Start-up Nation

At the same time, a package of banking-sector reforms pushed through by Netanyahu began to take effect. These reforms launched the phaseout of the government’s bonds that had guaranteed about 6 percent annual return. Up until that point, asset managers for Israeli pensions and life insurance funds simply invested in the Israeli guaranteed bonds. The pension and life insurance funds “could meet their commitments to beneficiaries just by buying the earmarked bonds. So that’s exactly what they did—they didn’t invest in anything else,” Keinan told us. “Because of these bonds, there was no incentive for Israeli institutional investors to invest in any private investment fund.”

But as the government bonds began to mature and could not be renewed, they released some $300 million a month that needed to be invested elsewhere. “So all of a sudden, boom, you’ve got a local pool of capital to spark an investment industry,” noted Keinan, as we sat, looking out at the Mediterranean, in his thirtieth-floor office in Tel Aviv, which is where his new investment fund is headquartered. “As a result, there are very few large international money managers that don’t have some exposure in Israel now, either in equities or the new corporate bond market, which didn’t exist three years ago, or in the shekel.”

Because of Netanyahu’s financial-sector reforms, it also became legal for investment managers to charge performance fees. Keinan didn’t waste any time; he founded KCPS, Israel’s first full-spectrum financial-asset-management firm, in Tel Aviv and New York. “The moment I read the draft law of Bibi’s reforms, my wheels started turning,” Keinan said. “It was clear that this truly could liberate our non-high-tech economy.”

Keinan argues that a ton of local talent was untapped. “If you think about what young Israelis learn in some of the army intelligence units, for example . . . often highly sophisticated quantitative analytical skills—algorithms, modeling out macroeconomic trends. If they wanted to go into high tech, there were plenty of start-ups that would gobble them up after their army service. But if they wanted to go into finance, they’d have to leave the country. That’s now changed. Just think about this,” he continued. “There are Israelis working on Fleet Street in London because there was no place for them here. Now, since 2003, there is a place for them in Israel.”

PART IV

Country with a Motive

CHAPTER 11

Betrayal and Opportunity

The two real fathers of Israeli hi-tech are the Arab boycott and Charles de Gaulle, because they forced on us the need to go and develop an industry.

—YOSSI VARDI

THROUGHOUT THIS BOOK, we’ve pointed to the ways the IDF’s improvisational and antihierarchical culture follows Israelis into their start-ups and has shaped Israel’s economy. This culture, when combined with the technological wizardry Israelis acquire in elite military units and from the state-run defense industry, forms a potent mixture. But there was nothing normal about the birth of Israel’s defense industry. It was unheard-of for a country so small to have its own indigenous military-industrial complex. Its origins are rooted in a dramatic, overnight betrayal by a close ally.

The best way to understand Israel’s watershed moment is through a shock to Americans that had a similar effect. During the postwar boom years, America’s global status was suddenly punctured when the Soviet Union upstaged the United States by launching the first space satellite—Sputnik 1. That the Soviets could pull ahead in the space race stunned most Americans. But in retrospect, it was a boon for the U.S. economy.

Innovation economist John Kao says that Sputnik “was a wake-up call, and America answered it. We revised school curricula to emphasize the teaching of science and math. We passed the $900 million National Defense Education Act (about $6 billion in today’s dollars), providing scholarships, student loans, and scientific equipment for schools.”¹ NASA and the Apollo program were created, as was a powerful new Pentagon agency dedicated to galvanizing the civilian R&D community.