Israel: Start-up nation

It has few people, no resources and lots of hostile neighbours — so how did Israel become a hotbed of entrepreneurism?

Why is it that Israel — a nation of only 7.1 million people — has more companies listed on the Nasdaq exchange than China, India, Japan, Korea, Singapore and all of Europe combined? How come, despite its complete lack of natural resources, its perpetual state of war and its ring of hostile neighbours, Israel has the highest density of startup companies in the world (one for every 1,844 Israelis)? These are some of the questions that Dan Senor, a Middle East specialist and foreign policy adviser to the U.S. government, and Saul Singer, a columnist for The Jerusalem Post, set out to answer in Start-Up Nation: The Story of Israel’s Economic Miracle . Packed with case studies and anecdotes from Israel’s leading entrepreneurs, the book explores the particular brand of ingenuity, chutzpah and resilience that characterizes Israeli entrepreneurism.

“During the six years following 2000,” the authors write, “Israel was hit not just by the bursting of the global tech bubble, but by the most intense period of terrorist attacks in its history and by the second Lebanon war. Yet Israel’s share of the global venture capital market did not drop — it doubled , from 15% to 31%.” In the following excerpt, Senor and Singer map out the exceptional cultural factors and geopolitical realities that have contributed to Israel’s unlikely emergence as one of the world’s most dynamic business hotbeds.

The elevation of La Paz, Bolivia, is 11,220 feet, and El Lobo is one floor higher. El Lobo is a restaurant, hostel, social club, and the only source of Israeli food in town. It is run by its founders, Dorit Moralli and her husband, Eli, both from Israel.

Almost every Israeli trekker in Bolivia is likely to come through El Lobo, but not just to get food that tastes like it’s from home, to speak Hebrew, and to meet other Israelis. They know they will find something else there, something even more valuable: the Book. Though spoken of in the singular, the Book is not one book but an amorphous and evolving collection of journals, dispersed throughout some of the most remote locations in the world. Each journal is a handwritten “bible” of advice from one traveller to another. And while the Book is no longer exclusively Israeli, its authors and readers tend to be from Israel.

Though it has become internationalized, the Book remains a primarily Israeli phenomenon. Local versions of the Book are maintained and pop up wherever the “wave” — what Hebrew University sociologist Darya Maoz calls the shifting fashions in Israeli travel destinations — goes. Many young Israeli trekkers simply go from Book to Book, following the flow of advice from an international group of adventure seekers, among whom Hebrew seems to be one of the most common tongues.

“More than any other nationality,” Outside magazine reported, “[Israelis] have absorbed the ethic of global tramping with ferocity: Go far, stay long, see deep.”

Israeli wanderlust is not only about seeing the world; its sources are deeper. One is simply the need for release after years of confining army service. Yaniv, an Israeli encountered by the Outside reporter, was typical of many Israeli travellers: “He had overcompensated for years of military haircuts by sprouting everything he could: His chin was a wispy scruff and his sun-bleached hair had twirled into a mix of short dreads and Orthodox earlocks, all swept up into a kind of werewolf do.

But it’s more than just the army. After all, these young Israelis probably don’t run into many veterans from other armies, as military service alone does not induce their foreign peers to travel. There is another psychological factor at work — a reaction to physical and diplomatic isolation. “There is a sense of a mental prison living here, surrounded by enemies,” says Yair Qedar, editor of the Israeli travel magazine Masa Acher. “When the sky opens, you get out.”

Until recently, Israelis could not travel to a single neighbouring country, though Beirut, Damascus, Amman and Cairo are all less than a day’s drive from Israel. Peace treaties with Egypt and Jordan have not changed this much, though many curious Israelis have now visited these countries. In any event, this slight opening has not dampened the urge to break out of the straitjacket that has been a part of Israel’s modern history from the beginning — from before the beginning.

Long before there was a State of Israel, there was already isolation. An early economic boycott can be traced back to 1891, when local Arabs asked Palestine’s Ottoman rulers to block Jewish immigration and land sales. In 1922, the Fifth Palestine Arab Congress called for the boycott of all Jewish businesses.

A longer official boycott by the 22-nation Arab League, which banned the purchase of “products of Jewish industry in Palestine,” was launched in 1943, five years before Israel’s founding. This ban extended to foreign companies from any country that bought from or sold to Israel (the “secondary” boycott), and even to companies that traded with these blacklisted companies (the “tertiary” boycott). Almost all the major Japanese and Korean car manufacturers — including Honda, Toyota, Mazda and Mitsubishi — complied with the secondary boycott, and their products could not be found on Israeli roads. A notable exception was Subaru, which for a long time had the Israeli market nearly to itself but was barred from selling in the Arab world.

Every government of the Arab League established an official Office of the Boycott, which enforced the primary boycott, monitored the behaviour of secondary and tertiary targets, and identified new prospects. According to Christopher Joyner of George Washington University, “Of all the contemporary boycotts, the League of Arab States’ boycott against Israel is, ideologically, the most virulent; organizationally, the most sophisticated; politically, the most protracted; and legally, the most polemical.”

In such a climate, it is natural that young Israelis seek both to get away from an Arab world that has ostracized them and to defy such rejectionism — as if to say, “The more you try to lock me in, the more I will show you I can get out.” For the same reason, it was natural for Israelis to embrace the Internet, software, computer and telecommunications arenas. In these industries, borders, distances, and shipping costs are practically irrelevant. As Israeli venture capitalist Orna Berry told us, “High-tech telecommunications became a national sport to help us fend against the claustrophobia that is life in a small country surrounded by enemies.”

This was a matter of necessity, rather than mere preference or convenience.

Because Israel was forced to export to faraway markets, Israeli entrepreneurs developed an aversion to large, readily identifiable manufactured goods with high shipping costs, and an attraction to small, anonymous components and software. This, in turn, positioned Israel perfectly for the global turn toward knowledge- and innovation-based economies, a trend that continues today.

It is hard to estimate how much the Arab boycott and other international embargoes — like France’s military ban — have cost Israel over the past 60 years, in terms of lost markets and the difficulties imposed on the nation’s economic development. Estimates range as high as $100 billion. Yet the opposite is just as difficult to guess: What is the value of the attributes that Israelis have developed as a result of the constant efforts to crush their nation’s development?

Today, Israeli companies are firmly integrated into the economies of China, India, and Latin America. Because, as Orna Berry says, telecommunications became an early priority for Israel, every major telephone company in China relies on Israeli telecom equipment and software. And China’s third-largest social-networking website, which services 25 million of the country’s young web surfers, is actually an Israeli startup called Koolanoo, which means “all of us” in Hebrew. It was founded by an Israeli whose family emigrated from Iraq.

In the ultimate demonstration of nimbleness, the Israeli venture capitalists who invested in Koolanoo when it was a Jewish social networking site have utterly transformed its identity, moving all of its management to China, where young Israeli and Chinese executives work side by side.

Gil Kerbs, an Israeli alumnus of Unit 8200 [the largest unit in the Israeli Defense Forces’ Intelligence Corps, responsible for collecting technology intel], also spends a lot of time in China. When he left the IDF, he picked up and moved to Beijing to study Chinese intensively, working one-on-one with a local instructor — for five hours each day for a full year — while also holding a job at a Chinese company, so he could build a business network there. Today, he is a venture capitalist in Israel, specializing in the Chinese market. One of his Israeli companies is providing voice biometric technology to China’s largest retail bank. He told us that Israelis actually have an easier time doing business in China than in Europe. “For one, we were in China before the ‘tourists’ arrived,” he says, referring to those who have only in recent years identified China as an emerging market. “Second, in China there is no legacy of hostility to Jews. So it’s actually a more welcoming environment for us.”

Israelis are far ahead of their global competitors in penetrating such markets, in part because they had to leapfrog the Middle East and search for new opportunities. The connection between the young Israeli backpackers dispersed around the globe and Israeli technology entrepreneurs’ penetration of foreign markets is clear. By the time they are out of their 20s, not only are most Israelis tested in discovering exotic opportunities abroad, but they aren’t afraid to enter unfamiliar environments and engage with cultures very different from their own. Indeed, military historian Edward Luttwak estimates that many post-army Israelis have visited over a dozen countries by age 35. Israelis thrive in new economies and uncharted territory in part because they have been out in the world, often in pursuit of the Book.

One example of this avid internationalism is Netafim, an Israeli company that has become the largest provider of drip irrigation systems in the world. Founded in 1965, Netafim is a rare example of a company that bridges Israel’s low-tech, agricultural past to the current boom in clean tech.

Netafim was created by Simcha Blass, the architect of one of the largest infrastructure projects undertaken in the early years of the state. Born in Poland, he was active in the Jewish self-defence units organized in Warsaw during World War I. Soon after arriving in Israel in the 1930s, he became chief engineer for Mekorot, the national water company, and planned the pipeline and canal that would bring water from the Jordan River and Sea of Galilee to the arid Negev.

Blass got the idea for drip irrigation from a tree growing in a neighbour’s backyard, seemingly “without water.” The giant tree, it turns out, was being nourished by a slow leak in an underground water pipe. When modern plastics became available in the 1950s, Blass realized that drip irrigation was technically feasible. He patented his invention and made a deal with a co-operative settlement located in the Negev Desert, Kibbutz Hatzerim, to produce the new technology.

Netafim was pioneering not just because it developed an innovative way to increase crop yields by up to 50% while using 40% less water, but because it was one of the first kibbutz-based industries. Until then the kibbutzim — collective communities — were agriculture-based. The idea of a kibbutz factory that exported to the world was a novelty.

But Netafim’s real advantage was having no inhibition about travelling to far-flung places in pursuit of markets that desperately needed its products — places where, in the 1960s and ’70s, entrepreneurs from the West simply did not visit. As a result, Netafim now operates in 110 countries over five continents. In Asia, it has offices in Vietnam, Taiwan, New Zealand, China (two offices), India, Thailand, Japan, Philippines, Korea and Indonesia. In South America, it has a presence in Argentina, Brazil, Mexico, Chile, Colombia, Ecuador and Peru. Netafim also has 11 offices in Europe and the former Soviet Union, one in Australia, and one in North America.

And because Netafim’s technology became so indispensable, a number of foreign governments that historically had been hostile to Israel began to open diplomatic channels. Netafim is active in former Soviet bloc Muslim states like Azerbaijan, Kazakhstan and Uzbekistan, which led to warmer relations with Israel’s government after the dissolution of the Soviet Union. In 2004, then–trade minister Ehud Olmert tagged along on a Netafim trip to South Africa in the hope of forming new strategic alliances there. The trip resulted in $30 million in contracts for Netafim, plus a memorandum of understanding between the two governments on agriculture and arid lands development.

Israeli entrepreneurs and executives, though, have themselves been known to engage in self-appointed diplomatic missions on behalf of the state. Many of Israel’s globe-trotting business people are not just technology evangelists but endeavour to “sell” the entire Israeli economy. Jon Medved — the inventor of the “nickname barometer” to measure informality — is one such example.

Raised in California, Medved was trained in political activism, not engineering. His first career was as a Zionist organizer. He moved to Israel in 1981 and made a small living by going on speaking tours to preach about the future of Israel to Israelis. But a conversation he had in 1982 with an executive at Rafael, one of Israel’s largest defence contractors, burst Medved’s bubble. He was told, unceremoniously, that what he was doing was a waste of time and energy. Israel didn’t need more professional Zionists or politicians, the executive stated flatly; Israel needed business people. Medved’s father had started a small company in California that built optical transmitters and receivers. So Medved began pitching his father’s product in Israel. Instead of going from kibbutz to kibbutz to sell the future of Zionism, he went from company to company to sell optical technology.

Later, he got into the investment business and founded Israel Seed Partners, a venture capital firm, in his Jerusalem garage. His fund grew to over $260 million, and he invested in 60 Israeli companies, including, which was bought by eBay, and Compugen and, both of which went public on the Nasdaq. In 2006, Medved left Israel Seed to launch and manage a startup himself — Vringo, a company that pioneered video ringtones for cellphones, which has quickly penetrated the European and Turkish markets.

But his own company is less important. Regardless of what Medved is doing for his enterprises, he spends a lot of time — too much time, his investors complain — preaching about the Israeli economy. On every trip abroad, Medved lugs a portable projector and laptop loaded with a memorable slide presentation chronicling the accomplishments of the Israeli tech scene. In speeches — and in conversations with anyone who will listen — Medved celebrates all the Israeli landmark “exits” in which companies were bought or went public, and catalogs dozens of“made in Israel” technologies.

Alex Vieux, CEO of Red Herring magazine, told us that he has been to “a million high-tech conferences, on multiple continents. I see Israelis like Medved give presentations all the time, alongside their peers from other countries. The others are always making a pitch for their specific company. The Israelis are always making a pitch for Israel.”

Excerpted from Start-Up Nation: The Story of Israel’s Economic Miracle by Dan Senor and Saul Singer. Now in stores. Published by McClelland & Stewart. Reprinted by permission of the publisher. All rights reserved.