A Breezy Tour of a Nation’s Chutzpah

Many years ago, I heard great things about a book called Start-up Nation and so I finally decided to buy it from Amazon India and read it. It is a Council on Foreign Relations book co-authored by Dan Senor and Saul Singer, both of whom are Israeli Jews. Dan Senor is a senior fellow at the said Council and an investor in the US, while Saul Singer is a journalist based in Israel. Together, they have tried to give us an assessment of how and why Israel produces so many innovations and start-up companies. I think it does make a great subject for a book.

Unfortunately, it ends up a light and breezy read, with little by way of research and documentation to corroborate their views. That’s because almost the entire book is based on their interviews with the leading characters behind Israel’s miracle start-up economy. From company bosses and US tech giants to Israeli politicians and IDF bosses, they all feature in the book. That’s why I got the sense quite early on in the book that this is more about what the authors and the leading protagonists think are the reasons for Israel’s success at starting-up, than the actual reasons themselves.

I must state at the outset that this book review comes with the usual caveat, that I am not sure how much of this book is what they wrote and how much of it is Perfect Relations’ idiot bosses’ and their BBDO cronies’ mischief. It is published by Twelve Books, an imprint of Hachette, in the US. There are enough tell-tale signs throughout the book to warn me of their nonsense.

Returning to the book, the authors link Israel’s innovative spirit to the country’s founding and its geography (read hostile Arab states in the neighbourhood). In their introduction to the book, the authors say,

“Adversity, like necessity, breeds inventiveness. Other small and threatened countries, such as South Korea, Singapore, and Taiwan, can also boast growth records that are as impressive as Israel’s. But none of them have produced an entrepreneurial culture – not to mention an array of start-ups – that compares with Israel’s.”

To my mind, they overdo the “necessity is the mother of invention” argument, because they do not spend enough time on the critical junctures in Israel’s economic history that forced the country to become entrepreneurial through innovation. They write, for example, of the Arab boycott of Jewish goods from Palestine in 1943, five years before the birth of Israel, in a chapter titled The People of The Book (a different book from the one being reviewed). But they do not spend time studying how the Arab boycott might have affected the Israeli economy and what forced them both by way of circumstance as well as deliberate policy to pursue innovation the way the country eventually did. I would have thought the Arab boycott could itself have been an entire chapter, if it indeed was so influential in changing Israel’s course. If anything, most people know of the decades-long strangulating effect of Israel’s embargo on Palestine’s economy and its economic blockade of Gaza.

Next, the authors link Israel’s need for innovation to the country’s military and security establishment. And a lot of time is spent on telling us about Israel’s compulsory military service or conscription and how it helps train the youth in developing new ideas and technologies. Now, we know that there are several countries that have a military conscription rule for youth, from Singapore and South Korea that the authors write about, to Germany that I know of, but you would hardly consider that training period fertile ground for innovation. On the contrary.

We also know that a country’s technological innovation and start-up eco system can be strongly linked to its military establishment, from America’s gargantuan military-industrial complex. And we also know how that works through large government-funded R&D projects that are routed through universities. Israel’s is not unusual. And thanks to the authors’ slap-dash handling of the subject, we never really know how it works in the case of Israel.

There are plenty of unnecessary details about specific companies such as Intel and the development of its 486 chip which was supposedly in Israel (which I didn’t know about) as well as Cisco and its R&D centre in Israel. There is also a lot of spiel about NASA and space missions like Apollo 13 and Columbia, but none of these ties in with the larger story about Israel’s start-up culture. Throughout the book, there is a sprinkling of the names of Harvard University academics, from Michael Porter and Ricardo Hausmann to Amy Edmondson and others, but that doesn’t help raise the level of their narrative, either.

In addition, there is an entire chapter titled The Buffett Test, about how Israel would fare in the risk assessment test with investors, given the country’s high security risk. In this chapter, they mention Bill Gates’ bullish attitude towards Israel as well as Warren Buffet’s US $ 4.5 billion investment in Iscar, a machine-tools maker there. A certain Alice Schroeder, author of The Snowball, and the only authorized biographer of Warren Buffett apparently told the authors,

“Warren has been in the insurance business for a long time and looks at every investment decision through that lens… It’s all about assessing risk like you would in an insurance policy. The things you really worry about are the potential for earthquakes and hurricanes. Warren asks, what kind of catastrophic risk is there, and can I live with it?”

I have never heard of Alice Shroeder nor any authorized biography of Warren Buffett by her, but I do know a book called The Snowball written by a former head of Ogilvy and later country head of WPP in India, Ranjan Kapur, sometime in 2004/05 and I have read it.

This chapter also has a silly conversation with a Jon Medved and his PowerPoint presentation including silly graphs, which I had shared on social media, and you can read in the image below.  

The section of Start-up Nation that deals with how Israel’s FDI increased despite heightened security threats

In a chapter titled Harvard, Princeton and Yale, the authors tell us that while in most countries admission to elite universities would be the most sought-after ambition of the youth, in Israel, it is which division of the IDF they would be joining. That’s apparently because some units – called the elite units of the IDF – attract the best students as cadets after a competitive exam and interview. During the IDF elite training course, these cadets continue with their academic studies in addition to the military training. Of the most elite of these elite units, the Talpiot (named after a verse in the Bible’s Song of Songs), the authors write,

“Once admitted into the program, Talpiot cadets blaze through an accelerated university degree in math or physics while they are introduced to the technological needs of all IDF branches. The academic training they receive goes beyond what the typical university student would receive in Israel or anywhere else – they study more, in less time. They also go through basic training with the paratroopers. The idea is to give them an overview of all the major IDF branches so that they understand both the technology and military needs – and especially the connection between them.”

While there might be something of a plausible reason here for Israel’s highly innovative and entrepreneurial culture, the authors once again do not delve deep enough in exploring this dimension. It is only halfway through the book, that we even get to read about industrial policy in a chapter titled The Industrial Policy that Worked. And even later that the authors get around to discussing how much Israel’s venture capital industry helped in a chapter titled Yozma.

The chapter on industrial policy is actually a short history of Israel’s economic development and not about any specific industrial policy that worked, as the title would have us believe. It delineates Israel’s economic boom periods as the initial decades after the founding of the country, 1948-1970, when the authors say that per-capita GDP quadrupled, even as Israel’s population tripled and 1990 onwards, when Israel became a global centre of innovation. According to Dan Senor and Saul Singer,

“Dramatically different – almost opposite – means were employed: the first period of expansion was achieved through an entrepreneurial government that dominated a small, primitive, private sector; the second period through a thriving, entrepreneurial private sector that was initially catalysed by government action.”

Between the boom periods, there appears to have been a lull caused by hyperinflation during the 1970s and 1980s in Israel according to the authors. They don’t dwell on this period of stagflation, except to say that it was caused by many macro-economic indicators – wages, rents and prices – being indexed to inflation, fuelling further inflation. I don’t know if this was indeed the case, but it is a fact that Israel suffers from very high inflation, particularly to do with housing, and one reads about large scale protests against high costs of living even today. According to the latest study of the world’s most expensive cities by The Economist Intelligence Unit, Tel Aviv just overtook Paris in 2021.

The chapter on how Israel kickstarted its venture capital industry is more important to Israel’s growth as start-up nation, and ought to have featured earlier in the book. Like every country that is on the verge of taking off on the back of new, pathbreaking innovations but can’t find adequate funding, Israel too faced its share of problems. Before venture capital came to Israel, start-ups had to either apply to the Office of the Chief Scientist for matching grants or for BIRD (Binational Industrial Research and Development Foundation created by the US and Israeli governments) grants.

The authors’ account of how the government initiative, Yozma (which means initiative in Hebrew) helped create Israel’s venture capital industry makes for good reading. They reason that the success of Yozma lay in the fact that although the government would retain a 40% stake in the new fund, they offered partners the option of buying that stake cheaply after 5 years if the fund was successful. This, along with the fact that each new fund had a foreign VC partner as well as an Israeli bank, made sure that the right expertise was on hand.

Start-up Nation focuses too much on innovation only in information technology and fails to do justice to other sectors and areas where Israeli start-ups have made huge contributions acknowledged as such by the entire world: agriculture and water management. Both of which were critical to Israel’s survival in its early days and continue to make huge progress even today. The book makes a casual mention of both, but I think they deserved better.

And while the book has a chapter each on the start-up ecosystem in America and how it differs from Israel’s as well as on what confronts the Arab world, I think the book could have done with a chapter at least on what the biggest threat to Israel’s innovation future is. It is not from America or the Arab world, but from within Israel. The growing populations and domination of the ultra-conservative Haredic Jews who do not conscript and are exempt from doing so. They also do not contribute to Israel’s economy in any way; in fact, they are a drain on the country’s resources. Yet, Israel’s government seems to be at their wits’ end on what to do with them and how to make their growing populations work and become an integral part of the economy. That surely will derail the innovation pipeline and dynamism of Israel’s economy in the not-too-distant future.

Start-up Nation is full of references to the ordinary Israeli’s courage in questioning and challenging his or her superiors, as one of the main reasons for Israel’s success at innovation. This is just glib and lazy reasoning. We know from Geert Hofstede’s studies in national cultures (about which I have written and podcasted on my blog), that many countries, especially those of the West and the North have low power distance, which manifests itself as low deference to authority.

Attributing everything to chutzpah too is glib and perhaps doesn’t do justice to Israel’s hard work and inventiveness.

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