How does a nation of 7.1 million people, perpetually at war and poor on natural resources produce more start-ups than large, stable countries like China, Korea, India or Japan? Saul Singer, co-author with Dan Senor, of Start-up Nation (Hachette, 2009) discusses how Israel has transformed adversity into an economic miracle. Excerpts from an interview with Kanika Datta.
The essence of your book is that adversity has bred a culture of innovation. Is this sustainable?
The whole Start-up Nation phenomenon is 15 to 20 years old so we kind of wondered the same thing. But there are important indications that it is sustainable and has a lot of potential for growth. The first thing is the performance of the economy during the two big downturns: first, when the 2000 dotcom bubble burst and then in the 2008 financial crisis. In 2000, by all rights, the whole thing should have disappeared because these companies had just come up in the 1990s and all the factors that were fed into it — the Oslo process, the general boom in debt, the Russian immigrants (who had played a huge role in leading the innovation process) — went south after that. Despite that, between 2000 and 2005, Israel actually increased its share in venture capital flows, even though such flows as a whole went down.
Then in 2008, Israel was hit less hard and recovered more quickly than any other developed economy for two reasons. One is the whole thing is built on adversity, and downturns are another kind of adversity; so Israelis have been able to take that in their stride and keep going. The other thing is that start-ups generally start coming up during a downturn, because they don’t need a whole lot money and they are not so sensitive to drops in consumer demand and so on. So it’s definitely proven sustainable. That said, there is no guarantee. When your niche is the cutting edge you have to work hard just to stay there. Israel has no problem if any other country comes up to the cutting edge alongside but if other countries start passing Israel, then Israel’s got nothing because we can’t compete on mass manufacturing. So we have to be careful not to assume that we’re always going to be on top. But I think we have tremendous potential to scale-up our start-up system
Much of it seems to depend on the ballast provided by the government in the 1990s. The state-led model of innovation has weaknesses, as we have seen in China…
I wouldn’t say that. The state has tried to help high-tech in various ways and through various programmes but if you were to ask me what are the two most important things that the government has done I would say it was the brilliant Yozma programme — we have a chapter on it in the book — that jump-started the venture capital sector. But the best thing about it was that the government actually got out of it because the private sector funds ended up buying out the government. So it was the ideal government programme of all time that actually not only succeeded but disappeared! Usually it’s the opposite.
The other big but softer thing was the basic idea that various governments from whatever party — and Israel has had many governments in this period — have generally understood that it is important to be nice to high-tech. It’s the golden goose. That meant not throwing too many taxes on it, not over-regulating it and creating a kind of bureaucratic space for it. But that’s not saying it’s a top-down thing. It’s very much a bottom-up thing. In fact, in the book we contrast Israel with Dubai, Singapore and other places that are much more government-led and we don’t think it will work the way it’s worked in Israel because it’s entrepreneurial driven here.
A lot of research you have talked about in your book goes into practical research for Intel or Cisco and other US corporations and it’s tied in with the products and services these companies offer. But staying on the cutting edge of cutting edge, so to speak, means a certain amount of “blue skies thinking” where there’s no immediate utility for the R&D. Does that happen?
Oh yes, I would say that is the rule when it comes to start-ups. It’s the nature of start-ups that they focus on disruptive innovations because they are risky that it is generally not worth it to aim for incremental innovations. But many of the examples we provide in the book refer to creative re-thinking. But at the same time you have a lot of core innovations by some of the IT giants — and that’s a big part of the story.
A lot of the innovation is a spin-off from the military because Israel is perpetually at war with its neighbours. This seems a very unstable environment…
Again, while there is a strong defence sector, most of the high-tech is not defence or directly from defence R&D. Biotech is very strong, agro-tech, medical R&D are all very strong. Israel spends 4.8 per cent of its GDP on civilian R&D, it’s the highest in the world. That’s not counting military R&D.
But the most important thing — the one that people tend not to talk about — is the cultural influence of military service. In Israel, just about everybody serves in the military, so it’s become a stage in life between school and work. And it’s a stage where people learn about leadership, teamwork, improvisation, sacrifice and, most important, what a mission is. Kids come out of this mission-oriented; so they’re well equipped to set up start-ups because the most important thing about start-ups is determination and drive and willingness to take risks, smartly. That’s what turns ideas into actual products and companies. So we’re arguing that the difference that Israel has is not that we have more ideas and are smarter people, but we have the drive and the willingness to take risks, and the military is a big part of that.
But a military mission is a short-term thing like a start-up. That’s inherently unstable — plus Israel’s start-ups are mostly externally linked. As you pointed out, you can’t have many large manufacturing units in Israel. Is this a weakness going forward?
First of all, we don’t advocate that people send their kids to the military in any other country; we wish we didn’t have to do it ourselves. And we wish we didn’t have the other kinds of adversity. We don’t want to rely on that to be innovative, and we hope it’s a challenge we have going forward of how to be innovative with less adversity.
Is this trend of civilian innovation being fed back into the peace process in ways we’re missing in the headlines?
I think so, there are many interesting things going on. The book has come out in Turkish and is coming out in Arabic. Salam Fayyad, the Palestinian prime minister, according to Bloomberg, has a copy of our book on his desk. I have talked to him and so has my co-author and he would like to follow the Israeli model politically and economically. There are other things going on, like a friend of mine has a $30 million venture fund just to invest in Ramallah. And there’s another Israeli fund to invest in Israeli Arabs, who haven’t been part of this trend mainly because they don’t serve in the military so they don’t have the kind of links that Israeli Jews have. But now many Arabs are beginning to set up their own software companies and some are even employing Jews to work in them.
