Sunday, November 8, 2009

The Israel Model

There's this new book out which is being talked about a lot: Start-up Nation: The Story of Israel's Economic Miracle, by Dan Senor and Saul Singer. Apparently, they've figured out how to make a pile of money from Israel's start-up culture, without themselves being hi-tech entrepreneurs: write a good about about it.

The Economist, which has been intrigued by Israel's unique role in the world of technology entrepreneurs for years already, has a review of the book not in the review section, but rather in the business section:

The country that has led the world in promoting entrepreneurship has also done the most to plug itself into global markets. The Israeli government’s venture-capital fund, which was founded in 1992 with $100m of public money, was designed to attract foreign venture capital and, just as importantly, expertise. The government let foreigners decide what to invest in, and then stumped up a hefty share of the money required. Foreign venture capital poured into the country, high-tech companies boomed, domestic venture capitalists learned from their foreign counterparts and the government felt able to sell off the fund after just five years.

Last year Israel, a country of just over 7m people, attracted as much venture capital as France and Germany combined. Israel has more start-ups per head than any other country (a total of 3,850, or one for every 1,844 Israelis), and more companies listed on the NASDAQ exchange, a hub for fledgling technology firms, than China and India combined. It may not have the same comforting ring as “the Swedish model” or “the polder model”, but when it comes to promoting entrepreneurship, “the Israeli model” is the one to emulate.

Here's a story about what it's like to live in the middle of this whirlwind.

About six months ago I needed to find somebody with a very specific type of software capability. The details are unimportant, but it had to be a company from a certain minor branch of the software world, and within that segment of the industry it had to be someone with a specific type of interface capability. So I went googling, and identified something like 20 companies worldwide that looked as if they might have what I needed. Of the 20, five (5!) were in Israel, all located within 30 miles of each other north of Tel Aviv (none in Jerusalem, alas). Eventually we winnowed it down to two who basically had what we needed, though in two very different formats. Their offices were a three minute walk from one another, both in Netanya.

What are the odds of that happening anywhere else in the world, outside Silicon Valley itself? (If there).

So the other day Jeffrey Goldberg interviewed Dan Senor. It's a bit understated, but otherwise a really fun read.

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: 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.


Anonymous said...

It would be interesting to compare this analysis with the one in Isaac Asimov's "Foundation" written circa 1940.

This Is Hell said...

Those are all good things but Israel's enemies are ideological. If all Israeli R&D ended tomorrow and as a result every airliner fell out of the sky, every computer stopped working and every hospital shut down, Israel's enemies would still call that a success. In fact they'd call it 'proof' of Zionist control of everything.

Gavin said...

The economists will pontificate for a hundred years on what the secret formula is Yaacov, but it's pretty obvious that the driver behind it is the people. You can't create a hi-tech industry out of bundles of cash. What do you think that's down to; genetics, environment, circumstances, education.... ?

Does your domestic economy allow foreign investment in property, public utilities & the likes? Has Israel had the same property price boom that most countries had?


Yaacov said...

Well Gavin, whatever it is, it can't be simply this one thing or that. Back in the 70's our economy was in shambles; in the early 80s we had hyper-inflation (though we did manage to get out of it without losing democracy, as sometimes happens with hyper-inflation). Then in the mid-80s we had a severe banking crisis and stock market crash. We didn't fully put the banking crisis behind us until sometime in the 90s - though in retrospect, that crisis and the digging ourselves out of it may well have contributed hugely to our not getting drawn into the swamp that almost drowned everyone else in 2007-9.

There has been no property bubble here, although some prices seem to me (the non-expert) higher than they might be.

I'm not fully versed in who can invest where, but so far as I know, we've got an open economy with free flows of capital in and out - another thing we didn't have at all in the 80s.

There is a cultural conditioning that makes how we do things particularly compatible to what goes in the world of hi-tech start ups - a nervous jittery irreverent brash creativity. I think however part of what's going on is a cycle of success. Whatever it is, it's working, so ever more of us do it and ever more of us take it for granted. An Israeli confronted with a problem is likely to go out of the box for a solution, and many Israelis won't shy away from the idea of setting up a small company that will deal with the matter, while finding money and hoping for the best. Europeans I interact with, and even Americans to some extent, not only don't think that way, they positively shy away from the thought. The Israeli lives in a place where lots of people are doing it that way, and he knows he'll find people to help with all the stages; the European wouldn't know where to start even if he wished to - and how would he?
This is, obviously, a gross oversimplification.

Gavin said...

Thanks Yaacov. I was meaning where did all the skills appear from. Hi-tech needs highly talented people, I can understand large countries like the US & even China bringing all their talent into one place (like Silicon Valley) but you only have a small population providing an unusually large skill base. Where did they suddenly spring from?

Yaacov said...

Two possible responses Gavin. One is that they came from the crumbling USSR. Between 1988 and 1993 something like 1.5 million people came to Israel from the dying USSR. For reasons that had to do with the way Soviet society organized itself, Jews in it gravitated to a large degree to certain parts of the economy, so they were dramatically over-represented in medicine, the sciences and engineering. At the time there were fewer than six million people in Israel, so it was a gigantic influx; ever since then, the ration of engineers to general population is much higher in Israel than anywhere else. Of course, they were soviet trained doctors and engineers, but it's easier to retrain an engineer than to turn an accountant, banker or lawyer into one.

The second answer is environmental. Once the engineer types (and the MBA types) were making oodles of money, that's where lots of young people gravitated to. Back in the 1950s or 1960s smart people worked for the government; in the 1990s smart people DIDN'T work for the government, they put themselves on the hi-tech track.