Book review: Dan Senor e Saul Singer, “Startup nation” A council for foreign relations book, Twelve New York 2011, pp. 309
Probably no other book analyses so deeply the reasons of the Israeli startup boom and allows the policy makers from other countries to draw some useful policy lessons to nurture a vibrant startup ecosystem.
As the book was issued more then 10 years ago, Israel hadn’t yet reached the economic standards of nowadays being the 13th richest economy in the world, but the path was clear. Most of all the startup and innovation ecosystem was established and it was already the most productive in terms of number of founded startups.
Radical economic reforms were already set in place by the Government having Benjamin Netanyahu as Finance Minister and the innovation scene was flourishing and attracted investments from all over the world, mainly the US. Growth was built on the most solid of the factors you can think of in the economy: entrepreneurship.
“The only reasonable thing is to dare”
The answer that the book tries to answer is: why Israel? Why in this tiny piece of semi desertic and semi-militarized land surrounded by fierce enemies, with a population of less than 8 million (when the book was published)? How come that in such harsh conditions a stunningly innovative economy has flourished?
Probably the statement of former Prime Minister Shimon Perez, one of the founding fathers of the Nation, member of the Zionist movement and inspirer of the book, offers the answer as it says: “the most careful thing is to dare”.
Israel itself was founded by a generation of visionaries, that took risks and looked for solutions within a very hostile historical context, driven by the energy of despair. The people found purpose and motivation in the search of a national nest for the Jewish people: a community that was persecuted for centuries and that risked annihilation during the tragedy of the Holocaust.
Harsh conditions forced the Jews to look for unconventional and difficult solutions and finally got them to found their first and most important startup: the State of Israel.
Perez identifies in adversity (which is a normal state of being for Israel) a “renewable source of innovation”; innovation means the ability to defy what exists and challenge the conventional. The pioneers of the 40’s had first to defeat the surrounding Arab Nations, then bring water and farming in the desert, provide food and find housing for an increasing population of immigrants, build a national economy initially based on agriculture, lacking private industrial investments and suffering the boycott of hostile nations. Harsh conditions pushed them to find innovative solutions, leverage on human capital in absence of natural resources.
In the rest of the book the authors analyze Israeli history and through anecdotes identify the national attitudes that made the startup boom at the beginning of the 2000’s possible and made it till nowadays the main factor of economic growth of the Israeli economy.
Small land, tragic landscape, great economic figures
In order to quantify the economic achievements of this small land surrounded by hostile and unpredictable enemies, let’s look at some basic figures.
Israel invests 5,6% of its GDO in R&D, more than any other OECD country. It’s the only country in the world where 91% of R&D investments come from the private sector and most of it from abroad.
A minor and residual part of the investments comes from the State in order to mitigate the risk of investing in the most disruptive ventures. Israel ranks third in world after San Francisco and New York by number of invested startups: London, Boston and Loa Angeles all rate worse than Tel Aviv. Israel is fifth in the world by size of financing rounds over the 50 million threshold.
The US market and the liberal reforms of the 90’s
The strategic decision in the 90’s of the US Government and of the major tech companies in the Sylicon Valley to achieve growth through disruptive innovation investing in R&D, open innovation and promoting entrepreneurship was of great help for Israel as its startups offered innovative solutions to US corporates which on the other hand offered Israeli founders a market and the much needed management skills to scale up.
But why were the Israeli able to meet the needs of US corporates so early and before other nations and why had Israel already been able to develop such a vibrant ecosystem?
Certainly, the economic reforms of Bibi Netanyahu played a role by liberalizing the system cutting public spending and taxes, reforming the public sector and liberating the animal spirits of young Israeli entrepreneurs: but this created just the right context. Israel was not the only country implementing liberal economic reforms in the 90’s.
What makes Israel so especially prone to create tech startups at drastically higher rates compared with other innovative nations like South Korea or Finland?
To find the real reasons we need to dig deeper in history and national psychology explain the authors.
A culture of flat hierarchies where leadership is constantly challenged
On founding element of the startup nation is the Israeli culture of disagreement and lack of politeness. A few strategic American investments found fertile ground in Israel because of the bluntness and openness of the Israeli teams which constantly challenge the authority of their leaders and don’t accept impositions, if they are not considered to be rationally the best solutions.
In Israeli culture innovation is a bottom-up process: during military training the army constantly put under pressure by surrounding enemies, has a steady shortage of high-ranking officers and need to involve low ranking young officers in tactical decisions on the field, sharing with them classified information. Low ranking officers, mostly still in their 20’s, feel empowered to take difficult decisions and entitled to improvise and innovate on the field. Officers gain respect on the field by their ability to achieve results, improvise and solve problems: hierarchy plays a minor role.
Dyaspora and immigration
The Jewish diaspora was also used since the very beginning of the State of Israel as a source of skills and best practice to import in the newly founded nation: as an example of it the book tells the story of the birth of the aviation industry in Israel and the contribution given to it by Al Schwimmer, a US army officer who provided Ben Gurion with used US military aircraft to fight Egyptian planes in the 1948 war of independence and was later recruited to help the new born State to help build an aviation industry.
A grate injection of technical expertise came to Israel through the big wave of immigration in the ‘90s: highly qualified Jewish immigrants leaving the Soviet Union forced the Government to invest in startup incubators and accelerators to encourage entrepreneurship rather than State jobs.
YOZMA
Whereas state funded incubators employed the new engineers coming from the USSR, almost none of the incubates startups managed to scale up and become an established company.
Israel lacked a functioning VC market and needed to import it also form the United States.
That’s when the Government program called “YOZMA” came into play: the government would co-finance new tech ventures up to one third of their value, if an Israeli and a foreign VC fund would finance the rest. This allowed Israel to import the know-how of foreign VC investors into the Israeli startup scene, reducing the risk for private investors and increasing the success rate of Israeli startups. The program was the spark that started the fire of innovation in the Jewish State.
Mashup mentality
Certainly, a key factor of innovation is also the multidisciplinary attitude of young Israelis and the possibility they have to develop innovation during their army experience and apply it in their civil life. A lot of innovation stems from applying military technology in the medical field. Teams of biotech engineers, doctors and aerospace experts work together in the army to develop solutions that can find applications in different fields.
This kind of approach is hard to find in more traditional and structured societies where the military is not so entangled in civil society or, if it is, like in authoritarian regimes, the society lacks the necessary freedom and informality provided by Israel to mix different fields of expertise to find “something that works”.
Communities and clusters
Industrial clusters are another source of growth and innovation as countries like Italy, Finland or South Korea show. They foster growth because they represent a local community based on trust, shared legacy and emotional ties. Communities function because they share a common past and a common purpose. Whereas a common past strengthens identity and cohesion, purpose works as a driver of growth and innovation.
Israel is not only a country, but it is also a cluster representing a community sharing a very strong purpose. This community is based on a past made of tragedies (the holocaust) and scarcity in the legendary pioneers era of the 40’s. Harsh conditions pushed the Israeli society to look for new and effective solutions since the very beginning, to defeat the Arab armies, to nurture the desert and build an economy from scratch in a permanently hostile geopolitical environment.
This context forced Israel to develop a culture of effectiveness, of constant search of solutions that actually work, even though they might challenge conventional wisdom.
Conclusions
If the above mentioned are at the roots of the vibrant Israeli ecosystem, what are the lessons to be drawn for other countries to grow a similar economy based on entrepreneurship and innovation?
Some are structural elements, which are not typically Israeli and can be found also elsewhere: like industrial clusters where universities, large companies, SME’s and startups combined work together and exchange know how and work force, or a liberal economy which fosters growth through supply and low taxation.
Other elements are deeply rooted in Israeli tradition and can hardly be replicated if not radically changing the national psychology of a nation: a sense of purpose and urgency rooted in scarcity and difficulties, a concept of leadership not based on hierarchy but on efficiency and adaptability, a strong individualism, combined with a higher purpose represented by a strong common identity materialized in the Jewish state and in the Israeli army.
Can a country train its youth to the hardships of life, can the educational system develop a sense of urgency and social cohesion, based on the study of history and common roots?
Can a government foster economic growth through entrepreneurship, rewarding risk taking behaviors, without judging failures?
Can a society abandon formal hierarchies, rewarding instead unconventional effective behaviors?
Can a country create a military like national program training the youth to serve a national purpose where leadership, responsibility, teamwork and technical skills are trained?
If the answer to all the above listed questions is yes, this country is probably fit to learn from Israel.
