Start-up Nation

Even the wars Israel has repeatedly fought have not slowed the country down. During the six years following 2000, 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 percent to 31 percent. And the Tel Aviv stock exchange was higher on the last day of the Lebanon war than on the first, as it was after the three-week military operation in the Gaza Strip in 2009.

Figure I.4. Sources: “Miracles and Mirages,” Economist, April 13, 2008; “GDP Growth Rates by Country and Region, 1970–2007,” Swivel, http://www.swivel.com/data_columns/spreadsheet/2085677.

The Israeli economic story becomes even more curious when one considers the nation’s dire state just a little over a half century ago. Shai Agassi’s family immigrated to Israel from Iraq in 1950, two years after Israel’s founding. The Agassis were part of a flood of a million refugees fleeing as a wave of violent pogroms swept the Arab world after the State of Israel’s founding. At the time, the fledgling Jewish state simultaneously faced two seemingly insurmountable challenges: fighting an existential war for independence and absorbing masses of refugees from postwar Europe and the surrounding Arab countries.

Israel’s population doubled in the first two years of its existence. Over the next seven years, the country grew by another third. Two out of three Israelis were new arrivals. Right off the boat, many refugees were given a gun they had no idea how to use and sent to fight. Some of those who had survived Nazi concentration camps fell in battle even before their names could be recorded. Proportionately, more Israelis died in the war for Israel’s establishment than Americans in both world wars combined.

Those who survived had to struggle to thrive in a stagnant economy. “Everything was rationed,” complained one new arrival. “We had coupon books, one egg a week, long lines.”⁹ The average standard of living for Israelis was comparable to that of Americans in the 1800s.¹⁰ How, then, did this “start-up” state not only survive but morph from a besieged backwater to a high-tech powerhouse that has achieved fiftyfold economic growth in sixty years? How did a community of penniless refugees transform a land that Mark Twain described as a “desolate country . . . a silent, mournful expanse,”¹¹ into one of the most dynamic entrepreneurial economies in the world?

The fact that this question has been treated only in piecemeal fashion is unbelievable to Israeli political economist Gidi Grinstein: “Look, we doubled our economic situation relative to America while multiplying our population fivefold and fighting three wars. This is totally unmatched in the economic history of the world.” And, he told us, the Israeli entrepreneur continues to perform in unimaginable ways.¹²

While the Holy Land has for centuries attracted pilgrims, lately it has been flooded by seekers of a different sort. Google’s CEO and chairman, Eric Schmidt, told us that the United States is the number one place in the world for entrepreneurs, but “after the U.S., Israel is the best.” Microsoft’s Steve Ballmer has called Microsoft “an Israeli company as much as an American company” because of the size and centrality of its Israeli teams.¹³ Warren Buffett, the apostle of risk aversion, broke his decades-long record of not buying any foreign company with the purchase of an Israeli company—for $4.5 billion—just as Israel began to fight the 2006 Lebanon war.

It is impossible for major technology companies to ignore Israel, and most haven’t; almost half of the world’s top technology companies have bought start-ups or opened research and development centers in Israel. Cisco alone has acquired nine Israeli companies and is looking to buy more.¹⁴

“In two days in Israel, I saw more opportunities than in a year in the rest of the world,” said Paul Smith, senior vice president of Philips Medical.¹⁵ Gary Shainberg, British Telecom’s VP for technology and innovation, told us, “There are more new innovative ideas, as opposed to recycled ideas—or old ideas repackaged in a new box—coming out of Israel than there are out in [Silicon] Valley now. And it doesn’t slow during global economic downturns.”¹⁶