I visited Israel many times and talked to numerous local startups, VCs, accelerators, and ecosystem builders. The local ecosystem gave birth to public companies, unicorns, and ample M&A. They even have a local Aerospace sector with a lunar program and their own spaceport! I was amazed how a tiny country with less than 10 mln population, limited in resources and surrounded by enemies could achieve that? To better understand the context I was advised to read the book Start-Up Nation. I did a short summary below. I hope you will find it useful.
Israeli army and Tech sector
The state of Israel was born in very harsh conditions. Now companies from all over the world open offices in Israel because of the large number of smart people inventing sophisticated technologies.
Chutzpah helps Israelis to challenge the status quo. For example, young people challenge the older ones, or one can do something that others are not brave enough to do.
They adopt military technologies for business applications, for example, PayPal applied the same technology to search for fraud in transactions as was applied to search for terrorists.
In the army, mistakes are treated tolerantly if the risks are assessed. The same goes for business. If you went bankrupt in Israel, it is very easy for you from a regulatory point of view to open a new company.
To create a culture of innovation, the feeling of fear of loss is more useful than the hope of gain. It is also crucially important to cultivate a culture of disputes of alternative opinions. Military also teaches leadership by showing personal examples and inspiring your team to follow you at the face of death.
Lieutenants in the Israeli army have a broad autonomy and can improvise without waiting for approval or orders from senior officers. The army intentionally has many lieutenants and few senior officers. A soldier can train a reserve general, and a general can make coffee for a soldier. It is a very horizontal hierarchy. Soldiers can vote and "fire" their lieutenant if they don't trust him/her.
Everyone serves in the army for 3 years in Israel. Teenagers prepare for the army like their peers in other countries prepare for university admission. At a young age, every citizen must make responsible decisions and risk their lives. The army conducts very strong testing of each candidate to select the right unit for her/him. They also have the Talpiot program, which accepts only a few hundred people each year. It is a 6-year program for the smartest with skills in physics and engineering, where they move from unit to unit for 2 months each, to have an understanding of each of their works. Graduates of this program have a broad outlook and make strong startups. Everyone serves in the army. Everything is transparent. Each person proves herself/himself in action and cannot hide even in the USA after that.
Israeli economy challenges and opportunities
Israel had import barriers in the 1970s. Citizens couldn't open bank accounts abroad. Many enterprises were state-owned. In the 1980s, the country suffered from hyperinflation (hundreds of percent per year). It was a lost decade. The private sector only began to grow after 1985 when the government changed the course.
The dawn of Israel’s tech boom happened during the global surge in IT, Dot-com crisis, massive immigration from the USSR, the end of the Cold war, and the era of globalization.
Israeli citizens are raised to be proactive, ready to take risks, and be flexible. Immigrants are intrinsically ready to take risks (moving to another country), which makes them good entrepreneurs. Immigrants from the USSR knew they had to be exceptional in their profession to survive. That was the only way to build some kind of protection for them and their families. As a result jews in the USSR accounted for 30% of doctors and 20% engineers despite they made up only 2% of the population. One or two generations back, someone in any jewish family was packing very quickly and leaving. Immigrants are ready to start over. They are risk takers. They have nothing to lose. A nation of immigrants is a nation of entrepreneurs. Immigration is one of the main drivers for business development in the US. This is why Israel is focused on bringing immigrants.
Why Israel was a perfect testing polygon for electric cars with battery replacements:
- Residents quickly adopted mobile phones (more than one phone per person) and are used to the subscription model for a phone in installments;
- The country is surrounded by enemies, making it difficult to travel long distances by car;
- They understand what energy security means;
- They believe that gasoline cars are indirectly subsidizing oil-producing countries including their enemies;
- There are plenty of engineers in the country to build the battery replacement network.
Global top companies know that the simplest way to benefit from Israeli innovations is to acquire a local startup or open an Israeli R&D center.
Jewish diaspora
Many people in the diaspora act proactively to support jews across the globe. For example, Elias was shocked when he could find only four other Ethiopians working in Israel’s high-tech sector. The problem was that the only path to the sector was through computer science departments in universities or colleges. Ethiopians were underperforming on the exams and couldn’t get to public universities and they were too poor to get to a private college. Elias, together with an American software engineer, in 2003 established a not-for-profit organization called Tech Careers, a boot camp to prepare Ethiopians for jobs in high tech.
International-migration researchers observe a phenomenon called “brain circulation,” when talented people leave their country and settle down abroad. When they become experts they return to their home countries and contribute to the local community leveraging their connections abroad.
American Jewish investors historically avoided investments in the Israeli economy. Diaspora started looking at Israel as a place to do business much later when the country grew, but the first Limited Partners for Israeli VCs were from diaspora.
BIRD program
Israeli entrepreneurs had to sell on the global market from day one. They were good at developing technologies, but they didn’t know how to manage companies or market products. Before venture capital funds emerged in Israel, there were only two sources of funding: 1) one could apply to the Office of the Chief Scientist (OCS) for matching grants (didn’t provide sufficient funding, 60% companies couldn’t raise follow-on capital to market the product), 2) one could apply for the Binational Industrial Research and Development grants (BIRD, $110 million endowment by the U.S. and Israeli governments to support U.S-Israeli joint businesses, grants of $500,000 to $1 million invested over 2-3 year period, payback through small royalties earned from successful projects). The BIRD team played a role of matchmaker between an Israeli company with a technology and an American company that could market and distribute the product in the United States. A US company was introduced to Israeli engineers with a product, and BIRD covered half of the costs of the project while Israel covered another half. As of the date of publishing the book BIRD invested $250M+ in 780 startups which resulted in $8B in direct and indirect sales. 60% of Israeli companies went public on the New York Stock Exchange by 1992. 75% of them were supported by BIRD. 74% of Israeli high-tech exports were generated by 4% of companies.
1,000,000 Soviet Jewish immigrants arrived in the country. ⅓ of them were scientists, engineers, or technicians and Israel’s high-tech sector could benefit from it. The Israeli economy had to create 500,000 new jobs. The government launched 24 incubators in 1991, so tha Russian scientists got the resources and financing (up to $300,000) they needed in the early stage of R&D. The goal was to commercialize the technologies.
Yozma program
To build the Israeli VC industry they needed strong ties with foreign financial markets, but money alone wouldn’t do the job. First time fund managers had to be mentored in the art of business mentoring, the expertise they had to acquire from Silicon Valley. That’s why the Ministry of Finance launched the program Yozma (“initiative” in Hebrew). The government invested $100M in 10 VCs. Each fund had three parties: Israeli venture capitalists in training, a foreign VC, and an Israeli investment company or bank. Yozma also had a $20M fund for direct investments in technology companies. If the Israeli partners raised $12M elsewhere, the government invested $8M to the fund. The government provided upside to fund managers by granting them the option to cheaply buy out the government equity stake —plus annual interest—after five years, if the fund was successful. The first LPs for the funds were wealthy Jews abroad. 10 Yozma funds launched between 1992 and 1997 raised $200M+. Those funds today manage $3B+. While startups got investment vehicles to get funding traditional small businesses were restricted in sources of investments or loans. The regulatory and tax regime favored VCs as if they didn’t operate in Israel. The government kept its hands off of the sector. Other management companies couldn’t charge performance fees until Jan 2005. That was a serious limitation for financial markets.
Talents in Israel
Reforms happen when the government changes its policy. A revolution happens when a country changes its mindset. Thanks to serving in the army Israel has many cross disciplinary experts. For example, a graphic designer can repair electronics. Such teams can develop unique solutions. The future of Israel depends on promoting and teaching entrepreneurship to young people. Many countries on the planet incentivise international companies to open local branches. The problem is that those companies often don’t create intellectual property in such economic zones and use them for trade. They will leave the moment they get better tax incentives elsewhere. Israel in contrast creates a tight-knit community whose members are committed to working, living and raising their kids in the country. It is a secure place on Earth for the Jewish people. The country has a purpose. This makes the technology sector more sustainable.
Israel is a nation of immigrants who drive the economy growth. The country currently has more engineers and scientists per capita than any other country and produces more scientific papers per capita than any other nation—109 per 10,000 people. Jewish newcomers and their non-Jewish family members are granted residency, citizenship, and benefits.
What makes Israel so innovative and entrepreneurial? It’s a high concentration of great universities, large companies, startups, and the ecosystem that connects them—including everything from suppliers, an engineering talent pool, and venture capital. The military plays an important role in R&D and supplying elite technological units for the private sector. After military service one has everything she/he needs to launch a startup. It will be a phone call away, if they have the right idea. It’s crucially important that launching a startup or working in high tech is cool for ambitious young Israelis despite the chances of success for startups are low. It’s okay to try and to fail.
George Bernard Shaw said once, “If you have an apple and I have an apple and we exchange apples, then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.”
While many countries have no reason to institute a military draft like Israel’s, they can benefit from national service programs that give young college-age people skills of leadership, teamwork, and mission-oriented skills and experience Israelis receive through military service. It will also increase social solidarity and nurture serving something larger than oneself.
