Jews may be called the People of the Book, among other things, but Israelis today would rather be known as the People of Startup Nation, taking pride in their knack for innovating, thinking outside the box and then selling it too. Multinationals famously prowl Israel for startups and talent, snapping whole (small) companies that they turn into their R&D hubs – sometimes just to shut the pests down before they get in their way. But with all due respect to the Jewish nation, its economic miracles and its technological prowess, how much impact can a country with just 8 million people, not all of whom launched disruptive companies, have in the real world? Does the Israeli startup scene really count outside the hallowed halls of Motorola and Microsoft? Haaretz business editor David Rosenberg talks with Haaretz senior editor Ruth Schuster and tells it like it is.
Q: China has 1.1 billion people and aspires to upgrade its manufacturing to high-tech. India has 1.3 billion upwardly mobile people, and they have tons of startups. Israel has 0.008 billion people (i.e., 8 million) and a commensurately small number of startups. Does the Israeli startup scene even count on the global map?
A: Yes, it does. China and India are aspiring to technology leadership, but getting there isn’t easy. It requires a certain kind of human capital that combines innovative ability and entrepreneurship that most of the world hasn’t been able achieve.
Israel and the United States are really the only two countries that have achieved technological leadership.
Part of the question stems from the fact that "technological leadership" is hard to measure – it’s not a function of how much a country spends on research and development, or how many engineering graduates it produces every year, or whether a government has programs to encourage startups. So it’s hard for governments, even for China’s with its Vision 2025 campaign, to engineer the development of a high-tech economy.
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In China’s favor, it has a strong entrepreneurial culture. Against China, it is governed by a repressive regime that tries to encourage people to be thinking outside the box – while obeying the government unquestionably. But it’s hard to compartmentalize freedom and creativity.
Q: We take pride in being innovative – Epilady depilators and disk-on-key mobile memories aside, what have we invented that others truly really didn't?
A: Israel has had a few others, like early development of drones, internet firewalls, internet chat, drip irrigation … but it is true nothing that has changed the world has come out of Israel.
Everyone in high-tech talks about “disruptive” technology and how they are working on something that will do it. But the fact is most technological innovation is incremental, although the increments are coming these days at a breakneck pace.
Where Israel has been a success – and this is tied up in the startup culture we have – is that innovation is an industry in its own right. Thousands of startups (a number most countries can only dream of) do nothing but innovate. They’re too small and young to make or market much but they are good at coming up with something new. Typically, alas, they then sell themselves to a big multinational that then becomes associated with it, such as Waze with Google.
Q: Say a wannabe entrepreneur has a clever idea (or so his mother thinks) - how can he check that hundreds of startups in India and China aren't already working in that very area?
A: They are. That is always the case, and there are probably scores of other ones in Silicon Valley as well.
However, Israel’s record to date on being the first (if not always the one who ultimately enjoys the fruits) is extraordinarily good.
The proof is in the figures – the number and amount of money the world’s biggest tech companies have invested in Israel, either putting money into startups or buying them. That trend is, if anything is growing, because old-line industries like automobiles and finance are contending with huge technology challenges and recognize that the only way they can succeed is by turning to startups. You can see that with so many global automakers investing and forming partnerships with Israeli startups in self-driving cars.
Q: In this uncertain, increasingly divisive world, would a startup in Israel have any advantage?
A: I don’t think racism is an issue, but there is a growing acknowledgement especially in the U.S. that China is gunning for America’s standing as the world technology leader. Personally, I’m skeptical China will be able to pull it off – it can use its big market, low cost base and manufacturing capacity to become a tech manufacturing power, similar to Taiwan or Japan, but I’m doubtful it can create the innovative culture that animates Israel and Silicon Valley.
However, that’s easy for me to say as a bystander. If I were a policymaker in Washington and fretting over the Chinese threat, which has military as well as economic implications, I would err on the side of caution.
The U.S.-China tech war could work to Israel’s advantage. The Chinese are increasingly being locked out of Silicon Valley, which they had been tapping for innovation and patents, and could turn to Israel as an alternative.
However, there is a very strong risk that America will act to block any such partnership – and then Israel will be stuck in a hard place between its closest ally and an up-and-coming world power it doesn’t want to alienate.
Q: How can Israelis be persuaded to stop chintzing and have original marketing material be written from scratch in each language, rather than translating their marketing material - which was probably terrible to begin with - from Hebrew?
Israelis have never been good at marketing in general. I think on one level it contributes to our startup culture: people prefer to be direct and honest about what they think, even when it’s not called for. That can make for a good brainstorming session at a startup, but it runs against the spirit of marketing, which is about creating an image and a brand. On the other hand, the nature of marketing has changed in the internet era. Analytics have become very important and Israelis are very good at it.
Q: How many startups in Israel succeed?
A: The rate is quite low – about four in 100 and a lot of the ones that survive aren’t huge successes, according to one study covering the years 1999 to 2014.
That’s the nature of the startup business everywhere in the world. In Israel’s case, the rate is probably better now, if for no other reason than having more experienced entrepreneurs and smart capital than we did 10 or 20 years ago.
What’s more worrying is that the number of new startups fell last year. That could be a blip in the screen or a sign that the industry has reached a plateau. I think the latter – Israel has, for now at least, exhausted its startup resources in terms of entrepreneurs and engineers. That can only change if more Israelis are recruited into the industry.
Q: Are there joint Israeli-Arab startups and how do they do?
A: Israeli-Arabs are hugely underrepresented in Israel’s Startup Nation. Part of this is situational: a lot of startups come out of the army in which Arabs don’t serve, and Israel’s "Silicon Valley" is in the Tel Aviv area while most Israeli Arabs live in the north.
That is slowly changing, partly because the tech industry is desperately short of skilled people and Arabs are a big untapped source of human capital, and partly because more Arabs are going on to university.
The real challenge – which applies even more the ultra-Orthodox Jews, another big untapped source of labor – is how easily that can adopt the culture of innovation. So much of it is tied up into the Israeli (Jewish) experience that arose from the Zionist movement’s values (the sabra mentality) and the army.
Q: What is the craziest startup invention in Israel?
The one that immediately comes to mind is the app Yo, which in its initial incarnation did nothing but send people a text or audio message saying “Yo.” Strangely enough millions of people downloaded it and the startup behind it raised at least $1.2 million in venture capital. It ultimately fell victim to hackers.
Q: How can the ultra-Orthodox be brought on board? Should the secular change behavior in order to appease them?
A: Integrating the ultra-Orthodox into the workforce is one of the biggest challenges facing the Israeli economy, because the Haredi population is growing too big for its “society of learners” model to go on much longer. Haredim, and mainly men, have to join the labor market and pay taxes rather than be the recipients of government aid.
It’s an unusual problem because Israel can’t absorb more people into the labor force (if anything, these days there is a labor shortage), but policymakers are contending with a community where work on an ideological level is considered inferior to study for adult males and the normal in the incentives for encouraging employment, like the prospect of middle class comforts, isn’t very effective.
Economic pressures are driving more Haredi men into jobs, but the current government’s backtracking on the issue has brought the phenomenon to a halt. In any case, the economy (and Haredim themselves) will only enjoy the full impact of employment is they work at jobs that create a lot of value-added, i.e., where productivity levels are high. That requires far higher levels of secular education that the typical Haredi male gets because their schools are focused on religious studies. Israel not only has to exert more economic pressure to coax more Haredim into the workforce but stand firm on the issue of education and on drafting Haredi men because the army is an important way to obtain training and entry into the non-Haredi world.