February 11, 2011
Cross posted and adapted from my Economist blog post. (scrubbed) and featured on Forbes.com
The 1990s were a revolutionary time in the Israeli economy. Yigal Erlich (then the Chief Scientist) created Yozma, the innovative government venture capital vehicle, accompanied by an inrush of private VCs, waves of NASDAQ IPOs, and a boom in corporate technology acquisitions. Recent accounts represent the period as a case study for governments looking to foster entrepreneurship. Unfortunately, these stories are incomplete and thus mislead policy makers; if you misread history, you cannot learn from it. In fact, developments in the 1990s were only the fruits of a process that had been fomenting for four decades. The bottom line is that it takes an entire entrepreneurship ecosystem to foment an entrepreneurial revolution. Read on.
The real timeline:
- 1950s. The seeds of Israel’s entrepreneurial revolution were sown in the late 1940s and 1950s. Israel’s first (Weizmann) and fourth (Katzir) presidents were scientists. Both believed strongly in the role of science in national defense and societal prosperity; in and of itself unique in the world and a strong message about national priorities. The first military technology transfers took place then, half a century before Mirabilis created ICQ, the first instant messaging system.
- 1960s. R&D got a huge boost in the 1960s, in part from the sudden 1967 French weapons embargo: military self-reliance became national policy, leading to massive investments in military R&D and the seeding of what would become an entrepreneurial hothouse, the Intelligence Signal Corp (Unit 8200). In 1968 the Katchalski Committee recommended the establishment of the Office of the Chief Scientist (OCS) to help fix “market failures” in commercializing R&D.
- 1970s. 1972 saw Israel’s first NASDAQ IPO (medical imaging pioneer, Elscint), the embryonic involvement of top-tier US-based venture capital, and very significantly, the establishment in Israel in 1974 of Intel’s first international R&D center. In 1977 the influential BIRD foundation was created to fund technology-based product development between Israeli and US companies.
- 1980s. By the early 1980s there were numerous top-tier VC investments, and by 1984 the NASDAQ value of the first wave of a dozen Israeli tech ventures was $780 million. In 1984 the government passed the milestone Law for the Encouragement of R&D. In 1985 the first limited partnership venture capital fund, Athena Venture Partners, was established with $23 million. In 1987 the cancellation of the Lavi fighter-plane mega-project flooded the market with thousands of engineers who swelled the ranks of start-ups. In 1987 MIT Professor Ed Roberts established a mentoring network of 50 Boston-based Jewish tech entrepreneurs, the Technion Entrepreneurial Associates [and by 1989 I even had enough material for my speech at the European Venture Capital Association conference in Berlin, “The History of Israeli’ Technological Entrepreneurship.”]
Could you write American history without Jefferson, Franklin, Madison, and Washington (for example)? Yet these accounts of Israeli entrepreneurship have done just that, overlooking founding fathers like Uzia Galil and Dan Tolkowsky, ignoring the first US VCs, Fred Adler and Bob Daly, and giving at best short shrift to the pioneering, generation-inspiring entrepreneurs of the 70s and 80s like the Zisapels (founders of 29 IT firms), Efi Arazi (Scitex), Stef Wertheimer (Iscar and Tefen).
There are consequences to this revisionism. For example, by focusing on the 90s, policymakers have neglected Israel’s emerging entrepreneurship ecosystem that preceded and enabled systematic initiatives to succeed. It was this ecosystem, admittedly incomplete, that, by 1990, made Israel’s entrepreneurial revolution a fait accompli; so much so that by 1997 there had already been 68 NASDAQ IPOs—all before Yozma’s investments started bearing fruit.
And in truth the massive Russian immigration of scientists and engineers has had little direct impact on Israel’s entrepreneurial revolution—in the 90s most had no choice but to accept K-12 teaching or low-level service jobs; Israel’s vast incubator program, admirably privatized, has so far bred a relatively low number of successful ventures; and Israel’s culture and institutions were anti-entrepreneurial until the mid-1990s, with labor and the government owning huge portions of the economy, private wealth scorned, and marginal tax rates discouraging extra work.
Israel’s entrepreneurial accomplishments have indeed been nothing short of miraculous. Since 1972, over 160 Israeli ventures have been listed on NASDAQ, more than any other country outside of the U.S. and Canada, and hundreds of tech ventures have been acquired. Well over a hundred billion dollars of value has been created. The world benefits from Israeli innovations, such as the USB memory stick, instant messaging and new generation cardiac stents, to name a few. The entrepreneurs who created such novel products have disproportionately contributed to Israel’s growth. So it is only natural for policy makers around the world to want to learn from Israel’s remarkable experience. But they will only reach the right conclusions if they first get the history right.
 Start-Up Nation: The Story of Israel’s Economic Miracle,
 See Innovation and the State, by Dan Breznitz, 2007
The author lived, studied, and worked as an entrepreneur, entrepreneurship educator, and venture capitalist in Israel between 1972-1976, and 1987-2004. Between 1987-1989 he directed the Technion Entrepreneurial Associates, which among other activities, held the 1st and 2nd “National Entrepreneurship Conferences” of Israel in 1988 and 1989. Between 1986-1989, with Stef Wertheimer and Harvard professor Richard Rosenbloom, he co-created and co-directed the Tefen Entrepreneurs Program. In 1987 he created Israel’s first university course on technological entrepreneurship at the Technion.
For more information on the Talpiot program and Unit 8200: