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Israel: The unreasonable nation, and how that makes it similar to Silicon Valley

Insights on two major tech hubs based on recent IMD discovery expeditions

By Jim Pulcrano

"The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man". George Bernard Shaw

Entrepreneurs exist everywhere, but several regions, notably Silicon Valley and Israel, are held up as examples for the rest of us to learn from. I know Silicon Valley reasonably well from more than 20 years of collaborating with the natives, together with IMD’s Executive MBA classes and other programs, but Israel is new to me. Yes, of course I’d read “Start Up Nation” many years ago, and reread it again recently, but the 10 days I recently spent there, as part of the IMD EMBA Discovery Expedition, led by the incomparable Prof. Shlomo Ben-Hur, confirmed many of the things I’d assumed, and gave me new insights.

Rather than simply describing the two places, which many have already done, and done better than I could from my brief analysis, I’m taking the perspective of a Swiss high-tech startup, an early-stage venture looking at the two regions and trying to understand the similarities and differences, and whether they should move their HQ, or part of their team, to one or the other.

One caveat: We’re comparing a country, Israel, to a tiny part of the United States. It might be more reasonable to look at this as a comparison between Tel Aviv and Palo Alto.

Similarities

Money: There is plenty of Venture Capital and angel money for startups in both regions, though in Israel it appears that the weighting is towards the early stages. Several people commented that when you get to your B or C round, it’s then time to go to California. “We’re good at startups, not at scaleups,” is a common refrain in Israel. Another difference is that the majority of Silicon Valley angel and VC money is domestic, coming from US players, while in Israel the majority comes from outside the country, predominately American and Chinese investors.

Mobility & Non-Competes: In both regions the law prohibits the use of non-compete clauses in employment contracts. You can quit the company you’re working for, walk down the street and start working for a competitor tomorrow. As one executive in Israel said, “If one of my engineers thinks that I’m going to put anything into his contract that could prohibit him from learning and taking on new challenges, whether with us or a competitor, he’d never consider working for us”. Obviously if you take any proprietary information with you, and exploit it in your new role, you’ll find yourself in court in both places, but more importantly, “the network” will know what you’re capable of, and it’s likely your career is over in both places.

The Network: Shlomo and others referred to “two-degrees of separation” in Israel, rather than the 6 steps that is commonly assumed around the world (the so-called “small world principle”), and the same applies in Silicon Valley. The strong networks are one of the factors in creating trust, which enables the speed of decision-making and risk taking in both places.

But I did note some differences. In Israel, thanks to the compulsory military service, and the fact that most people will go to one of six top Israeli universities, the bonds appear to be stronger and deeper. At eighteen years of age, boys and girls are plunged into rigorous training, big responsibilities and often high risks, which can’t but help create relationships of trust. On the other hand, it appears that the network can be a bit excessively close and resistant to outside influence, as there is relatively little influx of people from outside Israel into the network. In Silicon Valley, everyone comes from everywhere, India, China, New York, Paris, Russia, etc, and there is a constant flow of arrivals and departures. For those who stay, the network is constantly enriched in the Valley.

Top universities: Both regions have the privilege of great universities that are woven into the fabric of their ecosystems. I’m often asked if Stanford caused Silicon Valley, or if Silicon Valley shaped Stanford. Does it matter? The fact is that they benefit from each other, as does the University of California-Berkeley, UCSF, Santa Clara University, and San Jose State. In Israel you have the Hebrew University of Jerusalem, Technion, the Weizmann Institute of Science, Ben Gurion University of the Negev and Tel Aviv University. Both regions profit from the research done in these top-class schools, as well as the graduates who then stay, populate and lead the multinationals and startups. These schools also help to create and nurture the networks. One difference though is in the size of engineering graduates that they produce each year as raw material for their respective economies: The bay area will graduate about 18,000 engineers and scientists each year while Israel produces about 6,000 annually.

High cost: The cost of living in both places is high. Perhaps for a Swiss startup this will not be shocking, given the high prices in Switzerland, but anyone going to either place will have to contend with the high cost of housing, the requisite high salaries, and then the difficulty in finding and retaining great talent.

Talent: Both places have some of the best educated and most experienced technologists and entrepreneurs in the world, and both can’t find enough of that talent for their growing companies. And both have significant minorities that are under-represented in the tech workforce (African-Americans and Hispanics in the Valley, and Ultra-Orthodox Jews, women and Israeli Arabs in Israel). Israel now has the High-Tech Work Visa (HIT), which allows foreign, non-Jewish, experts to work in Israel for up to five years, and Silicon Valley relies on H1-B visas (the Israeli Innovation Authority estimates that there are 15,000 engineers needed now). It appears that Silicon Valley has an advantage in that foreign immigrants find it easier to integrate in California, and they know that if all goes well, they could eventually stay forever.

Failure is accepted: Not to be exaggerated, but people in both places see failure as part of the process, and you’re not socially stigmatized if your idea or your startup doesn’t work out. When you’re trying to create something from nothing, to do something that others haven’t succeeded in, you are experimenting, and most experiments are not successes.

Clear laws: Not to be underestimated, but in both places the law, how the stock market functions, where the government supports entrepreneurs (or not), etc., is fairly clear and applicable to everyone.

Anxiety: Perhaps still traumatized by the Holocaust and wondering if or when another war for survival will occur, anxiety is part of the Israeli mentality. Though different, the expectation of San Francisco bay area residents that “the big one” is going to happen (i.e. the next big earthquake), also supports this notion of living for today – carpe diem – and not worrying too much about tomorrow. Grab what you can while you can.

Why? Why? Why?: Israelis seem to feel that everything should be questioned. “Why?” is probably the most important word to understand in Hebrew. But, in a sense, this is the same in the Valley, though it might be framed differently: “I don’t necessarily agree with that decision, but show me the data and I’ll be OK”.

Differences

Startup versus Scaleup: Beyond Teva, Israel does not have many homegrown startups that scaled to become successful multinationals. Silicon Valley has many examples, including tech heavyweights such as Google, Apple, Oracle, PayPal, Ebay, Adobe and Salesforce.com. Some people I met during the Israel Discovery Expedition with the IMD EMBA class attributed Israel’s relative failure at scaleup to a lack of interest by Israelis in creating structure and processes, and their distaste for hierarchy and following anyone else’s rules. Micha Danziger, Chairman of a successful scaleup by the same name, commented: “Israelis don’t jump too high because we don’t want to fall too far”. Others attributed the lack of big companies to the anxiety I mentioned earlier, i.e. sell the company early and get what you can, as you never know what tomorrow will bring.

The proliferation of successful tech startups is one reason why so many multinationals have set up R&D centers in Israel. So, perhaps, instead of worrying about how to teach Israelis to grow their companies into multinationals behemoths it might be better for Israeli policy makers to tout Israel as the best R&D hub in the world. As Mooly Eden, former SVP of Intel, commented, “Innovation strives on chaos”, something that Israel has its share of. Swiss startups might consider looking to Israel for R&D collaboration and see Silicon Valley as the place to raise tons of money and build their marketing team.

Purpose: Many Silicon Valley startups set out to change the world and have a positive impact on humanity, but more seem to say it than actually do it. In Israel your startup is not only a means to solve a problem and make some money, but it’s also about building the nation. For example, look at what Daniel Birnbaum did with SodaStream, not only in building it up and selling it recently to PepsiCo for over $3 billion, but, more importantly, what he did and tried to do in offering employment to Palestinians in the occupied territories, even against the will of his own government.

Government intervention: Though the federal government is involved in both economies, the way it is done appears to be different. In Silicon Valley the US government is a customer, an investor and a research contract partner. In Israel, through organizations like the Israeli Innovation Authority, it intervenes to help important high-risk ventures that might find it difficult to raise funds from VCs. The view is that even if these individual ventures fail, they’ll create knowledge for Israel. It also creates incubators around the country, in partnership with multinationals. Knesset support can also be seen through the HIT visa program, to bring in more non-Jewish expert tech talent. Further government intervention can be seen through the universities, such as the Yissum Tech Transfer company, part of the Hebrew University of Jerusalem. Though Israel doesn’t like to plan long-term, the agile “smart intervention” of the government seems to have worked well, especially in its role of pulling the overall economy along, rather than just helping individual startups succeed. Necessity seems to drive Israeli government intervention, rather than politics.

Home market: It goes without saying that Silicon Valley startups have access to the huge and open US market, while Israeli startups don’t have much of a home market (population of 8.8 million). On the other hand, the Jewish diaspora assures Israelis that they will always find someone, everywhere, who will open doors for them around the world.

Admin/paper work: It would appear, from what we’ve heard from entrepreneurs in both places, that starting a company in Silicon Valley is far easier than in Israel.

Military: The role of the military in Israel, and in support of startups, is crucial. It both trains young people technically, especially those in special units such as the famed 8200, as well as sets the stage for how they question authority and try to find solutions to difficult problems. It puts them in positions of authority at a young age and creates a network that stays with them for life. In the Valley the question of military service rarely arises, even after almost 20 years of the country being at war, and being a Stanford graduate is probably more highly regarded than being a Captain in the army.

Role models and mentors: In the Valley everyone in tech knows someone who has at least tried to make it big with a startup, and most know someone who has succeeded. The attitude is “if he can do it, I can do it”. And those who are successful see it as their job to help those who come next, to be mentors and angel investors for them. Given Israel’s short history and smaller size in the tech sector (the tech sector is 8% of Israel’s employment, while it is 24 to 28% of Silicon Valley’s), the Valley has a huge advantage in this category.

Another difference that several people commented on, albeit anecdotally, was that Israel seemed to have more strong female leaders and women in important roles.

Diversity: As my friend Terry Akitt said, “If the US is a melting pot, and Canada a mosaic, then Israel is a stew”, with people from all over the world coming to live here. But in the tech sector Israel is fairly homogenous, with 70% of the workforce being Israeli Jews. In Silicon Valley we see people from all over the world succeeding.

Driver: Are Israeli entrepreneurs driven by failures, and thus their need to prove themselves, while Silicon Valley entrepreneurs see someone in their midst succeed, and take this as the encouragement they need to push forward even harder? This last difference is certainly a gross simplification, but listening to IMD MBA alumna Nava Swersky-Sofer describe the failures of the Levi fighter jet, and the Better Place electric vehicle venture (plus the recent explosion of the Genesis I moon probe), and how these propelled Israel into two domains where they are today world-class, made me wonder about what drives Israelis.

 "The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man". George Bernard Shaw

I am publishing this quickly in order to learn, so I invite those with differing or supporting views to comment on this by writing to me at [email protected] I thank the IMD EMBA participants for sharing their insights and questions with me throughout this expedition, as well as their time with me in September 2018. You were true learners, and you helped me to see things I never imagined. Thank you.

Jim Pulcrano is Adjunct Professor at IMD.

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