A Tale of Two Nations

The start-up nation of Israel is booming dynamic, innovative and most of all, highly profitable. For the fortunate few, that is. But the culture of quick exits and huge profits doesn’t do a thing for anyone else.

The case for our right to be called “the start-up nation” is clear and simple.

First off, the entire world comes here to learn how we built a start-up culture of entrepreneurship and risk-taking that gives rise to dozens of exits a year. If people from Singapore, Germany and China are coming to learn how we cultivate this ecology, then apparently we’ve done something right.

Second, the financial statistics speak for themselves: Given the massive risks involved in building a large company, floating shares on the stock exchange and tackling the cruel international markets, selling a company is almost always the best way for entrepreneurs, investors and employees to maximize profits.

Third, alongside the start-up nation is a nation of multinational high-tech companies: Intel, HP, Microsoft, Motorola, EMC, Cisco and even Apple have employed thousands of workers here over the years, and most offer more stable employment than start-ups. They have a reciprocal relationship with the start-ups, hiring their workers while also grooming potential hires.

Fourth, the start-up nation nurtures itself: After every exit, most of the entrepreneurs go back to their garages in order to launch their next start-up, and the lucky ones those who raked in tens of millions of dollars in the sellout become investors, mentors and angels. Every day, the Israeli start-up nation ecology sends its roots down a little deeper.

Fifth, the tough competition between big technology firms drives them to pay inflated prices for start-ups. They’re not buying merely technology or a team, but also “insurance” that their competitor will not be able to buy this technology. They are occasionally willing to pay significant premiums for this insurance much more than the cash flow the start-up is forecast to generate for them.

Sixth, Israeli technology and expertise combined with the buyer’s distribution and marketing infrastructure is a winning mix. The buyer is unable to create that kind of innovation in-house, while the seller’s chance of success on the global market, given the massive investment required in marketing, production and logistics, is very low.

Seventh, for the past 40 years, the world has associated Israel with the occupation, the Palestinian conflict, terror and battles between ultra-Orthodox and secular Jews. The only way in which we’ve managed to improve our brand is by building a name as the start-up nation. If we didn’t have this narrative, we’d be left with only the conflict and the occupation.

But does this success hide negative phenomena that are hard to see, quantify and even understand? It seems the answer is yes.

First off, the start-up nation encompasses only a very small percentage of the population. A bubble detached from the rest of the country, it exacerbates social and economic inequality. The start-up lifestyle and culture characterize a very specific group of people of a very specific age.

Second, the start-up industry is incredibly cruel: Its workers are very unlikely to have a long-term career. Very few companies are built to last, and the collapse of large companies and turnover at the top are crucial parts of the free market but it takes a critical mass of large companies to create a job market and provide employment opportunities for all kinds of people over the long term.

Third, the culture of start-ups and the quick exit have filtered throughout the rest of the economy. Everyone wants to make fast cash and move on to the next thing. If in the private sector the goal is to win the sprint, it’s not surprising that the public sector, politicians and all aspects of public life in Israel show no long-term thinking; instead, everyone is trying to maximize utility over the short term.

Fourth, the start-up and exit culture mean that most Israeli innovation is based on new products, and very little innovation is based on new processes.

The private and public sectors, which desperately need innovative processes, better management and a culture of competition and talent, won’t find any of this in start-ups so long as the latter exist within their own private bubble focused on research and development.

If Israel’s start-up sector were to produce more large companies, more entrepreneurs thinking about the long term, then we would also find ourselves developing management, marketing and long-term thinking that would filter through to the rest of the economy.

High-tech’s focus on flipping start-ups means that this industry is entirely detached from the rest of the economy. Thus the country’s most successful sector cannot truly become an engine for changing the economy, the culture, values and skills. Two entirely separate nations are sprouting up here the start-up nation, which excels in research and development, quick change and finding opportunities, and the nation of Israel with its outdated public sector and excess of economic concentration.

As far as the start-up nation is concerned, the current model is working great, and it offers tremendous advantages to its entrepreneurs, investors and employees. But in terms of the nation as a whole, this is a huge missed opportunity that perpetuates the current economic structure. The first case is simple and clear the second one is much more complex.

Ayala Tal