Friday, May 6, 2016

Secrets of Israel’s High-Tech Economic Success

Israeli Consul Gili Ovadia
Israel has one of the most vibrant high-tech economies in the world. Every major U.S. tech company has acquired important technology by acquiring Israeli startups and that list of acquirers includes Google, Facebook, EMC, Cisco, Intel,  and IBM, to name just a few. Last year, Microsoft alone acquired no less than five Israeli startups. According to a study by accounting firm PwC, in 2015 Israel, a small country of 8 million people, saw 62 tech companies acquired for a total value of $7.2 billion, Among European nations, only Germany and Britain did better.  As Table 1 shows, in terms of deals per population, Israel stands alone, with 7.8 deals per million people, double the figure of Sweden and five times the level of Germany or Britain.

Technology success has helped drive Israel’s economic growth. According to this report, technology goods and services accounts for about 12.5% of Israel’s GDP, probably double the level in the U.S.  This blog is about “soft” cultural factors and not hard statistics, but I cannot resist one more quick look at the data. As Table 2 shows, Israel’s GDP growth between 1999 and 2014 was 28%, roughly double the growth rate of U.S. GDP, and higher than most other developed nations.

A few weeks ago, I had an opportunity to discuss the secrets of Israel’s economic and business success with Israelis at a “showcase” of small Israeli companies organized by the Israeli Economic Mission for the RSA Conference in San Francisco, the U.S.’s premiere industry conference on cybersecurity. The showcase included representatives from 36 Israeli companies, most of them showing hardware or software products aimed at defending corporate networks from hacking, spying, theft, and other Internet dangers.  In a discussion I had with Israeli Consul for Economic Affairs in San Francisco Gili Ovadia (above) and several Israeli corporate executives, there emerged three reasons for Israel’s success in technology: the focus of Israel’s military on technology, Israel’s non-hierarchical business culture, and the maturity of Israel’s young people.
Table 1: European Tech Acquisitions 2015

Israel’s intelligence agencies are important training grounds for future leaders of tech companies. Agencies include not just the well-known Mossad, but lesser-known technology-oriented agencies like Unit 8200, a data-gathering agency analogous to the U.S.’s National Security Agency, and Hatsav, which collects intelligence from public sources. Every Israeli, male and female, is required to serve three years in the army, known as the Israeli Defense Force or IDF and some of them apply to go into one of the intelligence agencies instead. Military service normally begins at the age of 18.  Founders of many of Israel’s best-known tech companies —including Check Point Technologies and Palo Alto Networks (both now on the stock market) came out of intelligence agencies. “These guys tend to finish their service, sometimes do two or three years more, and then go into business and take their expertise and develop it into technology that has value in the private sector,” Ovadia said.  Some go onto college after the military to get an engineering degree. Some don’t bother, because they’ve learned enough in the military and often have an idea for a way to apply what they’ve learned in the military to solve a problem in the civilian world. For many, says Ovadia, college is unnecessary, because “on the job training is more important.”
Table 2: Israel and Major World Economies, Real GDP Growth 1999-2014

Doron Davidson, founder of a young security company named Secbi, said that Israel’s government has invested in the private sector to build a high-tech ecosystem to support private tech companies. This ecosystem receives funding from multiple government agencies, including the military and Israel’s Chief Scientist. “Israel is successful because of the ecosystem,” said Davidson.  Ovadia said: “The Chief Scientist drives innovation in Israel. To get grant money, you just need to have an innovative technology. He doesn’t care about the market or the people, just the technology.” In the past, many technological innovations in the U.S. were made possible by government support, or the work of blue-sky research centers like Bell Labs. The Internet itself was developed by Pentagon agency DARPA. Today government-backed funding on research is much declined from years ago.  While we have lots of market-driven innovation in areas like advertising and consumer services, there seems to be less fundamental innovation than before. (As Peter Thiel expressed it so memorably: “We wanted flying cars, instead we got 140 characters.”)

Sense of Mission
Ovadia told me that Israelis are by their nature non-hierarchical.  “Compared to the U.S., Israelis are different. In Israel, people step up and say what they think and what they believe. That leads to creative thinking and disruption.”  The non-hierarchical, even argumentative, nature of Israelis is perhaps partly a cultural inheritance from the European Jews who founded the country, compounded by the intense pressure of war and enemies on all sides, which has led the country to have to fight on all sides for the last 68 years.

Of course, Americans like to think of themselves as non-hierarchical. But I’ve worked at three tech startups, two of which could be termed failures and one a rip-roaring success. In each of them, the company was effectively a dictatorship of either the CEO or the man plotting to replace him. Hierarchy, secrecy, and eventually disaffection and dissatisfaction are the byproducts of companies where the sole mission is to achieve a “liquidity event,” i.e. sell the company, and everybody has little choice but to trust that the CEO knows the best way to achieve the hallowed liquidity event. In the early stages of a company’s life, when it is engineering-driven, the mission and challenge of building a working product can create a sense of unity and eliminate hierarchy. But as the company shifts from development mode to business mode, the sense of mission fades, and management secrecy and abrupt strategic shifts imposed by a hierarchical senior management take over. Venture capitalists in Silicon Valley are of course aware of this problem. Ben Horowitz, of venture firm Andreessen Horowitz, wrote an entire book (The Hard Thing About Hard Things) which is essentially a meditation on how to find and train a startup CEO who can lead and manage through this growth process.

Finally, Ovadia argued that the constant threat of enemy attack, as well as Israel's compulsory military service, provides young people with a sense of discipline, responsibility, and maturity that one doesn’t see in most developed economies. Ovadia described to me an Israeli soldier's experiences in the IDF in 2001 in what Israel called Operation Defensive Shield. The IDF defended the country against the “Second Intifada,” a wave of Palestinian bombing and shooting attacks which ultimately killed more than 1,000 Israelis. “By the age of 19, they've taken part in combat, and been face-to-face with the enemy, with bullets flying over my head.  They learn to have a lot of responsibility and self-discipline.” Ovadia, who trained to become a lawyer before deciding to join the Israeli diplomatic service, said the army changed him as a human being, “I was more self-disciplined, I knew what hard work was. The resilience I had was an order of magnitude greater than the typical young person of my age.” 

Another Israeli at the showcase, Yaniv Sulkes of Allot Communications, told us a similar story: “One of the secrets of Israel’s success is that the army takes people when they are young and motivated and puts them in front of significant challenges. You have a big problem, you have what seems like unlimited resources, and you can work on this problem day and night. For an 18-year-old, that inspires creativity and innovation and an entrepreneurial spirit.  It’s like finding yourself in the middle of the desert—you have to be innovative to survive. And that’s life.”

Here in the U.S., we seem to be going in a different direction, encouraging our college students to be less, not more, mature, and more dependent on their professors or college administrators instead of thinking for themselves. Drinking, partying, and college sports seem increasingly to dominate life on campus at many of our institutions of higher education.  A recent Bloomberg News report noted that more than half of the new off-campus housing buildings under construction include tanning salons! A swimming pool is considered old hat by today’s students, who can always find time for their beauty regimen it would appear. And as this University of Miami sorority video shows, many of them are quite successful in that pursuit. Compounding the problem of many young people thinking of college as a four-year, parent-funded vacation is the propensity of students, often encouraged by faculty, to focus on acting out their “political” objections to social issues that achieve great importance on campus, although often ignored by the rest of the world. So for instance, a lecturer chose to leave Yale University last year after she was criticized for speaking up in defense of freedom of choice for Halloween costumes, after Yale, pressured by student activists, had banned costumes of Mulan or Pocahontas, because of some alleged slight those Disney characters represented to Chinese or Native American people. The right Halloween costume is a very important choice for a child of four to six years old. Children of 18 to 21 ought perhaps to focus on slightly more demanding challenges, such as their own future.

It is ironic that hostility, terrorist attacks, and constant threat of war are what has helped make Israel’s economy the success it is. The challenge for us in the U.S. is to learn some lessons from countries like Israel, to help us avoid the economic decline which is a real threat, and certainly perceived as such by a record number of voters this election year.

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