for this book in the postcrash global economy.

  We interviewed over one hundred people for this book, and wish to thank all of them for their time and wisdom. In particular, Hall of Fame Israeli venture investors Eli Barkat, Yigal Erlich, Yadin Kaufmann, Erel Margalit, Jon Medved, Chemi Peres, and Yossi Vardi have been living and telling the Start-up Nation story from long before we got involved; they were our guides. Jon Medved, in particular, was pitching the Israeli economy to the world before it was on anyone’s map. Other extremely busy people who spent a lot of time with us in multiple interviews were Shai Agassi, Tal Keinan, and Scott Thompson. Isaac “Yitz” Applbaum and Alan Feld went out of their way to put themselves “on call” for us. Professor Shira Wolovsky Weiss helped us early on, as did Ken Pucker.

  A number of U.S. companies have a strong presence in Israel and truly “get” the Start-up Nation. Current and former leaders from three in particular opened their doors to us in Israel and in Silicon Valley and provided lots of access: thank you to Google’s Eric Schmidt, David Krane, Yossi Mattias, Andrew McLaughlin, and Yoelle Maarek; Intel’s Shmuel Eden and David Perlmutter; and Cisco’s Michael Laor and Yoav Samet.

  Leon Wieseltier provided us with wise counsel on the relationship between Jewish history and the modern Israeli ethos.

  Stuart Anderson, a former colleague of Dan’s from the Senate Subcommittee on Immigration, has always been a source of rich analysis on immigration reform. He shared important research on the subject for this book.

  We are grateful to the president of Israel, Shimon Peres, who gave us half a day in his office. He not only gave us his unique perspective as a central player throughout the entire span of Israel’s history, but is still, at age eighty-five, in high office and busy working to launch whole new industries. We would also like to thank the prime minister of Israel, Benjamin Netanyahu, for spending a lot of time with us during a hectic period for him in 2008.

  As we compared the Israeli and American experiences, a number of U.S. military leaders helped us think through the contrasts. In particular, we would like to thank Generals John Abizaid (ret.), Jack Keane (ret.), Mark Kimmitt (ret.), David Petraeus, H. R. McMaster, and Jim Newbold (ret.).

  Our wives, Campbell Brown (Dan) and Wendy Singer (Saul), have been an integral part of our daily conversation about this book since we began writing it, and bore the brunt of the frenzied weeks before each deadline.

  Campbell gave birth to the Senors’ first son, Eli, two weeks before we started writing the proposal, and to their second, Asher, just before we submitted the final manuscript, all as she held down the family fort during a chaotic time. Wendy scooped up the Singer girls—Noa, Tamar, and Yarden—for week-long trips to give Saul space before deadlines. The Singer girls added to our excitement as they lapped up stories of the latest Israeli inventions with enthusiasm.

  This book relied heavily on Campbell’s and Wendy’s criticisms and advice, and could not have been completed without their virtuoso feats of multitasking. For that, and for so much more, we dedicate it to them.

  We have also dedicated this book to Jim Sen
or (Dan’s father) and Alex Singer (Saul’s brother).

  Jim worked in Iran helping to organize the Jewish community, and later for the Weizmann Institute of Science, where he drafted resources for its pioneering solar energy program. Just months before the 1985 ground-breaking for the field of mirrors—now still active as a research facility—Jim passed away.

  On September 15, 1987, his twenty-fifth birthday, IDF Lieutenant Alex Singer was flown by helicopter into Lebanon to intercept terrorists bound for Israel; he was killed while trying to rescue his downed company commander. Many who never knew him have since been inspired by the joy and passion of his life as seen in Alex: Building a Life, the book of his letters, journals, and art.

  Jim’s and Alex’s work is part of this story. We missed their guidance, and sharing their amazement at what the Start-up Nation has become.

  NOTES

  Introduction

  1. The information in this passage is largely drawn from an interview with Shimon Peres, president of Israel, December 2008; and interviews with Shai Agassi, founder and CEO of Better Place, March 2008 and March 2009.

  2. Shai Agassi’s blog, “Tom Friedman’s Column,” July 26, 2008, http://shaiagassi.typepad.com/.

  3. The information about Better Place is largely drawn from interviews with Shai Agassi.

  4. Daniel Roth, “Driven: Shai Agassi’s Audacious Plan to Put Electric Cars on the Road,” Wired, vol. 16, no. 9 (August 18, 2008).

  5. Haim Handwerker, “U.S. Entrepreneur Makes Aliyah Seeking ‘Next Big Invention,’ ” Haaretz, August 28, 2008.

  6. Israel Venture Capital Research Center, www.ivc-online.com.

  7. Authors’ calculations based on venture capital data from Dow Jones, VentureSource.

  8. Dow Jones, VentureSource.