Title: Start-Up Nation: The Story of Israel’s Economic Miracle
Author: Dan Senor and Saul Singer
Scope: 3 stars
Readability: 3 stars
My personal rating: 4 stars
See more on my book rating system.

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Topic of Book

The authors seek to explain Israel’s transformational economic growth since 1948.

Key Take-aways

• Since 1948 Israel has experienced some of the most world’s most rapid economic growth, all while fighting three wars for survival and receiving massive numbers of immigrants.
• Because Israel has literally had to fight for its existence, it has adopted a culture of relentless experimentation and questioning.
• Starting in the 1990s, American tech companies started to invest in Israel. Israel now has the high concentration of start-ups and venture capital investments per capita in the world.
• Many Israel start-ups come directly from those who serve together in the same military unit, particularly those who served in elite units.
• Israeli corporate culture is very decentralized, adaptive where subordinates routinely question their leaders.
• Virtually all young men serve in the Israeli military for two-to-three years. The IDF deliberately understaffs its senior leadership and gives very high levels of latitude to junior leaders. This gives tremendous leadership experience to young men.
• Afterward they serve in reserve units for decades, giving citizens a dense network of personal contacts.

Important Quotes from Book

This is a book about innovation and entrepreneurship, and how one small country, Israel, came to embody both.

We examine history and culture, and use selected stories of companies to try to understand where all of this creative energy came from and the forms in which it is expressed.

If there is one story that has been largely missed despite the extensive media coverage of Israel, it is that key economic metrics demonstrate that Israel represents the greatest concentration of innovation and entrepreneurship in the world today.

Technology companies and global investors are beating a path to Israel and finding unique combinations of audacity, creativity, and drive everywhere they look. Which may explain why, in addition to boasting the highest density of start-ups in the world (a total of 3,850 start-ups, one for every 1,844 Israelis), more Israeli companies are listed on the NASDAQ exchange than all companies from the entire European continent.

In 2008, per capita venture capital investments in Israel were 2.5 times greater than in the United States, more than 30 times greater than in Europe, 80 times greater than in China, and 350 times greater than in India.

After the United States, Israel has more companies listed on the NASDAQ than any other country in the world.

The Israeli economic story becomes even more curious when one considers the nation’s dire state just a little over a half century ago.

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] 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.

As usual in the Israeli military, the tactical innovation came from the bottom up—from individual tank commanders and their officers. It probably never occurred to these soldiers that they should ask their higher-ups to solve the problem, or that they might not have the authority to act on their own. Nor did they see anything strange in their taking responsibility for inventing, adopting, and disseminating new tactics in real time, on the fly.

The Israeli lieutenant probably has greater command decision latitude than his counterpart in any army in the world.”

This latitude, evidenced in the corporate culture we examined in the previous chapter, is just as prevalent, if not more so, in the Israeli military.

Normally, when one thinks of military culture, one thinks of strict hierarchies, unwavering obedience to superiors, and an acceptance of the fact that each soldier is but a small, uninformed cog in a big wheel. But the IDF doesn’t fit that description. And in Israel pretty much everyone serves in the military, where its culture is worked into Israel’s citizens over a compulsory two- to three-year service.

The IDF is deliberately understaffed at senior levels. It means that there are fewer senior officers to issue commands,” says Luttwak. “Fewer senior officials means more individual initiative at the lower ranks.”

Luttwak points out that the Israeli army has very few colonels and an abundance of lieutenants. The ratio of senior officers to combat troops in the U.S. Army is 1 to 5; in the IDF, it’s 1 to 9.

This scarcity of manpower is also responsible for what is perhaps the IDF’s most unusual characteristic: the role of its reserve forces. Unlike in other countries, reserve forces are the backbone of Israel’s military.

Israel’s reserve system is not just an example of the country’s innovation; it is also a catalyst for it. Because hierarchy is naturally diminished when taxi drivers can command millionaires and twenty-three-year-olds can train their uncles, the reserve system helps to reinforce that chaotic, antihierarchical ethos that can be found in every aspect of Israeli society, from war room to classroom to boardroom.

While students in other countries are preoccupied with deciding which college to attend, Israelis are weighing the merits of different military units. And just as students elsewhere are thinking about what they need to do to get into the best schools, many Israelis are positioning themselves to be recruited by the IDF’s elite units.

While it’s difficult to get into the top Israeli universities, the nation’s equivalent of Harvard, Princeton, and Yale are the IDF’s elite units. The unit in which an applicant served tells prospective employers what kind of selection process he or she navigated, and what skills and relevant experience he or she may already possess.

In Israel, one’s academic past is somehow less important than the military past.

But the IDF has a unit that takes the process of extreme selectivity and extensive training to an even higher level, especially in the realm of technological innovation. That unit is Talpiot.

Talpiot has the distinction of being both the most selective unit and the one that subjects its soldiers to the longest training course in the IDF—forty-one months, which is longer than the entire service of most soldiers. Those who enter the program sign on for an extra six years in the military, so their minimum service is a total of nine years.

Talpions may represent the elite of the elite in the Israeli military, but the underlying strategy behind the program’s development—to provide broad and deep training in order to produce innovative, adaptive problem solving—is evident throughout much of the military and seems to be part of the Israeli ethos: to teach people how to be very good at a lot of things, rather than excellent at one thing.

45 percent of Israelis are university-educated, which is among the highest percentages in the world.

Innovation often depends on having a different perspective. Perspective comes from experience. Real experience also typically comes with age or maturity. But in Israel, you get experience, perspective, and maturity at a younger age, because the society jams so many transformative experiences into Israelis when they’re barely out of high school. By the time they get to college, their heads are in a different place than those of their American counterparts.

So for combat soldiers, connections made in the army are constantly renewed through decades of reserve duty. For a few weeks a year, or sometimes just a week at a time, Israelis depart from their professional and personal lives to train with their military unit. Not surprisingly, many business connections are made during the long hours of operations, guard duty, and training.

While Israeli businesses still look for private-sector experience, military service provides the critical standardized metric for employers—all of whom know what it means to be an officer or to have served in an elite unit.

The history of Israel’s economy is one of two great leaps, separated by a period of stagnation and hyperinflation. The government’s macroeconomic policies have played an important role in speeding the country’s growth, then reversing it, and then unleashing it in ways that even the government never expected.

The first great leap occurred from 1948 to 1970, a period during which per capita GDP almost quadrupled and the population tripled, even amidst Israel’s engagement in three major wars.1 The second was from 1990 until today, during which time the country was transformed from a sleepy backwater into a leading center of global innovation. Dramatically different—almost opposite—means were employed: the first period of expansion was achieved through an entrepreneurial government that dominated a small, primitive private sector; the second period through a thriving entrepreneurial private sector that was initially catalyzed by government action.

At the center of the first great leap was a radical and emblematic societal innovation whose local and global influence has been wildly disproportionate to its size: the kibbutz. Today, at less than 2 percent of Israel’s population, kibbutzniks produce 12 percent of the nation’s exports.

From 1950 through 1955, Israel’s economy grew by about 13 percent each year; it hovered just below 10 percent growth annually into the 1960s. Not only did Israel’s economy expand, it experienced what Hausmann calls a “leapfrog,” which is when a developing country shrinks its per capita wealth gap with rich first-world countries.

Whereas economic growth periods are common in most countries, leapfrogs are not. A third of the world’s economies have experienced a growth period in the past fifty years, but fewer than 10 percent of them have had a leapfrog. The Israeli economy, however, increased its per capita income relative to the United States’ from 25 percent in 1950 to 60 percent in 1970. That means Israel more than doubled its living standard relative to that of the United States within twenty years.

During this period, the government made no effort to encourage private entrepreneurship and, if anything, was rhetorically hostile to the notion of private profit.

Israel’s economic miracle is due as much to immigration as to anything. At Israel’s founding in 1948, its population was 806,000. Today numbering 7.1 million people, the country has grown almost ninefold in sixty years. The population doubled in the first three years alone, completely overwhelming the new government…  Foreign-born citizens of Israel currently account for over one-third of the nation’s population, almost three times the ratio of foreigners to natives in the United States. Nine out of ten Jewish Israelis are either immigrants or first- or second generation descendants of immigrants.

Between 1990 and 2000, eight hundred thousand citizens of the former Soviet Union immigrated to Israel; the first half million poured in over the course of just a three-year period. All together, it amounted to adding about a fifth of Israel’s population by the end of the 1990s.

One other element makes the role of Israel’s immigration waves unique: the policies the Israeli government has implemented to assimilate newcomers.

Crucially, Israel may be the only country that seeks to increase immigration.

The Israeli government has made the chief mission of the Ministry of Immigrant Absorption the integration of immigrants into society. Language training is one of the most urgent and comprehensive priorities for the government. To this day, the ministry organizes free full-immersion Hebrew courses for new immigrants: five hours each day, for at least six months.

Israel, a nation of immigrants, has continually been dependent on successive waves of immigration to grow its economy. It is in large part thanks to these immigrants that Israel currently has more engineers and scientists per capita than any other country and produces more scientific papers per capita than any other nation—109 per 10,000 people.

[In 1991] a band of young bureaucrats at the Ministry of Finance came up with the idea for a program they called Yozma, which in Hebrew means “initiative.”

The idea was for the government to invest $100 million to create ten new venture capital funds. Each fund had to be represented by three parties: Israeli venture capitalists in training, a foreign venture capital firm, and an Israeli investment company or bank. There was also one Yozma fund of $20 million that would invest directly in technology companies.

The real allure for foreign VCs, however, was the potential upside built into this program. The government would retain a 40 percent equity stake in the new fund but would offer the partners the option to cheaply buy out that equity stake —plus annual interest—after five years, if the fund was successful. This meant that while the government shared the risk, it offered investors all of the reward. From an investor’s perspective, it was an unusually good deal. “This was a rare government program that had a built-in get in and get out,” said Jon Medved. “This was key to its success.”

According to the Israel Venture Association, there are now forty-five Israeli venture capital funds. Ed Mlavsky said that over the period from 1992 to early 2009, there have been as many as 240 VCs in Israel, defined as companies both foreign and domestic investing in Israeli start-ups.

What makes the current Israeli blend so powerful is that it is a mashup of the founders’ patriotism, drive, and constant consciousness of scarcity and adversity and the curiosity and restlessness that have deep roots in Israeli and Jewish history.

So what is the answer to the central question of this book: What makes Israel so innovative and entrepreneurial? The most obvious explanation lies in a classic cluster of the type Harvard professor Michael Porter has championed, Silicon Valley embodies, and Dubai has tried to create. It consists of the tight proximity of great universities, large companies, start-ups, and the ecosystem that connects them—including everything from suppliers, an engineering talent pool, and venture capital. Part of this more visible part of the cluster is the role of the military in pumping R&D funds into cutting-edge systems and elite technological units, and the spillover from this substantial investment, both in technologies and human resources, into the civilian economy.

If you would like to learn more about the causes of economic miracles, read my book From Poverty to Progress.