What’s Next for the Startup Nation?

When I was ten, my parents took me to the Tel-Aviv Museum to see the opening of a new art exhibition. On our way back, my dad mentioned to my mom how dissatisfied he was that, in order to understand and enjoy the exhibition, he was forced to follow a guide. Instead of following a guide, my dad wanted to wander around the space of the exhibition and stop at the paintings that he liked, taking his time with the artwork that spoke to him and not just paying attention to the ones the guide felt was important. He wanted to receive a proper explanation of the paintings and sculptures that he liked, but at the same time he wanted the ability to wander off and have a meaningful experience on his own. By the time we got home he had an idea about how to solve this problem. For the next few weeks, he spent his evenings in his home office, thinking and drawing up plans. He drew the initial sketches for a new device and the electronic system that would support it. During that time, he also had a few conversations with one of his friends, and he got him excited about the idea too. The two of them began to envision a device that was the size of a mobile phone (this was 1990) and that one could hold and walk with around the museum. The idea was that when you saw a piece of art that you liked, you would punch in a few numbers and receive an explanation about it. The two assembled a small team, and soon after, a company by the name of Espro came to life. In two years, they arrived at the Louvre museum in Paris and introduced the world to the first digital personal guide—easyguide. The device gave viewers the ability to pick and choose what they wanted to hear and to learn and wander at their own paces. After the Louvre, they installed the system in the Van Gogh Museum in Amsterdam and from there they began to reach every prestigious museum and national heritage site around the world. As my dad was busy building his first company, a massive flow of immigration started to arrive in Israel. From 1990–1995, the Israeli population would grow by almost fifteen percent, and most of these new immigrants originated from the ex-Soviet Union. To accommodate this situation, the Bank of Israel said that the country would need 50 billion dollars in investment capital—the equivalent of the entire Israeli GDP of 1990—over a five-year period just to integrate the new population. During this time, net foreign direct investment barely reached 200 million dollars. Unemployment at the turn of the decade reached twelve percent and inflation levels were stable at twenty percent. Every day, Israelis were feeling the toll of the harsh economic conditions and, what is more, they were terrified of what would come after a huge increase in population. As politicians talked of the need for a more labor-intensive manufacturing sector to accommodate the labor surplus that accompanied these new arrivals, stories of new companies, new ideas, and new innovations began to fill the airwaves. At first, the entrepreneurs featured in these stories were labeled ‘dreamers.’ At a time when the typical dream of a Jewish mother was to see her son become a lawyer or a doctor (or both), most people thought that becoming an entrepreneur or a ‘dreamer’ was a polite way of saying one would soon be checking into a mental facility. In 1990, this was not merely a misguided thought; the Jewish mother had facts to back her arguments. Although the Israeli high tech sector sales had grown from 2 to 3 billion dollars between 1985 and 1989, the number of employees in high-tech electronics had actually dropped, from almost 40,000 employees in 1984 to just over 33,000 at the end of 1989. This trend had raised understandable doubts about whether the high tech sector would ever be able to employ people in sufficient numbers to accommodate the massive Soviet immigration. In 1992 as Israel was heading into an election, the state of the economy worsened still. Policies directed toward encouraging the development of labor-intensive industry had made little effect, and a sharp deterioration in the total deficit threatened to push Israel back to the hyperinflation levels of the 1980s. However, policies and initiatives that were considered less significant, mostly those that were directed at encouraging entrepreneurs and venture capitals, were the ones that started slowly to bear fruit. These initiatives, which were relatively small in size, set up financial mechanisms for luring venture capital funds into Israel and create high tech incubators that would support early-stage entrepreneurs. By 1998, the result of these policies was clear. In a single year Israel was able to attract over 3 billion dollars in capital investment, most of which was foreign. It was a thirty-fold increase in a period of less than three years. In 1998, the leading story in every new show was that of AOL’s purchase of a small Israeli company, Mirabilis (the developer of ICQ), for a staggering 407 million dollars. Life in Israel changed overnight. Saying you had an idea that you’d been working on was no longer something you wanted to hide. By the end of 1998, Israel had over 3,000 startup companies, or one for every 2,000 inhabitants. One by one, some of these Israeli companies became public in stock markets around the world, and foreign corporations were acquiring twice as many companies that were going public. At the turn of the century, the green color at every major stock exchange was glowing hard. It seemed as if Moore’s law applied to the stock market in the same way that it did to the history of computer hardware. Everyone believed that green would rule the world. But then the unthinkable happened. The dot com bubble burst, large respectable companies could no longer weather the financial burden and were forced to file for bankruptcy. As in the world, the new Israeli heroes crumbled one by one and the Israeli technology giants, the role models of the Israeli entrepreneur age, followed suit. On March 3rd, 2001, NICE, one of the first truly global high tech companies in Israel, fired 220 of its employees. Two weeks later another Israeli giant, Gilat Satellites, announced that it would let go of 275 employees after the eighteen-year-old company had lost ninety percent of its value over the past year. A month later in April, Comverse, the pioneer of voicemail, let go of 400 of its people, while making sure that access to the roofs of its buildings in northern Tel-Aviv were blocked so that no one could jump. Many people called the eighteen months that followed the burst of the dot com bubble a ‘business hell.’ Every day new companies were being shut down, more people were being let go, and mere survival was considered success. Miraculously, Israel did not enter into a recession. However, growth levels became and stayed sluggish for the rest of the decade. Venture capital investment levels leveled off and the rate of initial public offerings (IPOs) did not bounce back to late-1990s levels. Still, the entrepreneur spirit of the dot com years has never bowed its head. In terms of the rate of creation and survival of new companies (from 2003 to 2011), the business demographics of Israel have leveled, and an economic ecosystem that has focused mainly on hard-core technology with little access to large businesses and end customers, has made Israel’s main export to be - cutting edge technological startup companies. The story of the Israeli economy is an amazing one. It’s a story of the struggles and successes of brilliant and innovative people, people like my dad, who used to light up when he walked into a shop or museum only to find a piece of equipment he had developed in our basement long after the rest of us had gone to sleep.