How Did Israel Become "Start-Up Nation"?

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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:

Q.

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

A.

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.

Q.

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?

A.

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.

Q.

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?

A.

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.

Q.

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?

A.

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.

Q.

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.

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.

Q.

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.

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.


Daniel

A number of factors contribute to the high level of innovation in Israel (and lets not forget the tremendous contribution of Jews to US tech innovation.. Dell, Google, Facebook etc). One is the emphasis on asking questions and probing for answers that is prominent in the religious tradition. This kind of close reading persists culturally even outside of a religious framework (Seinfeld and Curb Your Enthusiasm are great, almost Talmudic, examples). Another factor is feeling like an outsider. When you are not in the majority you are less likely to accept things the way they are, more likely to notice inconsistencies, inefficiencies and opportunities surrounding you. These factors have given us some great start-ups - and many great comedians!

Jim Walsh

I suppose it helps that the US pumps billions of our borrowed dollars in foreign aid into Israel while suppression of economic growth in the Palestinian territories and exploitation of Arab labor helps keep costs down.

Dual citizenship, among other things, also allows Israeli start ups and sales companies to enter the American market with fewer impediments than those from most other countries.

An interesting experiment might be to make Israeli start ups operate under the same restrictions that Palestinian start ups operate under. Not only the regulations and delays, but the physical impediments to production and markets.

Finally, it is just a bit irritating to see Mr. Netanyahu and his Likud government stick their thumb in President Obama's eye on the settlements issue.

How long can this go on?

Functional Illiterate

Uh, a nation that has had enormous sums of private donations and American taxpayer money poured into it for decades is a "Start-Up Nation?" When can middle America get some of that action?

munden

How Did Israel Become "Start-Up Nation?
It is obvious they got prime real estate free from the natives.
They got alot of foreign aid from many countries and Israel sympathizers all over the word ...
Any body with free real estate and external cash had a very good chance to build a start up...

Ben

It is a shame that when Israel's immigration policies are discussed in this blog post, it was left out that the Palestinians who were forced out of their homes when Israel was created (see "1948 Palestinian Exodus" in wikipedia for details) are not allowed to return, but individuals with Jewish heritage, even if they never lived in the region in generations, are allowed to get citizenship.

Matthew

It's not mentioned here, but Israel is also a recipient of billions of dollars from the United States for military purposes. Historically, and across the globe, the military has always been ground zero for advances in technology.

In the U.S., our high-tech economic sectors have succeeded because of massive public investment in research and development through the Pentagon, including computers, containerization, biotechnology, etc.

Will

How have Israeli entrepreneurs overcome these formidable challenges to build successful businesses and attract investors...?

They certainly didn't do it by themselves. No country has received more economic and military aid than Israel.

Paul F

The secret to the success that is proposed here is create a militarized economy that imports talent from abroad.

Really, how many countries can emulate that. Let's look at Israel's military spending per capita that is basically financed by US aid. What other country can sustain that? Also it has a strategic relationship to the United States that is unique.

Second the open-immigration policy thing is disingenuous. It is open to Jewish immigration from the former Soviet republics, not immigration in general. And this was a one time deal sort of thing, where you were able to import a whole population displaced by the collapse of the USSR. Don't think this is something other countries can emulate.

To suggest there is some sort of model here for emulation is quite misleading.

Neil

Very interesting. It should also be noted that the immigration to Israel is Jewish immigration; perhaps that explains why politicians are pro-immigration. It cannot be compared to Muslim immigration to Christian Europe or hispanic immigration to the US.

Sam

One thing to consider is that management accepts and expects penetrating questions from everyone.

Management in the US talks about innovation but is overly concerned that everyone is in alignment with corporate goals and speaking the same language.

One result is that innovative ideas aren't fully considered and those asking tough challenging questions aren't included in decision making.

C Hughes

You forgot to mention billions in U.S. tax dollars used to build it's war machine and illegal settlements in Palestinian territory. Since Israel is doing so well let's stop giving them US Aid and give it to the people in the region that really need it. The Palestinian people.

James Logan

Perhaps Americans could learn of this 'chutzpah' you speak of.

Some will need training though, in order to understand that this doesn't mean, packing a gun at a Presidential appearance, nor does it mean asking the question: "How are you going to do this for me?"

J

Two predictions about this thread:

1.) A lot of people with anti-Israel axes to grind are going to start posting extremely vicious snark.

2.) A fair number of a people are going to wax romantic about a military draft and it's possible good effects on the supposed lack of character among American youth.

I'm not going to even dignify persons in category 1 with a response. As for people in catagory 2, couple of things, many from the article itself:

-The American military is VERY different from the Israeli military. Ingenuity and, as the article says, anti-hierachy is the hallmark of the IDF. The USM--particularly the Marines and Army--are characterized by strong discipline. Which I'm sure is great in certain situations. But not for fostering creativity, independent action, etc.

-The IDF is woven into the fabric of Israeli society in a way that the USM is not and probably never will be. The draft is one aspect, but the other part is that soldiers in the IDF are rarely deployed to the opposite side of the planet for years on end for ends and causes barely understood by them. Most IDF troops are, at most, a few hundred miles from home. Even front-line troops can expect to go home every couple of weeks.

-The IDF is also strongly connected to the educational system in a way that the USM is not. The USM and U.S. higher education are usually parallel, not overlapping systems. Oh and no, just to head would-be militarists off at the pass: No, it would not solve the problem to make the U.S. educational system "more like" the USM. Both Israeli and U.S. higher education are great because they are independent, innovative, draw from a huge international talent pool, and secular (yes, really).

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Casey

I'm based in NYC, but am part of an Israeli startup, so I have a pretty close view of all this.

One surprise to many Americans is that chutzpah is not universal in Israel. I'd agree chutzpah is more common in Israel than in the US, but there are lots of gentle souls in Israel. It's just that nobody notices them. I also think it's an overstatement to say that other languages don't have an equivalent term; cohones comes to mind.

Chutzpah can also have a downside, actually many downsides. When planning for a recent project, we quickly ruled out one approach that had been strongly advocated by one of the hyper-chutzpah members of the team. But, meeting after meeting we had to rule it out, again and again, wasting huge amounts of time and effort. Yeah, the army fills 20-somethings with teamwork skills; chutzpah works to drain those skills.

Chutzpah also can lead to overconfidence. I've seen this so many times. Israelis will think they know more than anyone else, and be dead wrong. This can apply to technical issues, business, or the best wine for a picnic. Chutzpah also can lead to an adversarial relationship when mutual benefit would better serve a company's interest. And chutzpah can make Israelis tone deaf when it comes to subtlety in relationships, especially relationships with quieter cultures, such as japan.

I haven't read the book, so maybe they focus on it, but for me the biggest reason for Israeli tech success is that they value technical people and technical skills. Such skills are valued both economically and socially. There are pockets in the USA where being a sw developer or a biochemist is the cool thing, but for the most part technical people are dismissed with stereotypes and disdain, and not compensated adequately.

In my son's graduating class at an elite us high school, about 80 kids, not one was headed towards an engineering school, and only one or two had any interest in science. They had a fabulous high school curriculum in science and math, but no interest in further study. Why would a lawyer or a broker want to know about physics? In Israel, the elites gravitate towards math, science and engineering, and are well rewarded for doing so. They are bound to start something with all that talent.

-Casey

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Bernie

Perhaps it is covered in the book and not this interview, but another explanation could be the huge emphasis the Jewish tradition has always put on education - a tradition that goes back thousands of years. In such a tradition "smart" = "good", and is rewarded in the society.

By contrast, in many other societies (ours in the US too, sadly), "smart" is equated with "elite" in the negative sense of the word. Here it seems to be "smart" = "geek". Just watch Fox and one gets a clear message that the real Americans, the good Americans are not the smartest ones.

Ms. Palin targets that demographic section of the population, identifies with them and criticizes the "elites" as somehow not being true Americans.

In Israel everyone is encouraged to and wants to be the "elite", and when large numbers of them succeed in doing so, excellence just becomes the norm.

Herman

The importance of military experience and the leadership skills practiced and perfected by commissioned and non-commissioned officers cannot be over-stressed. And the stress on teamwork within a military unit needed for success and survival adds to the leadership training given to everyone in a unit. Given this training provided to young Israelis of both genders and such experience are a key to their success in life that we would be wise to recapture through required public service, military or otherwise.

Max

I spelled it wrong: the campaign is called 'hasbara."

alex schindler

man, commenters are pretty pathetic here. One generally doesn't offer economic critique based on a Cliff Notes understanding of political realities.

Firstly, America's much-touted aid is military. What is spent on R&D, of course, comes right back to us, which is the nature of the Israel-America relationship. This R&D is certainly valuable to the development of their hi-tech sector-- ICQ, for example, basically began within the IDF (though not, i believe, as an IDF project, anymore than Facebook was Zuckerberg's Harvard project). What is spent on hardware, hardly serves to build the Israeli economy. Money is of course fungible, and thus one might argue that money Israel would have to spend on its massive (for obvious reasons) defense budget is now free to pour into development of its economy-- but in fact, this answers no question that the commentators above sought to answer. Throwing money at an economy doesn't magically produce innovation. The question was, what about Israeli culture and life which produces this disproportionate number of creative, innovative people?

this large aid-per-capita explanation also fails simply on the grounds that it does not, by any means, cause Israel to have a higher standard-of-living or easier employment than say, America, or any of the European countries whose start-ups lose in the comparison. Getting a job in Israel is hard. Having a high salary is hard. Cost of living is higher than in America, salaries are significantly lower, taxes are MASSIVELY higher. None of this suggests convenient conditions for start-ups. People whining about politics are ignoring that salient reality. You should read the book and learn something instead.

I won't address politics, since it is utterly irrelevant to the article, though I would recommend that someone open a book rather than basing their opinion on the moral platitudes found on internet blogs (or al-jazeera, or haaretz, or the NYT, or JPost... newspapers start with certain biases and evaluating what is fact and what is opinion is not always easy. This is true of historians and political scientists as well, but at least academia forces them to cite their sources).

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DrS

Does Israel do as well, or even exist, without US money and military equipment? How much tax revenue would Israel have to pull out of its citizens to fund it's own military, and do you think this would have a negative effect on entrepreneurism?

CK

Wait a minute, aren't they the "shut-down" nation? As in, shut down any hopes of a peace process so we can steal land?

Seems to me the upside of all this business activity is that we could be very effective slapping them with trade sanctions for their criminal war behavior.