Israel
How a nation turned into a hotbed of entrepreneurism
It has few people, no resources and lots of hostile neighbours–so how did Israel become a hotbed of entrepreneurism? Long before Israel was a state, there was already isolation. An early economic boycott can be traced back to 1891, when local Arabs asked Palestine’s Ottoman rules to block Jewish immigration and land sales. In 1922, the Fifth Palestine Arab Congress called for the boycott of all Jewish businesses.

A longer, official boycott by the 22-nation Arab League, which banned the purchase of “product of Jewish industry in Palestine” was launched in 1943, five years before Israel’s founding. This ban extended to foreign companies from any country that bought or sold to Israel and even to companies that traded with these blacklisted companies. Almost all the major Japanese and Korean car manufacturers – including Honda, Mazda and Mitsubishi – complied with the boycott and their products could not be found on Israel’s roads. A notable exception was Subaru, which for a long time had the Israel market nearly to itself but was barred from selling in the Arab world.

Every government of the Arab League established an official Office of the Boycott, which enforced the boycott, monitored the behaviour of targets and identified new prospects. According to Christopher Joyner of George Washington University, “ Of all the contemporary boycotts, the League of Arab States’ boycott against Israel is, ideologically, the most virulent, organizationally, the most sophisticated; politically, the most protracted; and legally, the most polemical.”

In such a climate, it is natural that young Israelis seek both to get away from an Arab world that has ostracized them and to defy such regionism – as if to say, “The more you to try to lock me in, the more I will show you I can get out.” For the same reason, it was natural for Israelis to embrace the internet, software, computer and telecommunications arenas. In these industries, border, distances, and shipping costs are practically irrelevant. As Israeli venture capitalist Orna Berry says, “High-tech telecommunications became a national sport to help us fend against the claustrophobia that is life in a small country surrounded by enemies.”

This was a matter of necessity, rather than mere preference or convenience.

Because Israel was forced to export to far-away markets, Israeli entrepreneurs developed an aversion to large, readily identifiable manufactured goods with high shipping costs, and an attraction to small, anonymous components and software. This, in turn, positioned Israel perfectly for the global turn toward knowledge and innovation-based economies, a trend that continues today.

It is hard to estimate how much the Arab boycott and other international embargoes–like France’s military ban­– have cost Israel over the past 60 years, in terms of lost markets and the difficultes imposed on the nation’s economic development. Estimates range as high as $100 billion. Yet the opposite is just as difficult to guess: What is the value of the attributes that Israelis have developed as a result of the constant efforts to crush their nation’s development?

Today, Israeli companies are firmly integrated into the economies of China, India and Latin America. Because telecommunications became an early priority for Israel, every major telephone compan in China relies on Israel telecom equipment and software. And China’s third-largest social-networking website, which services 25 million of the country’s young web surfers, is actually an Israeli startup called Koolanoo, which means “all of us” in Hebrew. It was founded by an Israeli whose family emigrated from Iraq.

In the ultimate demonstration of nimbleness, the Israeli venture capitalists who invested in Koolanoo when it was a Jewish social networking site have utterly transformed its identity, moving all of its management to China, where young Israeli and Chinese executives work side by side.

Gil Kerbs, an Israeli alumnus of Unit 8200 (the largest unit in the Israeli Defense Forces’ Intelligence Corps, responsible for collecting technology intel), also spends a lot of time in China. When he left the IDF, Gil picked up and moved to Beijing to study Chinese intensively, working one-on-one with a local instructor–for five hours each day for a full year, so he could build a business network here. Today, he is a venture capitalist in Israel, specializing in the Chinese market. One of his Israeli companies is providing voice biometrics technology to China’s largest retail bank. He told us that Israelis actually have an easier time doing business in China than in Europe. “for one, we were in China before the “tourists” arrived, he says, referring to those who have only in recent years identified China as an emerging market. “Second, in China there is not legacy of hostility to Jews. So it’s actually a more welcoming environment for us.”

Israelis are far ahead of their global competitors in penetrating such markets, in part because they had to leapfrog the Middle East and search for new opportunities. By the time they are out of their 20’s, not only are most Israelis tested in discovering exotic opportunities abroad, they aren’t afraid to enter unfamiliar environments and engage with cultures very different from their own. Indeed, military historian Edward Luttwak estimates that many post-army Israelis have visited over a dozen countries by age 35. Israelis thrive in new economies and uncharted territory in part because they have been out in the world.

One example of this avid internationalism is Netafim, an Israeli company that has become the largest provider of drip irrigation systems in the world. Founded in 1965, Netafim is a rare example of a company that bridges Israel’s low-tech, agricultural past to the current boom in clean tech.

Netafim was created by Simcha Blass, the architect of one of the largest infrastructure projects undertaken in the early years of the state. Born in Poland, he was active in the Jewish self-defense units organized in Warsaw during World War I. Soon after arriving in Israel in the 1930s, he became chief engineer for Mekoror, the national water company, and planned the pipeline and canal that brings water from the Jordan River and the Sea of Galilee to the arid Negev.

Blass got the idea form drip irrigation from a tree growing in a neighbour’s backyard, seemingly “without water”. The giant tree, it turns out, was being nourished by a slow leak in an underground water pipe. When modern plastics became available in the 1950s, Blass realized that drip irrigation was technically feasible. He patented this invention and made a deal with co-operative settlement located in the Negev desert to produce the new technology.

Netafim was pioneering not just because it developed an innovative way to increase crop yeilds by up to 50% while using 40% less water, but because it was one of the first kibbutz-based industries. Until then the kibbuts – collective communities ­– were agriculture based. The idea of a kibbutz factory that exported to the world was a novelty.

But Netafim’s real advantage was ahving no inhition about travelling to far-flung places in pursuit of markets that desperately needed its products–places where, in the 1960s and ‘70s, entrepreneurs from the west simply did not visit. As a result, Netafim now operates in 110 countries over five continents. In Asia, it has offices in Vietnam, Taiwan, New Zealand, China, India, Thailand Japan, Phillipines, Korea and Indonesia. In South America, it has a presence in Argentina, Brazil, Mexico, Chile, Ecador and Peru. Netafim also has 11 offices in Europe and the former Soviet Union, one in Australia, and one in North America.

And because Netafim’s technology became so indispensable, a number of foreign governments that historically had been hostile to Israel bgan to open diplomatic channels. Netafim is active in former Soviet bloc Muslim states like Azerbaijan, Kazakhstan and Uzbekistan. This lead to warmer relations with Israel’s government after the dissolution of the Soviet Union. In 2004, then trade minister Ehud Olmert tagged along on a Netafim’s trip to South Africa in the hope of forming new strategic alliances there. The tip resulted in $30 million in contracts for Netafim, plus a memorandum of understanding between the two governments on argiculture and arid lands development.

Israeli entrepreneurs and executives, though, have themselves been know to engage in self-appointed diplomatic missions on behalf of the state. Many of Israel’s globe-trotting business people are not just technology evangelists but endeavour to “sell” the entire Israel economy. Jon Medved–the inventor of the “nickname barometer” to measure informality– is one such example.

Raised in California, Medved was trained in political activism, not engineering, His first career was as a Zionist organizer. He moved to Israel in 1981 and made a small living by going on speaking tours to preach about the future of Israel to Israelis. A conversation he had in 1982 with an executive at Rafael, one of Israel’s largest defense contractors, burst Medved’s bubble. He was told unceremoniously, that he was doing was a waste of time and energy. Israel did not need more professional Zionists or politicians, the executive stated flatly; Israel needed business people. Medved’s father had stated a small company in California that built optical transmitters and receivers. So Medbed began pitching his father’s product in Israel. Instead of going from kibbutz to kibbutz to sell the future of Zionism, he went from company to company to sell optical technology.

Later, he got into the investment business and founded Israel Seed Partners, a venture capital firm, in his Jerusalem garage. His fund grew to over $260 million, and he invested in 60 Israeli companies, including Shopping.com which was bought by eBay, and Compugen and Answers.com, both of which went public on Nasdaq. In 2006, Medved moved left Israel Seed to launch and manage a startup himself, Vringo, a company that pioneered video ringtones for cellphones, which has quickly penetrated the European and Turkish markets.

But his own company is less important. Regardless of what Medved is doing for his enterprises, he spends a lot of time–too much time, his investors complain–preaching about the Israeli economy. On every trip abroad, Medved lugs a portable laptop and projector loaded with a memorable slide presentation chronicling the accomplishments of the Israeli tech scene, In speeches–and conversations with anyone who will listen–Medved celebrates all the Israel landmark “exists” in which companies were bought or went public, and catalogs dozens of “made in Israel” technologies.

Alex Vieux, CEO of Red Herring magazine, told us that he has been to “a million high tech conferences, on multiple continents. I see Israelis like Medved give presentations all the time, alongside their peers from other countries. The others are always making a pitch for their specific companies. The Israelis are always making a pitch for Israel.”

This article was edited from “Start-Up nation: the Sotry of Israel’s Economic Miracle”  written by Dan Seno and Saul Singer, published by McClelland & Stewart.