Dec 20, 2011 16 min read Books

Book Review : Start-up Nation (story of Israel)

I read the "Start-up Nation" book last week. This book was so engrossing that I read it within 2 days, keeping aside everything else.

After reading this book, I started seeing the patterns about Israel being high tech hotspot, for example consider just two pieces of news in the last 3-4 days: Apple buying Anobit, an Israeli company, for $500 million as well as building a research center in Israel and Cornell won the bid to build a university in New York city… in collaboration with Technion university of Israel.

What is important

This book taught me the importance and inter-play of:

Entrepreneurism
Venture capital
Being committed to own business and country at same time
When people are pushed for survival, only then do they show the zeal for entrepreneurism and trade – otherwise nation becomes lazy
Size of country does matter
Government policies
- For example, the world’s richest man has to go to a different country to develop new nuclear energy technology.
Immigration
Technology as future growth
Multiple fields learning
Defense Forces
Liberalization and freedom of speech

To highlight in a bit more detail, I have picked a few quotes and insights from each chapter:

0. Introduction

Story of Shimon Peres and Shai Agassi pitching Better Place to auto manufacturers – Better Place is re-thinking electric vehicles by making fuel stations swap out your battery with a charged one instead of pumping petrol or diesel into the car, highly ambitious, executed first in Israel, now in China, etc.

1. Persistence

Story of "Fraud Sciences" company pitching to Paypal to use their fraud detection service – Paypal ended up buying them so that the competition doesn’t get them – idea came from founders who were soldiers in the Israeli army hunting down terrorists – they found hunting frauds easier.
Chutzpah
Israeli attitude and informality flow also from a cultural tolerance for what some Israelis call "constructive failure" or "intelligent failures." Most local investors believe that without tolerating a large number of failures, it is impossible to achieve true innovation. In the Israeli military, there is a tendency to treat all performance – both successful and unsuccessful – in training and simulations, and sometimes even in battle, as value-neutral. So long as the risk was taken intelligently, and not recklessly, there is something to be learned.
Story of how Intel’s chip design vision changed purely because of doggedness of the Israeli Intel office to convince higher-ups and how that eventually saved the company

2. Battlefield Entrepreneurs

As usual in the Israeli military, the tactical innovation came from bottom up – from individual tank commanders and their officers. It probably never occurred to these soldiers that they should ask their higher-ups to solve the problem, or that they might not have the authority to act on their own. Nor did they see anything strange in their taking responsibility for inventing, adopting, and disseminating new tactics in real time, on the fly. Yet what these soldiers were doing was strange. If they had been working in a multinational company…
Company commander is also the lowest rank that must take responsibility for a territory. As Farhi puts it, "If a terrorist infiltrates that area, there’s a company commander whose name is on it. Tell me how many twenty-three-year-olds elsewhere in the world live with that kind of pressure… How many of their peers in their junior colleges have been tested in such a way? How do you train and mature a twenty-year-old to shoulder such responsibility?
In the Israel Defence Forces (IDF), there are even extremely unconventional ways to challenge senior officers. "I was in Israeli army units where we threw out the officers," Oren told us, "where people just got together and voted them out. I witnessed this twice personally. I actually liked the guy, but I was outvoted. They voted out a colonel." When we asked Oren in disbelief how this worked, he explained, "You go and say, ‘We don’t want you. You’re not good.’ I mean, everyone’s ona first-name basis… You go to the person above him and say, ‘That guy’s got to go.’… It’s much more performance-oriented than it is about rank.

3. The People of The Book

Almost every Israeli trekker in Bolivia is likely to come through El Lobo (restaurant), but not just to get food that tastes like it’s from home, to speak Hebrew, and to meet other Israelis. They know they will find something else there, something even more valuable: the Book. Though spoken of in singular, the Book is not one book but an amorphous and evolving collection of journals, dispersed throughout some of the most remote locations in the world. Each journal is a handwritten "Bible" of advice from one traveler to another. And while the Book is no longer exclusively Israeli, its authors and readers tend to be from Israel.
Israeli wanderlust is not only about seeing the world; its sources are deeper… there is another psychological factor at work – a reaction to the physical and diplomatic isolation. Until recently, Israelis could not travel to a single neighbouring country…
For the same reason, it was natural for Israelis to embrace the Internet, software, computer, and telecommunications arenas. In these industries, borders, distances, and shipping costs are practically irrelevant. As Israeli venture capitalist Orna Berry told us, "High-tech telecommunications became a national sport to help us defend against the claustrophobia that is life in a small country surrounded by enemies." … "Today, Israeli companies are firmly integrated into the economies of China, India, and Latin America. Because, as Orna Berry says, telecommunications became an early priority for Israel, every major telephone company in China relies on Israeli telecom equipment and software…

4. Harvard, Princeton and Yale

Innovation often depends on having a different perspective. Perspective comes from experience. Real experience also typically comes with age or maturity. But in Israel, you get experience, perspective, and maturity at a younger age, because the society jams so many transformative experiences into Israelis when they’re barely out of high school. By the time they get to college, their heads are in a different place than those of their American counterparts… In the military, you’re in an environment when you have to think on your feet. You have to make life-and-death decisions. You learn about discipline. You learn about training your mind to do things, especially if you’re frontline or you’re doing something operational. And that can only be good and useful in the business world… This maturity is especially powerful when mixed with an almost childish impatience.
When an Israeli man wants to date a woman, he asks her out that night. When an Israeli entrepreneur has a business idea, he will start it that week. The notion that one should accumulate credentials before launching a venture simply does not exist. This is actually good in business. Too much time can only teach you what can go wrong, not what could be transformative.
The military gets you at a young age and teaches you that when you are in charge of something, you are responsible for everything that happens… and everything that does not happen," Lowry told us. "The phrase ‘It was not my fault’ does not exist in the military culture.

5. Where Order Meets Chaos

Although Singapore’s military is modeled after the IDF – the testing ground for many of Israel’s entrepreneurs – the "Asian Tiger" has failed to incubate start-ups. Why?
There is a can-do, responsible attitude that Israelis refer to as rosh gadol. In the Israeli army, soldiers are divided into those who think with a "rosh gadol" – literally, a "big head" – and those who operate with a rosh katan, or "little head." Rosh katan behavior , which is shunned, means interpreting orders as narrowly as possible to avoid taking on responsibility or extra work. Rosh gadol thinking means following orders but doing so in the best possible way, using judgment, and investing whatever effort is necessary. It emphasizes improvisation over discipline, and challenging the chief over respect for hierarchy. Indeed, "challenge the chief" is an injunction issued to junior Israeli soldiers, one that comes directly from a postwar military commission that we’ll look at later. But everything about Singapore runs counter to a rosh gadol mentality.
In Israeli’s elite military units, each day is an experiment. And each day ends with a grueling session whereby everyone in the unit – of all ranks – sits down to deconstruct the day, no matter what else is happening on the battlefield or around the world. "The debrief is important as the drill or live battle," he told us. Each flight exercise, simulation, and real operation is treated like laboratory work "to be examined and reexamined, and reexamined again, open to new information, and subjected to rich – and heated debate. That’s how we are trained." In these group debriefs, emphasis is put not only on unrestrained candor but on self-criticism as a means of having everyone – peers, subordinates, and superiors – learn from every mistake. "It’s usually ninety minutes. It’s with everybody. It’s very personal. It’s a very tough experience," Dotan said, recalling the most sweat-inducing debriefings of his military career. "The guys that got ‘killed’ [in the simulations], for them it’s very tough. But for those who survive a battle – even a daily training exercise – the next-toughest part is the debriefing." …
Finally, Eiland leveled a criticism that is perhaps quintessentially Israeli and hardly imaginable within any other military apparatus: "One of the problems of the Second Lebanon War was the exaggerated adherence of senior officers to the chief of staff’s decisions. There is no question that the final word rests with the chief of staff, and once decisions have been made, all must demonstrate cmplete commitment to their implementation. However, it is the senior officer’s job to argue with the chief of staff when they feel he is wrong, and this should be done assertively on the basis of professional truth as they see it.
Large organizations, whether military or corporate, must be constantly wary of kowtowing and groupthink, or the entire apparatus can rush headlong into terrible mistakes. Yet most militaries, and many corporations, seem willing to sacrifice flexibility for discipline, initiative for organization, and innovation for predictability. This, at least in principle, is not the Israeli way.

6. An Industrial Policy That Worked

The history of Israel’s economy is one of two great leaps, separated by a period of stagnation and hyperflation. The government’s macroeconomic policies have played an important role in speeding the country’s growth, then reversing it, and then unleashing it in ways that even the government never expected.

7. Immigration

Israel’s economic miracle is due as much to immigration as to anything. At Israel’s founding in 1948, its population was 806,000. Today numbering 7.1 million people, the country has grown almost ninefold in sixty years. The population doubled in the first three years alone, completely overwhelming the new government. As one parliament member said at the time, if they had been working with a plan, they never would have absorbed so many people. Foreign-born citizens of Israel currently account for over one-third of the nation’s population, almost three times the ratio of foreigners to natives inthe United States… Israel is now home to more than seventy different nationalities and cultures.
Ask yourself, why is it happening here?" he said of the Israeli tech boom. We were sitting in a trendy Jerusalem restaurant he owns, next to a complex he built that houses his venture fund and a stable of start-ups. "Why is it happening on the East Coast or the West Coast of the United States?" A lot of it has to do with immigrant societies. In France, if you are from a very established family, and you work in an established pharmaceutical company, for example, and you have a big office and perks and a secretary and all that, would you get up and leave and risk everything to create something new? You wouldn’t. You’re too comfortable. But if you’re an immigrant in a new place, and you’re poor," Margalit continued, "or you were once rich and your family was stripped of its wealth – then you have drive. You don’t see what you’ve got to lose; you see what you could win. That’s the attitude we have here – across the entire population.
Crucially, Israel maybe the only country that seeks to increase immigration, not just of people of narrowly defined origins or economic status… the job of welcoming and encouraging immigration is a cabinet position with a dedicated ministry behind it. Unlike the U.S. Citizenship and Immigration Service, which maintains as one of its primary responsibilities keeping immigrants out, the Israeli Immigration and Absorption Ministry is solely focused on bringing them in.
In the beginning of the 1960s, Romanian dictator Nicolae Ceausescu demanded hard cash to allow Jews to leave the country. Between 1968 and 1989, the Israeli government paid Ceausescu $112,498,800 for the freedom of 40,577 Jews. That comes out to $2,772 per person.

8. The Diaspora

AnnaLee Saxenian is an economic geographer at U.C.Berkeley and author of The New Argonauts. "Like the Greeks who sailed with Jason in search of the Golden Fleece," Saxenian writes, "the new Argonauts [are] foreign-born, technically skilled entrepreneurs who travel back and forth between Silicon Valley and their home countries." She points out that the growing tech sectors in China, India, Taiwan, and Israel – particularly the last two countries – have emerged as "important global centers of innovation" whose output "exceeded that of larger and wealthier nations like Germany and France." She contends that the pioneers of these profound transformations are people who "marinated in the Silicon Valley culture and learned it. This really begain in the late ’80s for the Israelis and Taiwanese, and not unil the late ’90s or even the beginning of the ’00s for the Indians and Chinese.
The new Argonaut, or "brain circulation," model of Israelis going abroad and returning to Israel is one important part of the innovation ecosystem linking Israel and the Diaspora.
Peres (in the Israeli Defense Ministry) had tried to buy thirty surplus Mustang aircraft for the Israeli Air Force, but the United States had decided to destroy the planes instead. Their wings were sliced off and their fuselages cut in two. So Schwimmer (one of the non-Israeli Jewish Diaspora)’s team bought the cut-up planes at cost from a Texas junk dealer, reconstructed them, and made sure they had all their parts and were operational. Then the team disassembled the planes again, packed them in crates marked "Irrigation Equipment," and shipped them to Israel.

9. The Buffett Test

No sooner did the richest man in the world leave Israel than the second-richest, Warren Buffett, showed up. The most revered investor in America had arrived to visit the first company he’d bought outside the United States… Iscar, the Israeli company Buffett bought, has its main factory and R&D facilities in the northern part of Israel and was twice threatened by missile attacks – in 1991, when the whole country was targeted by Iraq’s Saddam Hussein during the Gulf War, and during the 2006 Lebanon War, when Hezbollah fired thousands of missiles at Israel’s northern towns. "Doesn’t this constitute catastrophic risk?" we asked Alice Schroeder, the only authorized biographer of Warren Buffett. Buffett’s view, she told us, is that if Iscar’s facilities are bombed, it can go build another plant. The plant does not represent the value of the company. It is the talent of the employees and management, the international base of loyal customers, and the brand that constitute Iscar’s value. So missiles, even if they can destroy factories, do not, in Buffett’s eyes, represent catastrophic risk.
During the 2006 Lebanon War, just two months after Buffett acquired Iscar, 4228 miles landed in Israel’s north. Located less than eight miles from the Lebanese border, Iscar was a prime target for rocket fire… One rocket did slam into Tefen Industrial Park and a slew of rockets landed nearby. And though, during the war, many workers did temporarily relocate, with their families, to the southern part of the country, Iscar’s customers would never have known it. "It took us a brief time to adjust, but we didn’t miss a single shipment," Wertheimer said. "For our customers around the world, there was no war.

10. Yozma

Every year when I tried to review the success of these small companies, it was disappointing," said Erlich. "While they may have succeeded in R&D, we didn’t see them succeed in growing companies." He became convinced that a private venture capital industry was the only antidote. But he also knew that in order to succeed, an Israeli VC industry would need strong ties with foreign financial markets. The international connections were not just about raising funds; aspiring Israeli VCs needed to be mentored in the art of business mentoring. There were thousands of venture capital firms in the United States that were involved in the nuts and bolts of successful tech start-ups in Silicon Valley. They had experience building companies, understood the technology and the funding process, and could guide first-time entrepreneurs. That’s what Erlich wanted to bring to Israel.
That’s when a band of young bureaucrats at the Ministry of Finance came up with the idea for a program they called Yozma, which in Hebrew means "initiative." The idea was for the government to invest $100 million to create ten new venture capital funds. Each fund had to be represented by three parties: Israeli venture capitalists in training, a foreign venture capital firm, and an Israeli investment company or bank.
The real allure for foreign VCs, however, was the potential upside built into this program. The government would retain a 40 percent equity stake in the new fund but would offer the partners the option to cheaply buy out the quity stake – plus annual interest – after five years, if the fund was successful. This meant that while the government shared the risk, it offered investors all of the reward. From an investor’s perspective, it was an unusually good deal.
The ten Yozma funds created between 1992 and 1997 raised just over $200 million with the help of government funding. Those funds were bought out or privatized within five years, and today they manage nearly $3 billion of capital and support hundreds of new Israeli companies. The results were clear. AS Erel Margalit put it, "Venture capital was the match that sparked the fire."

11. Betrayal and Opportunity

Like many small states, Israel preferred to buy large weapon systems from other countries, rather than devote the tremendous resources needed to produce them. [Especially from France. In 1969, France changed loyalties opting for rapprochement with the Arab world.] The Israelis quickly pursued stopgap measures. Israel decided that it must move quickly to produce major weapons systems, such as tanks and fighter aircraft, even though no other small country had successfully done so.
The most ambitious project of all was the Lavi fighter jet, using American-made engines. [Even though the project was eventually cancelled], the Israelis had made an important psychological breakthrough: they had demonstrated to themselves, their allies and their adversaries that they were not dependent on anyone else to provide one of the most basic elements for national survival – an advanced fighter aircraft program. Second, in 1988 Israel joined a club of only about a dozen nations that had launched satellites into space – an achievement that would have been unlikely without the technological know-how accumulated during the Lavi’s development. And third, it helped jump-start the high-tech boom to come. Yossi Gross, one of the Lavi’s engineers, went on to found seventeen start-ups and develop over three hundred patents.

12. From Nose Cones to Geysers

The companies where mashups are most common in Israel are in the medical-device and biotech sectors, where you find wind tunnel engineers and doctors collaborating on a credit card-sized device that may make injections obsolete. Or you find a company that has created an implantable artificial pancreas to treat diabetes. And then there’s a start-up that’s built around a pill that can transmit images from inside your intestines using optics technology taken from a missile’s nose cone.
Some of Gross’s companies combine such wildly diverse technologies that they border on science fiction. Beta-O₂, for example, is a startup working on implantable "bioreactor" to replace the defective pancreas in diabetes patients. Diabetics suffer from a disorder that causes their beta cells to cease producing insulin. Transplanted beta cells could do the trick, but even if the body didn’t reject them, they cannot survive without a supply of oxygen. Gross’s solution was to create a self-contained micro-environment that includes oxygen-producing algae from the geysers of Yellowstone Park. Since the algae need light to survive, a fiber-optic light source is included in the pacemaker-sized device. The beta cells consume oxygen and produce carbon dioxide; the algae does just the opposite, created a self-contained miniature ecosystem. The whole bioreactor is designed to be implanted under the skin in a fifteen-minute outpatient procedure and replaced once a year.

13. The Sheikh’s Dilemma

Cultural commitment can be central to the success of economic clusters, of which Israel’s high-tech industry is a case in point. A cluster, as described by the author of the concept, Harvard Business School professor Michael Porter, is a unique model for economic development because it’s based on "geographic concentrations" of interconnected institutions – businesses, government agencies, universities – in a specific field. Clusters produce exponential growth for their communities because people living and working within the cluster are in some way connected to each other. As Porter says, the "social glue" that binds a cluster together also facilitates access to critical information. A cluster, he notes, must be built around "personal relationships, face-to-face contact, a sense of common interest and ‘inside’ status." Margalit would point out that Israel has just the right mix of conditions to produce a cluster of this kind – and that’s rare. After all, attempts to create clusters don’t always succeed. Take, for example, Dubai.
Attracting new members to a cluster by offering a less expensive way to do business might be sufficient to create a cluster, but not to sustain it. If price is a cluster’s only competitive edge, some other country will always come along to do it more cheaply. The other qualitative elements – such as tight-knit communities whose members are committed to living and working and raising families in the cluster – are what contribute to sustainable growth. Crucially, a cluster’s sense of shared commitment and destiny, which transcends day-to-day business rivalries, is not easy to manufacture.

14. Threats to the Economic Miracle

What if Israel’s economic miracle were simply built on a rare confluence of events and would disappear under less favorable circumstances? Even if Israel’s new economy is not just the product of happenstance, what are the real threats to Israel’s long-term economic success?
A diminished supply of venture capital dollars [in view of the worldwide economic crisis] could mean less "innovation finance" for Israel’s economy.
The problem according to Ben-David, is that while the tech sector has been surging ahead, and becoming more productive, the rest of the economy has not been keeping up.
As the New York Times’ Thomas Friedman put it, "I would much rather have Israel’s problems, which are mostly financial, mostly about governance, and mostly about infrastructure, rather than Singapore’s problem because Singapore’s problem is culture-bound.

15. Conclusion

In twenty-five years, Israel increased its agricultural yields seventeen times. This is amazing," Peres told us. "People don’t realize this," Peres said, "but agriculture is ninety-five percent science, five percent work."
Peres seemed to see technology everywhere, and long before Israelis themselves thought in such terms. This may have beeno ne of the reasons Ben-Gurion backed Peres so strongly; the "Old Man" was also fascinated by technology, he told us. "Ben-Gurion thought the future was science. He would always say that in the army it’s not enough to be up to date; you have to be up to tomorrow," Peres recalled.
What makes the current Israeli blend so powerful is that it is a mashup of the founders’ patriotism, drive and constant consciousness of scarcity and adversity and the curiosity and restlessness that have deep roots in Israeli and Jewish history. "The greatest contribution of the Jewish people in history is dissatisfaction," Peres explained. "That’s poor for politics but good for science."
This theme can be traced to the very idea of Israel’s founding. The modern state’s founders – or national entrepreneurs – were building what might be called the first "start-up nation" in history.
At eighty-five, Peres still has the chutzpah to think up and advocate new industries. As they do in Israeli society, 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. The most careful thing, as Peres told us, is to dare.

Summary

This book has been instrumental in illuminating my mind about nation-building, about why startups are essential to a nation’s survival going forward and how much of a role the ecosystem plays.

I have been liberal in taking quotes from the book, but believe me, I haven’t even covered half the book in these quotes, so please do go read the book now!

I have to mention a special thanks to Sameer Guglani for recommending this book to me. I can already see that the "Morpheus gang" has the seeds of a cluster.

Update on 29-Dec-2011: See this article on why one VC has the opinion that Chile is not a great startup place – the interesting part is how culture of the country plays a big role in the entrepreneurialism of its residents.

Update on 12-Jan-2012: Many more hubs being kickstarted and hope to thrive : Las Vegas ‘Downtown Project’, Startup Chile, Tech City in East London.

Update on 22-Jan-2012: A very interested article by New York Times titled “How U.S. Lost Out on iPhone Work – Apple, America and a Squeezed Middle Class”.