How Did Israel Become "Start-Up Nation"?

Since the onset of the current financial crisis, political and economic pundits have loudly proclaimed the end of American economic dominance. U.S. policymakers are struggling to revive the economy, establish new industrial competencies, and remain globally competitive. Meanwhile, in a small, young, constantly embattled country across the globe, old-fashioned entrepreneurialism is alive and well. Israel, just 60 years old and with a population of 7.1 million, has emerged as a model of entrepreneurialism that countries at all stages of development have tried to replicate.
A new book by Dan Senor and Saul Singer, Start-Up Nation: The Story of Israel’s Economic Miracle, explores the culture behind Israel’s economic success. Senor, an adjunct senior fellow at the Council on Foreign Relations and former foreign policy adviser in Iraq and Qatar, has agreed to answer some of our questions about the book:

Why is Israel the ultimate “Start-Up Nation”?

Israel has the highest density of tech start-ups in the world. More importantly, these start-ups attract more venture capital dollars per person than any country — 2.5 times the U.S., 30 times Europe, 80 times India, and 300 times China. Israel has more companies on the tech-oriented NASDAQ than any country outside the U.S., more than all of Europe, Japan, Korea, India, and China combined. But it’s not just about start-ups. Scratch almost any major tech company — Intel, Microsoft, Google, Cisco, Motorola, and so on — and you will find that Israeli talent and technology play a major role in keeping these multinational companies on the cutting edge.

In the book, you explore a number of explanations for Israel’s overwhelming economic success, one of which is the famous Israeli chutzpah. What exactly is chutzpah and what role does it play in Israel’s business culture?

Chutzpah is hard to define. Modern Hebrew borrowed the word from Yiddish, the all-but-vanished German-Slavic language. According to Yiddish scholar Leo Rosten, chutzpah is “gall, brazen nerve, effrontery, incredible ‘guts,’ presumption, plus arrogance such as no other word and no other language can do justice to.”
What do Proctor & Gamble, General Electric, Hewlett Packard, Microsoft, and Google have in common? They were all created or got their first big boost during downturns. It takes chutzpah to try to raise money and start a business when others are closing down.
In the U.S. there are isolated pockets of chutzpah. But an outsider would see chutzpah everywhere in Israel: in the way university students speak with their professors, employees challenge their bosses, sergeants question their generals, and clerks second-guess government ministers.
When the Intel Corporation began building its Israeli teams in the 70’s, the Americans found Israeli chutzpah so jarring that Intel started running “cross-cultural seminars on Israeliness.” Intel-Israel’s Mooly Eden, who ran the seminars, said that “from the age of zero we are educated to challenge the obvious, ask questions, debate everything, innovate.” As a result, he adds, “it’s more complicated to manage five Israelis than 50 Americans because [the Israelis] will challenge you all the time — starting with ‘Why are you my manager; why am I not your manager?'”
When Paypal — the internet payments giant — bought Israeli start-up FraudSciences in 2007, Paypal president Scott Thompson went to Tel Aviv to meet with the FraudSciences team. He told us about his first meeting with the staff:

Every question was penetrating. I actually started to get nervous up there. I’d never before heard so many unconventional observations — one after the other. Junior employees had no inhibition about challenging how we 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 here? Did we just buy FraudSciences, or did they buy us?”

To Israelis, this is the normal mode of being. Somewhere along the way — either at home, in school, or in the army — they learn that assertiveness is the norm, reticence something that risks your being left behind.

At the age of 18, almost all non-Arab Israeli citizens must serve in the Israel Defense Forces (IDF) for at least two years. How does the IDF service experience shape the future of young Israelis and contribute to the country’s economic success?

Certain units have become technology boot camps, where 18- to 22-year-olds get thrown projects and missions that would make the heads spin of their counterparts in universities or the private sector anywhere else in the world. The Israelis come out of the military not just with hands-on exposure to next-gen technology, but with training in teamwork, mission orientation, leadership, and a desire to continue serving their country by contributing to its tech sector — a source of pride for just about every Israeli.
Beyond the elite tech units, the military has a much broader cultural impact. The compulsory service produces a maturity not seen in Israelis’ foreign peers who spend that time in university. “They’ve got more life experience,” British Telecom executive Gary Shainberg told us, which “is critical, since innovation is all about finding ideas, and finding new ideas is often about having perspective.” And perspective typically comes with age. But in Israel you get perspective at a young age because so many transformational experiences are jammed into Israelis — including military service — in their late teens and early 20’s.
Perhaps even more surprisingly, Israel’s resource-stretched and constantly tested military teaches improvisation and flattens hierarchies. Soldiers learn “the value of five minutes” as one general told us. They are taught to get the job done and figure out how. And especially in the reserves, barriers are broken; young people command their teachers or bosses, no one salutes, and privates address generals by their nicknames. All this contributes to an informal and anti-hierarchical culture outside the military, which is critical for an experiment-focused, probing, and innovating economy.

Your book jacket describes Israel as “a country of 7.1 million people, only sixty years old, surrounded by enemies, in a constant state of war since its founding, with no natural resources.” How have Israeli entrepreneurs overcome these formidable challenges to build successful businesses and attract investors like the famously risk-averse Warren Buffett?

The great irony of the Start-Up Nation story is that Israel has transformed the challenges it has faced into assets that form the cornerstones of its culture of innovation. Adversity of all kinds, such as being under attack, small, isolated, and lacking resources, have forced Israelis to be resourceful, to do more with less, to innovate, and to be global from day one. The fact that Israel specializes in adversity is most dramatically seen in downturns.
When the tech bubble burst and the peace process fizzled in 2000 to 2001, one might have expected the Israeli tech scene — then only a few years old — to evaporate. Instead, Israel garnered a larger market share of the global venture capital pie in 2005 than it did in 2000. Similarly, in the current downturn, Israel has been among the least affected and the first to recover among developed nations.

Tell us about Israel’s immigration policy and why it’s different from policies in other countries. Have Israel’s recent immigrants helped or hurt its economy?

A key lesson from Israel is that innovation is not just something that goes on inside companies; it comes from a wider culture that fosters both innovation and entrepreneurship. Israel is a country of immigrants — there are over 70 nationalities represented in this tiny country. Two out of every three Israelis are newcomers, or the children or grandchildren of newcomers. The Israeli battery-operated car grid company Better Place was founded by the son of an Iraqi immigrant. The Israeli company Koolanoo — the third-largest social networking site in China — was founded by the child of an Iranian immigrant. The Internet music start-up FoxyTunes — which was recently sold to Yahoo for tens of millions of dollars — was founded by a young Ukrainian immigrant. Walk around Israeli neighborhoods, and you’ll find yourself dealing with Israelis from Ethiopia, Poland, Yemen, Russia, and Australia, to name a few.
Immigrants are natural risk takers since they were willing to uproot themselves and start over. In particular, the great wave of immigrants from the former Soviet Union in 1990 to 2000 brought to Israel a tremendous boost in engineering talent just as the tech sector began to take off. Israel is also the most pro-immigration country; politicians there actually compete with each other with campaign promises to bring in more immigrants, not fewer.

Various countries have attempted to duplicate Israel’s entrepreneurial culture, with limited success so far. What policy initiatives would you suggest to a country hoping to become the next “Start-Up Nation”?

A key lesson is to learn to leverage the business talents of young people with military experience. In Israel, employers look for and value the leadership skills of young officers who have already received tremendous management skills by age 21. By age 25, they have both military experience and a university degree. In the U.S., by contrast, too many corporate executives are illiterate when it comes to reading a military resume. We heard one story about an Iraq-war vet being interviewed by a corporate recruiter. The vet walked through all his incredible leadership experience from the battlefield. But at the end of the interview, the interviewer said, “that’s all very interesting, but have you ever had a real job?”
American business needs to embrace, not spurn, this incredible reservoir of ex-military talent.
This does not mean that other countries need the military conscription model that Israel has been forced to take to become entrepreneurial. Other frameworks, such as national service programs, could also provide the management and maturation experience that Israelis get, but in a civilian context. Finally, the Israeli experience shows that countries that want to be more entrepreneurial should welcome immigrants as a great resource for rebooting their economies.