Start-up Nation

Even before the global financial crisis that began in 2008, observers of the innovation race were sounding alarms. “India and China are a tsunami about to overwhelm us,” predicted Stanford Research Institute’s Curtis Carlson. He forecasts that America’s information technology, service, and medical-devices industries are about to be lost, costing “millions of jobs . . . like in the 1980s when the Japanese surged ahead.” The only way out, says Carlson, is “to learn the tools of innovation” and forge entirely new, knowledge-based industries in energy, biotechnology, and other science-based sectors.²⁰

“We are rapidly becoming the fat, complacent Detroit of nations,” says former Harvard Business School professor John Kao. “We are . . . milking aging cows on the verge of going dry . . . [and] losing our collective sense of purpose along with our fire, ambition, and determination to achieve.”²¹

The economic downturn has only sharpened the focus on innovation. The financial crisis, after all, was triggered by the collapse of real estate prices, which had been inflated by reckless bank lending and cheap credit. In other words, global prosperity had rested on a speculative bubble, not on the productivity increases that economists agree are the foundation of sustainable economic growth.

According to the pioneering work of Nobel Prize winner Robert Solow, technological innovation is the ultimate source of productivity and growth.²² It’s the only proven way for economies to consistently get ahead—especially innovation born by start-up companies. Recent Census Bureau data show that most of the net employment gains in the United States between 1980 and 2005 came from firms younger than five years old. Without start-ups, the average annual net employment growth rate would actually have been negative. Economist Carl Schramm, president of the Kauffman Foundation, which analyzes entrepreneurial economics, told us that “for the United States to survive and continue its economic leadership in the world, we must see entrepreneurship as our central comparative advantage. Nothing else can give us the necessary leverage.”²³

It is true that there are many models of entrepreneurship, including microentrepreneurship (the launching of household businesses) and the establishment of small companies that fill a niche and never grow beyond it. But Israel specializes in high-growth entrepreneurship—start-ups that wind up transforming entire global industries. High-growth entrepreneurship is distinct in that it uses specialized talent—from engineers and scientists to business managers and marketers—to commercialize a radically innovative idea.

This is not to suggest that Israelis are immune from the universally high failure rate of start-ups. But Israeli culture and regulations reflect a unique attitude to failure, one that has managed to repeatedly bring failed entrepreneurs back into the system to constructively use their experience to try again, rather than leave them permanently stigmatized and marginalized.

As a recent report by the Monitor Group, a global management consulting firm, described it, “When [entrepreneurs] succeed, they revolutionize markets. When they fail, they still [keep] incumbents under constant competitive pressure and thus stimulate progress.” And the Monitor study shows that entrepreneurship is the main engine for economies to “evolve and regenerate.”²⁴

The question has become, as a BusinessWeek cover put it, “Can America Invent Its Way Back?”²⁵ The magazine observed that “beneath the gloom, economists and business leaders across the political spectrum are slowly coming to an agreement: Innovation is the best—and maybe the only—way the U.S. can get out of its economic hole.”

In a world seeking the key to innovation, Israel is a natural place to look. The West needs innovation; Israel’s got it. Understanding where this entrepreneurial energy comes from, where it’s going, how to sustain it, and how other countries can learn from the quintessential start-up nation is a critical task for our times.

PART I

The Little Nation That Could

CHAPTER 1

Persistence

Four guys are standing on a street corner . . .

an American, a Russian, a Chinese man, and an Israeli. . . .

A reporter comes up to the group and says to them:

“Excuse me. . . . What’s your opinion on the meat shortage?”

The American says: What’s a shortage?

The Russian says: What’s meat?