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Innovation Lessons in "Start-Up Nation"

One might expect <a
href="http://www.startupnationbook.com/"Start-Up Nation: The Story
of Israel’s Economic Miracle
to come from the pen of business
school or economics professors, but the biographies of authors Dan
Senor and Saul Singer reveal policy backgrounds. Both were advisors in
the U.S. Federal Government.

These backgrounds give a clue that Senor and Singer aim beyond
questions of how to be a successful entrepreneur or high-tech
executive. In fact, their book is a serious investigation of the
social, historical, and psychological traits that produce
extraordinarily creative people–and significantly, creative people
who can translate their cranial light-bulbs into technologies with the
potential to change the world.

The book has garnered a fair amount of news coverage, but still not as
much as it deserves, in my opinion. It took me only about three hours
to read, and I highly recommend it as a refreshing–but not
necessarily reassuring–perspective on a country that is profoundly
misunderstood and misrepresented by media outside its diminutive
borders.

In this blog I’ll summarize the traits that that the authors find make
Israel a successful incubator for innovation, distinguishing between
traits that other countries can emulate and traits that seem uniquely
embedded in Israel’s historical and geographic circumstances.
Finally, as I usually do in these book reviews, I’ll lay out three
observations that came to my mind while following the authors’
argument: the importance of hard data, flipping axioms, and the
creative role government can play.

Israel’s stunning performance in world markets is beyond argument. The
country lists more companies on NASDAQ than India, Japan, South
Korea, Singapore, and all the countries of Europe–combined!
(I originally included China in this list, but that was based on
outdated information: it now has a lot of high-tech companies, as you
can see from the comments at the end of the blog.)

Venture
capital flows into the country. It’s often noted that technically
trained Israelis emigrate, but less often reported that many of them
return and spectacularly exploit their international connections. And
because investment is based on technical progress instead of clever
financial book-keeping, Israel has weathered the current recession
with some decline in revenues but not a single bank failure.

Start-Up Nation claims to reveal the reasons behind the
success of this country that not so long ago was considered a victim
of quasi-socialist stagnation and crippling costs related to war and
violence. Some of the authors’ observations have been made
before–such as the importance of forcing young people to take serious
responsibility in army service, and the value of accumulating highly
trained immigrants from Russia and other places–but these
observations have previously been oversimplified and leave out what
Senor and Singer consider crucial inputs. Start-Up Nation not
only tries to restore the proper balance and show traits from a more
productive perspective, but integrates them into a comprehensive
picture of a churning economy.

Traits that other countries can emulate

Although Israel has special advantages, some of the elements to which
Senor and Singer trace its innovativeness can theoretically be
achieved elsewhere. Briefly, these are:

  • A loyalty to the entire community that goes beyond personal success.
    The authors point out that, for all of Israelis’ notorious
    fractiousness, they expend enormous effort helping total strangers.
    All of Israel is a single team, even a single family. (Obviously, this
    family feeling does not extend to non-Jews.) Israeli entrepreneurs who
    give talks abroad often play up the strengths of their country as well
    as their company.

  • A sense of dissatisfaction. To innovate, one must be convinced that
    things are not good enough the way they are now. For Israelis, this
    drive for change has both Biblical and more recent historical roots,
    but technology provides a new arena rewarding hopes for improvement.

  • A Do-It-Yourself approach to technology, which perhaps is one
    manifestation of the afore-mentioned innate dissatisfaction. The
    authors report that equipment purchased by the army is always being
    tinkered with. The same interest in taking things apart and
    jerry-rigging them extends throughout the culture.

  • A culture of challenging authority. The authors point out that this is
    a deep cultural value (and like many before them, trace it partly to
    the Jewish intellectual tradition), one that is particularly hard to
    foster in countries with controlling regimes.

  • A determination to succeed against all odds. Countries that get
    complacent and rest on their laurels–as most observers think North
    Americans are doing–eventually lose their privileged places. The
    authors highlight fascinating stories of Israelis keeping up
    production in the face of war, and of cheerfully taking on seemingly
    impossible challenges.

  • Interdisciplinary agility. Israelis tend to learn many skills–partly
    to survive in the armed forces–and to form companies closely linking
    people with different areas of expertise. In an age where many
    challenges require mashups between disciplines, this imparts a strong
    advantage.

  • A tolerance for failure. Like the Silicon Valley, Israel is a place
    where someone can start a company, manage it through bankruptcy, and
    then pick up to start another company. A single failure, the authors
    say, gives the entrepreneur a high chance of succeeding at the next
    venture. Even in the military, people are rewarded for tackling
    problems with creative intelligence–not so much for the ultimate
    success or failure of the attempt.

  • Providing young people with arenas to exert responsibility. In Israel,
    of course, this arena is its unusually unhierarchical armed forces
    (and people who don’t do army service, such as Arabs and the
    ultra-orthodox, miss out on critical experiences). But other countries
    could find other ways to challenge youth in situations where taking
    charge is a must and where results really matter.

  • A fruitful mentoring relationship between venture capitalists and new
    entrepreneurs. Injecting money into new ventures (as so many
    countries do) is not enough; the managers must be guided through the
    shoals of financial, technical, and human resource challenges. Israel
    set up a unique program called Yozma in 1993 to bring
    together all the necessary elements.

  • Government policies friendly to startups. Israel has a decidedly mixed
    history here. Even after making a historic turn away from government
    control and toward a free market, its environment is most helpful to
    computer and high-tech companies. There are certainly innovations in
    many other areas–notably agriculture–but the authors say these
    fields encounter hampering regulations.

  • A truly open-arms approach to immigrants, who bring not only fresh
    perspectives but a high tolerance for risk. Once again, of course,
    Israel’s liberal attitude toward immigrants applies only to Jews (and
    a lot of haggling goes on around deciding who qualifies). Even for
    Jews, it can take a long time to assimilate waves of newcomers and
    turn them into productive employees. But countries that don’t make it
    easy to set down roots suffer economically. Short-term foreign workers
    never form the sustainable innovative institutions that can be planted
    by truly committed immigrants.

Traits unique to Israel’s history and geography

Israel also possesses unique traits that the Senor and Singer draw in
to explain its entrepreneurial success. No other culture has undergone
thousands of years of persecution culminating in genocide–nor should
that be a necessary price. But it’s amazing how Israel has turned its
liabilities into assets, and these lessons can be inspirational for
people suffering in other parts of the world.

  • The country’s regional isolation (boycotted by all its neighbors) and
    its small size has forced it to think internationally from the start.
    Israelis are also avid travelers, gathering up experiences that allow
    them to think creatively.

  • Demographic diversity is another trait that has many negative
    repercussions, but that the Israelis have also mined for its
    strengths. New ideas always seem less odd in a culture where one has
    to get along with different types of people.

  • A long intellectual tradition encourages a love of learning that
    extends to worldly accomplishments (although I have to point out that
    the same tradition contains many rabbis who railed against the study
    of mundane things); just as important, it encourages students to
    examine and re-examine every idea from new points of view–effectively
    making them ask constantly what would result if something obvious were
    not true. I will explore this intellectual attitude in the
    section Flipping axioms.

  • The tight-knit society leads to a situation where “everybody knows
    everybody” and one can easily find the right mix of staff for a new
    company. (I wonder whether this cliquishness extends far beyond the
    economically dominant ethnic group–the Ashkenazi Jews, who trace
    their ancestry to Northern and Western Europe.)

  • The constant existential threat posed by attacks and bombings call for
    hair-trigger creativity. It’s worth noting here that the authors
    present Israel’s response to war and terror in a consistently heroic
    light (along with recognition that they sometimes screw up). But the
    authors note that every engagement is followed by an assessment to
    determine what could have been done better.

  • The small size of the population (further reduced, as I noted earlier,
    by deferrals for the religious and for Arabs) forces each army recruit
    to take on responsibility right away.

The importance of hard data

At this point I will delve into some more subtle threads that I see
running through the book.

The first is the importance of accumulating evidence to build a case
for change. Two incidents from the book illustrate this nicely:

  • Israel’s Intel facility, which invented the historic 8088 (and would
    later invent the Core 2 Duo) faced its biggest uphill battle when it
    approached its parent company to propose the principle behind the
    Centrino. Senor and Singer note that Israeli staff flew into Intel
    headquarters insistently to talk about the advantages of the new
    design–and seemed to deal with management resistance by increasing
    their own pressure. But it’s important to note that they accumulated
    data to prove the superiority of the design. Mere persistence
    would probably not have carried the day.

  • An Israeli company called Fraud Sciences pitched a system for
    identifying untrustworthy customers and vendors to a manager at
    eBay. The manager was adamantly unwilling to believe that this tiny
    group of developers could do a better job than all of eBay’s experts,
    and the founder of Fraud Sciences was not a good salesman. Luckily,
    eBay had a low-risk, low-cost way to test the start-up: eBay would
    give information about one hundred thousand customers to Fraud
    Sciences and compare their analyses to eBay’s analyses as well as the
    subsequent history of those customers. Fraud Sciences passed the test
    with flying colors and ended up being bought by eBay. There was no way
    even the most determined cynic could argue with the facts.

We now see data-crunching brought right into the development process,
as with a process called “predictive drug development” practiced by
the Israeli company Compugen.

Flipping axioms

I mentioned before the oddly subversive style of the Jewish
intellectual tradition. I call it flipping an axiom: find the key
trait that holds back change–a trait that no one has challenged
before because it seems unassailably true–and ask “What would happen
if it were false?” This is a kind of non-Euclidean geometry of
thought. Two examples of this thinking at work in Israel include:

  • The Centrino project at Intel, mentioned in the previous section,
    required overturning a tautology accepted throughout a whole industry
    and customer base. The problem they were facing was that increases in
    chip speed led to increases in heat dissipation. Laptops with advanced
    processors could not be designed because the build-up of heat would
    destroy them.

    So the Israeli team asked: what if we sped up processing without
    increasing clock speed? To give an indication what a radical thought
    this was, consider that U.S. Intel management rejected the idea
    because they had build their entire marketing strategy around clock
    speed. Clock speed had become the universal measure for computer
    performance. The Israelis threw out the assumption, found a solution,
    and sold it to management–and the world.

  • Start-Up Nation begins appropriately enough with the
    well-known innovator Shai Agassi, who wants to create a network of
    battery replacement stations to support an infrastructure of electric
    cars. The basic elements of the plan had all been thought up by auto
    manufacturers already and rejected as unfeasible. But Agassi found a
    promising way to cut through the difficulties (although it has not had
    a chance to be tested yet in everyday use).

    The key to Agassi’s thinking, as presented by the authors, was to
    assume that cars had to stop using fossil fuels. The world is
    running out of them. Agassi rejected other options such as hydrogen
    and hybrids, so he decided cars must be electric around the
    same time manufacturers decided they must use gasoline
    (although other options such as ethanol are also being explored).
    Taking electric cars as an axiom, Agassi found all the other
    propositions to make cars work.

The creative role government can play

I’ll end by exploring the positive role of government in Israel.
Entrepreneurial government is just as important as entrepreneurial
business–but it must do different things. In this regard the Israeli
experience matches up somewhat with the positive role Nandan Nilekani
proposed in Imagining India, which I reviewed
a few months ago.

In the early years, the Labor government kept a firm hand on the
economy. The authors suggest that this worked well in the Israel of
the 1950s and 1960s, an underdeveloped country needing obvious
infrastructure investments. When the country reached a higher level
calling for more complex economic relationships, the socialist bent
became dysfunctional. (Many economists have found similar trajectories
in the Soviet Union and Maoist China.) It was time to retract, so to
speak, to permit more creation.

The authors enthusiastically endorse the Chicago School shock
treatment carried out by the right-wing Likud government that took
over in the 1970s. They don’t mention the troublesome income gap
created by this turn to the markets, but it does seem to have
unleashed the innovative capitalism that has made Israelis relatively
affluent for their part of the world, and an attractive location to
work for Jews as well as non-Jews from elsewhere.

The government doesn’t make direct investments, but to some extent it
chooses winners–hooking them up to external investors–through the
Yozma program mentioned earlier.

Like all governments, Israel promotes R&D through the military.
But it provides on particularly interesting kind of government
incubator: Talpiot, an intensive multi-disciplinary training program
for promising young recruits.

Talpiot looks over the entire eligible high school population and
aggressively encourages applications from the people it believes will
make the most creative problem-solvers. It puts them through basic
training as well as a technical academic program, and assigns them
quickly to real-life problems. The training goes on for forty-one
months, and the recruits are required to stay in the military for six
more years.

Most Talpiot graduates leave the armed forces when their required six
years are up, and this is seen as a strike against the program by its
critics. But the authors point out that these highly trained, highly
practical experts go on to apply their skills in private industry, so
the government has effectively provided an elite corps for the
country.

Israel certainly faces problems that technology and organizational
savvy cannot solve. But its political, economic, and cultural
successes have made it a model for other developing countries–none
more than the Arab nations, who are trying to emulate it in many ways.
Start-Up Nation is surprisingly broad and deep, for such a
short book. I’m persuaded that it has unraveled many of the mysteries
behind Israel’s business success. And it does its best, in a very
uncertain world, to suggest how both Israel and other countries could
replicate that success.

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  • John

    Sounds a lot like George Gilder’s book “The Israel Test.”

  • Andy Oram

    Thanks, John. I haven’t read Gilder’s book yet. The buzz and interviews give me the impression that he puts politics and morality at the forefront with bit of economic background–the opposite from Senor and Singer.

  • John

    I wouldn’t say Gilder puts economics in the background. You could read Israel Test as a book on entrepreneurship that draws most of its examples from Israel. Gilder says the “test” is whether you celebrate achievement or envy it, whether you aspire to excellence or seek to tear it down.

  • Alan Young

    “The country lists more companies on NASDAQ than China, India, Japan, South Korea, Singapore, and all the countries of Europe–combined.”

    That may have been true a few years ago, but certainly not today.
    There are 333 foreign companies listed on NASDAQ. 63 are Israeli, which is indeed more than all of Europe; but 102 are Chinese (not including Hong Kong).

  • Miguel Marcos

    I haven’t read the book but, in order to be fair, I would expect it to include an anlysis of the influence of the Israels’s military budget and structure, including the military and non-military aid and benefits it receives from the US. (I’m not looking at the political side of things, just the economic).

    The technology industry in the US benefits from the largest military budget in the world (I’m not sure where it stands in comparison to China’s military budget). Large swaths of the technology we all enjoy are direct descendents of military investment, the Internet being a prominent example.

    That there are a great number of successul Israeli technology firms doesn’t surprise me. The country has done an excellent job of supporting research and development as well as encouraging private enterprise. There are lessons for all countries to learn here.

    I think, however, it’s necessary to balance that with an analysis on the influence of the military budget + foreign aid and the influence of both on the economy.

  • Matt Johnston

    I have to agree with Miguel, coming from another nation transitioning from a traditional skills-based economy to a knowledge economy. When you compare Ireland and Israel, there are several comparisons.

    A divided country, history of conflict, large international diaspora.

    But there is one major difference. Ireland may have received funding from it’s diaspora but it did not receive the sort of funding that Israel received from the US DoD budget spending. The impact of the military budget combined with the impact of the diaspora is nothing to be sniffed at. I’m not saying that Ireland wants or needs DoD money – quite the opposite – but the impact of this investment seems to go unmentioned above.

    My interest is, however, in Ireland, North and South. We’d welcome interactions with the Irish diaspora internationally – get in touch with the Start Virtual Incubator in Belfast or the Greenhouse Startup Incubator in Limerick – two private enterprises dedicated to helping Ireland transition to the 21st Century.

  • Andy Oram

    Thanks for the comments. Regarding the NASDAQ data, the authors said they took it from
    http://www.nasdaq.com/asp/NonUsOutput.asp in May 2009. The data is downloadable in spreadsheet form, so it could be independently counted up but I haven’t done that.

    The infusion of US money is probably very important, and it wasn’t discussed in the book. US support for governments for strategic and military reasons (South Korea, Japan) has often been cited as factors in their development.

  • Andy Oram

    OK, did a little scripting on http://www.nasdaq.com/asp/NonUsOutput.asp. Israel is listed as the country for 60 out of the 284 listings. But it’s hard to figure out what country is the real home for many firms, when you see (for instance) the Cayman Islands listed as the country for 54 companies and the British Virgin Islands for 28, such as two instances of China Cablecom Holdings (CABL and CABLU).

  • Arnold Robbins

    The “cliquishness” is part of society in different ways, but much of it, with respect to the high tech industries, is based on who you know from your army service, as well as on who your father knows from his army service. (This puts immigrants at something of a disadvantage sometimes; there are lots of old boy networks here.)

    As to NASDAQ listings, many Israeli companies “reparent” themselves to companies listed in the US; they have sales and marketing “headquarters” in the US but all the R&D and “real work” are done in Israel. So that should be taken into account too.

    Overall, very interesting review and sounds like a book well worth reading.

  • Wai Yip Tung

    Hmm… I can easily pick out a bunch of Chinese companies listed under Cayman Islands. Starts with Baidu, ctrip.com, eLong and a whole bunch of companies with the word “China” in their name.

    Neverhtless, hats off to Israel. No question they are the overachiever. The world can do much better by learning from Israel.

    Regarding military service, I don’t know if there are strong research showing it contributes to future success. But as a pacifist, it is hard for me to recommend this as a form of training to instill discipline and responsibility to young people. There must be some equivalent training in the civilian world without involving bombs and weapon , right?

  • Saul Singer

    Thanks, Andy for this great analysis of the book, one of the most thoughtful that I’ve seen.

    On NASDAQ, I’m told that since we wrote the book China has surpassed Israel in terms of companies on that stock exchange. Of course, in per capita terms, Israel is still *slightly* ahead :-).

    Regarding the comments on military budget and foreign aid, it’s important to keep in mind that Israel spends more of its GDP on civilian R&D than any other country — about 4.5 percent. Defense R&D is on top of that. And if anything, the very high defense spending is a burden on the budget and the economy that other countries don’t have bear.

    Regarding aid, Israel’s GDP is roughly $200 billion in PPP terms, while the military aid from the US is about $2.5 billion a year, or less than 2 percent of the economy. Even with this aid, Israel “wastes” a disproportionate amount on defense spending. Plus, most of the US aid is required to be spent in the US to buy US defense systems. It is clearly not a significant economic factor, let alone an explanation for Israel’s success.

    Finally, I agree with Wai Yip Tung that it is not necessary or desirable for other countries to increase military service in order to inculcate the kinds of skills and values that have helped Israelis. The idea would be to create civilian frameworks that give young people leadership, maturity, teamwork, and mission-orientation — and the experience of working for something larger than themselves — that they can’t readily find in either academia or business.

    Really finally, we’re happy to report that the first foreign language agreement our publisher reached was for a Chinese edition! Meanwhile, the book is already a bestseller in Singapore in English.

  • EM Ganin

    Thought provoking article. A few comments

    1. the paragraph “A Do-It-Yourself approach to technology” really belongs in the section on Israel’s unique history. Two quick examples
    a. when Israel declared independence in 1948 it had no Air Force. Here’s a short quotation from the Wikipedia article on Israel Air Force “Creativity and resourcefulness were the early foundations of Israeli military success in the air, rather than technology (which, at the inception of the IAF, was generally inferior to that used by Israel’s adversaries). The IAF’s humble beginnings made its first air victories particularly impressive and noteworthy.”
    b. Throughout its history Israel has faced embargoes on military equipment and aid. From the invention of the Uzi submachine gun in the early 1950s, through the Kfir jet and Merkava tank, Israel has created a sophisticated design/manufacturing capability.

    2. Regarding Israel’s future dominance in the high-tech field, there are many challenges to overcome. The much-praised Intel plant may close because of disputes with the religious zealots of Jerusalem (see: http://www.haaretz.com/hasen/spages/1128058.html).

  • Andy Oram

    Thanks, EM Ganin. The book also talks a bit about the way Israel got its first warplanes–a pretty messy and often underground process–and developed an air industry.

  • peter

    here’s a good panel discussion with a few Israeli tech entrepreneurs on what makes Israel such a “Start Up” nation:

    http://www.scribemedia.org/2010/04/19/technology-innovation-entrepreneurship-israel/

    there’s also a keynote from the woman who runs the MIT enterprise forum in Tel Aviv.

  • gerson jacobs

    Most exciting book in years.