START UP NATION: THE STORY OF ISRAEL’S ECONOMIC MIRACLE
by Dan Senor and Saul Singer
Review by Jason Benedict – Strategist, RCE
Why does Israel have the highest density of start-ups in the world? Why are tech companies like Google, Microsoft and Intel, beating a path to their door? Why are there more companies listed on NASDAQ from Israel than from all of Europe combined? Why have they been able to attract over two times as much venture capital per capita as the US? What has created this ecosystem? This fascinating book by journalists Senor and Singer explores Israel’s economy, culture, politics and modern history to answer these questions.
In the last decade Israel has emerged as a leading innovator. Surrounding Arab countries may be able to pump oil, but the country of Israel is like a huge tech incubator that is pumping out new ideas at an unprecedented rate. This has allowed them to attract tech giants, leading thinkers and venture capital from around the globe. Though trans-national tech firms are setting up shop around the globe in countries like Singapore, India and Ireland, they don’t establish their mission critical work in those places. The authors quote an American executive from eBay saying, “Google, Cisco, Microsoft, Intel, eBay…the list goes on. The best kept secret is that we all live and die by the work of our Israeli teams” (p. 17).
The book outlines a number of factors that contribute to Israel’s success in this area. Perhaps the most striking theme is the way that Israel’s history, trials, mandatory military service and proximity to hostile neighbors has created a culture of entrepreneurship. This culture is observed in characteristics like chutzpah, resilience, egalitarianism, willingness to risk and a need to question the status quo and find a better way.
Chutzpah is the Yiddish word for an audacious, assertive, “never take no for an answer” attitude. Most Israeli’s possess an extreme egalitarianism and zeal for better ideas and improvement. This in turn produces very flat, cross functional organizational structures with little attention to hierarchy and protocol combined with a commitment to questioning, challenging and debriefing.
What does this look like? In the military, officers are challenged openly on ideas by enlisted men; in companies clerks challenge CEOs. Military officers are spread thin and important decisions are pushed down the ranks. Titles are dispensed with and teams work together for the best solution. Every action, successful and unsuccessful, is examined and debriefed in great detail. People are allowed to fail, but they had better learn from it. “Defending stuff that you’ve done is just not popular. If you screwed up, your job is to show the lessons you’ve learned. Nobody learns from someone who is being defensive” (p. 94).
The role that compulsory military service plays in shaping a culture of innovation is featured prominently in the book. The military, the IDF, has an extremely entrepreneurial culture: it puts young people in intense situations where they must learn teamwork, develop clarity, maturity, and judgment. They are put in charge of million-dollar equipment and expected to make life and death decisions. The authors contrast the average Silicon Valley worker in their mid-twenties with those in Israel: Israeli techies in their mid-twenties are veterans; they have a graduate degree and are married. “They’re much more mature; they’ve got more life experience. Innovation is all about finding ideas. In Israel you get experience, perspective and maturity at a younger age, because society jams so many transformative experiences into Israelis when they’re barely out of high school” (p. 73). The military also creates a powerful lifelong social network that plays prominently in many Israeli success stories. In Israel there is only one degree of separation. The IDF creates a kind of interconnectedness, transparency and accountability in society (p. 76).
Other factors that strengthen innovation are immigration, the proximity of hostile countries, and clusters. The book makes the case that immigrants are pre-disposed to entrepreneurship. “One or two generations back, someone in our family was packing very quickly and leaving. Immigrants are not averse to starting over. They are, by definition, risk takers. A nation of immigrants is a nation of entrepreneurs” (p. 130). Jewish communities globally also have placed a high value on intellectual capital, and have invested heavily in education. Immigrants were on average very well-educated and brought this highly portable intellectual capital with them.
Senor and Singer also develop the theme that the hostility of surrounding Arab populations has fed into the characteristic of chutzpah and created a kind of serious-minded resilience in Israelis. They are assertive, they focus, they don’t take things for granted, and they get used to risk. Scott Thomson of PayPal described his first all-staff meeting with his new Israeli acquisition. “Each face was turned raptly to him. No one was texting, surfing, or dozing off. The intensity only increased when he opened the discussion period: ‘Every question was penetrating. I actually started to get nervous up there. I’d never before heard so many unconventional observations – one after another. And these weren’t peers or supervisors, these were junior employees. And they had no inhibition about challenging the logic behind the way we at PayPal had been doing things for years. I’d never seen this kind of completely unvarnished, unintimidated, and undistracted attitude. I found myself thinking, ‘Who works for whom?’” (p. 30).
Another theme the authors develop is that Israel has created a classic cluster of the type described in Michael Porter’s work: education, talent, venture capital, and industry. However, they are careful to point out that clusters lack transformative power without the culture of innovation. Senor and Singer contrast Israel with Dubai’s largely ineffectual effort to create clusters that produce innovation. In fact, they are careful to point out that it is Israel’s combination of factors that works. Singapore has great education and compulsory military service, but their hierarchical, “never challenge the status quo” culture stifles innovation. Similarly, North Korea is under constant threat, but can’t foster entrepreneurship. The USA has an innovative military but has not been able to bridge the divide between military experience and the business community.
While Israel has been successful in becoming a kind of national incubator for technology startups, other parts of their economy have been lackluster. The authors are careful to explore challenges and pitfalls. This theme—success in spite of themselves—is instructive. For example, flirtations with socialism, Keynesian stimulus, and central control have hurt Israel in the past. From the mid-70’s to the mid-80’s there was an economic slump called the “lost decade”. While the tech sector is soaring, other parts of Israel’s economy have suffered from policies that are less business-friendly. Additionally, significant parts of the society, like the Hassidim and the Arab Israelis (communities exempt from compulsory military service), have high unemployment and low incomes. A combination of high birth rates and dependence on social welfare in these communities threatens Israel’s continued economic success.
Start Up Nation is instructive in many ways, but perhaps most importantly, by contributing a definition and prescription for creating an entrepreneurial culture: blend a culture of assertiveness, willingness to question, good judgment, courage, willingness to risk, resilience, and esteem of experiential learning, along with an appreciation for real solutions, instructive failure and experimentation. These characteristics, when present together, make an excellent environment for entrepreneurship.
One topic the authors didn’t explore, a gap in my estimation, was the concept of spiritual capital, and the possible role it could play in Israel’s economic miracle.
Book website: www.startupnationbook.com