“To ban failure, is to ban success”

November 2013

Conversation with Saul Singer, co-author of “Start-up Nation”, on – prevalence of entrepreneurship in Israel – corporates’ R&D efforts – what makes startups tick

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Here is the transcript of the video.

Emmanuel Daniel (ED): Saul Singer is co-author of 2009’s “Start-up Nation”. The whole concept of the book is the idea that entrepreneurship can come from a small country such as Israel, a highly disciplined country with a very strong military background. What has your conversation been with people in other countries, and how much of that is transposable to maybe a larger country without a military background?

1. Israel’s startup culture

Saul Singer (SS): What’s interesting about the book and the international reaction to the book is that we wrote it in English for an American audience, my co-author Dan Senor and me. We really didn’t think about an international audience. We thought there were some people who were interested in another side of Israel. When the book came out, it was translated into Chinese and Korean and 25 different languages. We realised that even though the Israeli story is so unique in many ways, it’s also very relevant to other countries that are trying to become innovated.

The reason why, is while everyone looks at Silicon Valley; they think, “Okay, that’s the United States,” and that’s not really relevant to us. We’re not the US. Then they look at Israel, this tiny country with no resources, a very unfriendly neighborhood, no local market to speak of, shut off from the regional market, lots of adversity. Yet Israel has managed to build the largest startup sector outside of Silicon Valley in the world.

ED: You captured that very well. You crystallised the startup culture in Israel. I can see why a number of countries are already started honing their human resources and infrastructure thinking, and to what extent governments should facilitate innovation.

To what extent do you see the Israeli experience being applicable to other countries like this, especially in countries where you have army officials who spend time in government positions? There comes a point where you need to re-deploy them for civilian-type enterprises. The experience hasn’t been very successful – this transition from military to civilian life. To what extent do you deal with some of these issues in your book?

SS: I would say that the military has been a huge factor for us. One of the interesting things we do in the book is look at other countries like South Korea and Singapore, where there’s also compulsory military service, and try to compare and see whether there’s been an impact in those countries as well. We realised that these countries are different in so many ways, even form the military aspect. One thing about the Israeli military that’s very unusual is that it drives responsibility very far down, to the level of 18- and 20-year-olds.

It’s just the way our military is built; because we’re such a small country, we rely on drilling leadership and responsibility down the ranks. This is just one example of how the Israeli military is, strangely, a source of entrepreneurial thinking. The military is a huge bureaucracy like every other military regime, but the difference lies in that the young generation goes through this experience, and it becomes a third stage of life for them. In many countries you have school, then work. In Israel, it’s school, the military, and then work.

What Israelis learn in this third stage in life are qualities like leadership, teamwork – how to work as a team – sacrifice, the idea of sacrifice for something larger than yourself for your society. The most important is mission orientation. This idea that they try to drill into you is the concept of a mission – it is something that is very difficult to accomplish. You have to succeed, but on the other hand, you have to take risks. How do you combine the need to succeed with the need to take risks? Israelis come out of this experience much more ready to become entrepreneurs.

ED: The average Israeli young person, who’s just finished his stint in the military doesn’t necessarily walk into job at a state-held enterprise. Basically he’s on his own after he leaves the military; is that correct?

SS: For those who’ve gone through the military in high-tech oriented units in the Air Force and Intelligence divisions, they often go directly into the high-tech, startup sector. Some of them even set up their own startups. There’s this sense that it’s very normal – more normal in Israel than in most countries – to go first for the big corporate job; to go directly into the world of entrepreneurship and startups.

What’s unusual about Israel is that compared to most countries, when you talk about the creative economy, it usually makes up the main part of their economies. In Israel, it’s the smaller part – the domestic, regular economy is the other, largest part. However, it is also the most dynamic – half of our exports come from Israel’s creative economy. It’s clearly the growth engine of the country. It’s the central facet of the economy; not necessarily in terms of size, but in terms of importance.

ED: The math behind the creativity then gets translated into a business. If you say that a lot of them come from the high-tech component of the military, then the question is, are the military, or the government the first customer base that they sell back into? There are countries – and India comes to mind – where entrepreneurship is very well entrenched because you have a dysfunctional government.

People find that they have to look after themselves. I’ve actually attended a conference in India where I was surprised at the number of unfunded small entrepreneurs out there. It’s the funding component and the natural customer base that unlocks entrepreneurship.

SS: Yes. Two things about that. First, I would say that usually the customer is not the government. Most startups, even those run by people who spent time in the military, are hardly doing anything related to the military. They use the kind of soft skills that picked up along the way, and with some exposure to technology, take it in completely different directions. On funding, first of all, it’s very important when we talk about “Start-up Nation”, to realise the fact that Israel gets about two and a half times the venture capital of the United States on a per capita basis, and about 30 times as much as Europe. One of the factors that have made Israel become a startup nation is the phenomena where hundreds of big corporates from all over the world come to our country looking for startups to buy, to invest, or creating R&D centres from scratch. That’s one huge part of our startup nation. Another is basically Israel getting on the map of global venture capital.

2. Fostering entrepreneurship

ED: Can you describe how that ecosystem came about? Are American Israelis coming back to Israel? What is the genesis of that?

SS: I think the essence of it is really – I would call it getting on the map. The question is, how do you get noticed? The first success stories are always important. For example, one of the first ones for Israel happened in 1996 with a company called ICQ. ICQ was a chat programme created by a few, young 20-year-olds. They wanted to be able to communicate on the internet simultaneously. They came up with a chat programme and realised that it was actually a much better idea than what they initially had in mind.

They went on to build the programme that went viral and suddenly had millions of users. In fact, it was one of the first things to go viral all over the internet before Facebook and Twitter and even Netscape.

ICQ was then bought by AOL for $400 million. This created a tremendous signal, telling the outside world that something very interesting is going on in Israel and that they’d better pay attention. It also sent a signal internally that entrepreneurship is something you could do on your own; you don’t necessarily have to be at a big corporate to achieve big things.

It provided a huge boost, internally, to entrepreneurship and helped put the country on the international map. This is what I think countries around the world are trying to achieve.

ED: As a writer, how did you personally come to crystallise this phenomenon as something you’d want to write about?

SS: I was working at an English newspaper in Israel called the Jerusalem Post and would write a great deal about the economy. Naturally, as a journalist, I would be complain about the economy; that you should do this or that. The idea for the book came from my co-author, Dan Senor, who currently resides in New York. He’s actually my brother in law.

Senor was a Harvard MBA graduate, and he brought one of the first groups of students from the Harvard MBA School to Israel. He wanted to give them a book to explain what they were seeing, but couldn’t find one, so we decided to write one ourselves. That’s how it happened.

ED: You get a lot of feedback in terms of what other governments are doing to build their own entrepreneurship concepts, and how governments throw money at property deals, entrepreneurship centers, and cyber ports to get things going. Where do you think that’s coming from? What is your take on what governments are spending money on?

SS: That’s very interesting. I would say that the thought process of governments tend to be, “We need to be more innovative. Part of being innovative is to have startups. How do we get startups?” And they think, “Well, the first thing we need to do is build a tech park.”

There’s a problem with that idea; sure, tech parks are can be very important, but they’re only really good for corporates. Tech parks are good for creating a mass of corporates. They’re not very good for startups because startups don’t really like to be in tech parks.

Startups often like to be in the coolest neighborhoods. They like to be where the coffeeshops are, maybe near a university. You can’t really predict a location where startups will come up. Building a tech park doesn’t necessarily help with the creation of startups.

Governments also tend to think along the lines of “We have to increase our R&D spending.” Many countries spend one percent or two percent of their GDP on research and development. Israel actually spends four and a half. It actually went up to 4.8% of GDP. But, it’s not so much R&D driving innovation; it’s more about innovation driving the R&D process.

ED: How would you describe Israel’s R&D spending?

SS: It’s a combination of these thousands of startups that are by their nature intensively doing R&D. In a way, they are concentrated R&D. They don’t have huge sales operations and are small, so essentially they’re all R&D.

There are then these R&D centers that are either created from scratch by corporates, for instance, IBM and Cisco each bought about 12 Israeli companies recently. Facebook just bought its first company there while Apple also recently bought a company establishing an R&D centre. Google and Microsoft have been huge in Israel for a long time and are growing. General Electric, Hewlett Packard, Siemens, British Telecom, and even Samsung is very active in Israel. It is either corporates buy a bunch of companies and those companies collectively become their R&D centre, or they create one from scratch.

What’s interesting about Israel that is different from other countries is in most cases, when a corporate buys a startup, it’s really for a particular technology. End of story. But in Israel, it’s more about the Israeli startups becoming an innovation centre for its parent company. That’s the emerging pattern in Israel.

ED: Your take is that Israel has more innovation companies than several countries put together. What is the failure rate like?

3. Accepting failure as a path to success

SS: The failure rate of Israeli startups is extremely high, just like the failure rates of Silicon Valley startups or startups anywhere else. It’s very important to understand that most startups fail.

Even for startups that have been successful, you can almost guarantee that they’ve failed somewhere along the way, or started with one idea and it didn’t work. There’s this search for a successful business model. When you think about the difference between startups and big companies, startups are essentially trying to find a successful business model whereas big companies are in process of scaling up from a successful business model. Big firms are those that have already discovered the right business model, and are growing it.

Also, startups must grow. It’s not an absolute dichotomy, but essentially that’s it. A very, very important message is that one of the most common, important characteristics about the startup sector is the acceptance of failure. Failure is part of what it means to be successful.

I was recently in Chile and the local government was about to change the bankruptcy laws there. It used to be basically illegal to go bankrupt in the country. But they’re now trying to soften the blows of bankruptcy by adopting an approach similar to the US’. That’s a very good idea because if you try to ban bankruptcy, you’re essentially trying to ban failure. And if you ban failure, you’re banning success.

ED: What is the fallback for all of these young people, many of whom I’m sure are already in their middle age when they fail? Do they have social security? Do they have family? What is the social net in holding the society together?

SS: The investment ecosystem for startups is built to include failure in the sense that investors know that an entrepreneur who has failed once or twice before is probably a better investment than a first time entrepreneur, because someone who’s failed is more experienced and unlikely to make a similar mistake further down the road. Failure is not seen as a stigma in this part of the world. It’s seen as an important part of gaining experience. The other thing is that investors realise that there will be failures along the way, but if they have any chance of making it big, they have to be tolerant of hiccups along the way.

ED: That’s the investment side of things. How about the person himself? Israel must be strewn with young people who are still struggling.

SS: Right, but what’s typical about entrepreneurs is that they don’t give up. They may fail with a particular idea, but usually they have another idea.

ED: In another country, many such entrepreneurs would be out on the streets, but in Israel they still hold together. What is the mechanism holding them together? Is it a state sponsored social safety net or is it family?

SS: I would say it’s more of a cultural support system in the sense that it’s very hard to be an entrepreneur anywhere else in the world. It’s particularly lonely in most places first of all because entrepreneurs are different than most people. They have ideas that most people think are crazy and they’re very passionate about them.

But what’s good about Israel from a startup ecosystem perspective is that it’s a little bit more normal to be an entrepreneur here. This is because there have been so many success stories. Parents, who if their kid tells them, “I want to be an entrepreneur,” they don’t go crazy.

They think, “Well maybe that’s not such a crazy idea.” That kind of cultural support is really important. That gives you the strength to fail, to take the risk, and to keep at it until you succeed.

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