Secrets To Israel’s Innovative Edge

Several became billion-dollar unicorns and were subsequently bought over by foreign tech giants, such as Viber and Waze (acquired by Rakuten and Google, respectively). Others sought listing on foreign stock exchanges, with over 250 Israeli companies going public on the tech-focused NASDAQ since the 1980s. After the U.S. and China, Israel is the most represented country on NASDAQ.

Despite its size, Israel clearly has a disproportionate impact on global innovation.

Power of the slingshot

In Malcolm Gladwell’s 2013 best seller David and Goliath, he describes the famous battle at the Valley of Elah. Though confronted with a much larger and better armed opponent, David (the future king of Israel) reacted with speed and agility, ultimately killing the towering Goliath with a slingshot. Gladwell continues by arguing that seeming disadvantages can prove to be hugely favorable in other situations.

Like David, Israel is a living example of turning weaknesses into strengths and triumphing over the odds. At first sight, it appears limited by its small size, precarious geopolitical environment, and lack of natural resources. But what seems like weaknesses can also be translated into strengths.

Israel’s innovative sectors are in part the result of its numerous vulnerabilities. With almost no resources, it has limited potential for resource-intensive primary and secondary industries. As a result, it was necessary for Israel to invest heavily in education and maximize the intellectual capacity of its people. Its economy naturally gravitated towards knowledge and innovation-heavy industries.

It was able to overcome its lack of freshwater and become a leader in desert agriculture by developing world-class technologies in drip irrigation and desalination – an example of Israel’s penchant for turning limitations into assets. Today, swaths of desserts in Israel have been converted into dates and olives orchards, with such produces forming a sizable portion of the country’s agricultural exports.

Moreover, an ongoing boycott by Israel’s Arab neighbors has cut it off from most regional markets. With a population of only 8.5 million, Israel’s domestic market is also too small to generate sufficient internal demand. To bypass such geopolitical isolation, many Israeli companies focus on high-tech industries such as software and Internet where scalability is not restricted by borders or transportation costs. At $18.4 billion per year, high-tech exports today comprise 45% of Israel’s total exports. In the $80 billion global market for cybersecurity products, it commands 10% market share.

Snir, who manages Microsoft MSFT +0.68%’s investments in Israel and Europe, remarks that “Israeli companies are built from day one to act globally”. Although they are forced to target faraway export markets, this has helped them become globally oriented and well-connected with foreign customers – a key competitive advantage in an increasingly “flat” world. “This is something I can’t say for European startups,” says Snir. “Europe is a large market, so startups there start by addressing local markets and only think about global expansion later.”

Located in the outskirts of Tel Aviv, Ginger Software has developed an advanced third-party keyboard app that improves grammar and checks spelling. At its inception, it was built with global markets in mind. “We had beta groups from all across the world, to understand the cultural nuances,” explains Oded Lilos, a former marketing chief at Ginger, before adding that the app was designed to process inputs in almost all major foreign languages. The company also works closely with local partners to accelerate overseas growth. One of its biggest investors is billionaire Li Ka-shing, which has created opportunities for the company to work with Hong Kong companies.

“Israel is a very small country and far away from everything,” says Anya Eldan, who oversees early-stage companies and incubators at the Office of Chief Scientist (OCS), a special department in the Ministry of Economy that promotes industrial R&D. “Our companies never develop anything for the local market. Everything is for the global market.

A melting pot of opinions

Israel’s land mass is smaller than New Jersey, but it is home to people from over 70 nationalities. From its founding in 1947 to 2016, Israel’s population multiplied almost five-fold from 1.8 million, driven largely by the migration of a Jewish diaspora that brought with it diverse cultures, perspectives, and skillsets. In 2014, a third of the people in Israel were foreign-born, a comparable proportion with other innovation hubs such as Silicon Valley and New York.

The inflow of new immigrants has often been a key engine of Israel’s economic vitality. In the 1990s, close to a million citizens from the former USSR moved to Israel. Many came with strong science and engineering backgrounds and directly contributed to Israel’s high-tech boom. Backed by their diverse and fresh perspectives, the new Israelis demonstrated tremendous drive and risk-taking appetite. They were willing to do things differently and more efficiently, with few conventions to hold them back.

“Israel is a young country with a lot of immigration. Everyone has to prove himself over and again,” Eldan from the Office of Chief Scientist explains. “There is not so much legacy here or a set way to do things, so we’re much more experimental.”

As residents of a society in constant flux and renewal, Israelis tend to be direct and informal. This outlook towards life is commonly described as “chutzpah”, a Yiddish word for “audacity”. It means being refreshingly honest, even when questioning or speaking to those in authority. It also means going straight to the point when resolving an issue instead of wasting time on social niceties.

While such behavior can be perceived by outsiders as being argumentative and disagreeable, many Israeli entrepreneurs explain that they are simply challenging preexisting assumptions and the status quo to make improvements. As OCS’ Eldan describes with a chuckle, “Israelis are never happy with something. They are always trying to make it work better.”

Another manifestation of “chutzpah” is a strong bias towards action. An Israeli innovator moves quickly to execution after coming up with an idea. Often, it begins with building a simple proof of concept prototype, followed by constant iteration in a lean and cost-efficient manner. This can-do attitude is usually supported by intense focus and confidence, creating a virtuous cycle of creation and growth. In the process, a few radically innovative products emerge, sometimes disrupting entire industries.

Richard Foster, the author of Innovation: The Attacker’s Advantage and a co-founder of McKinsey’s innovation and technology practices, explains that attacker companies start by targeting niche segments with new ideas and approaches. As their productivity rises and cost declines, they quickly scale up and devour the incumbents’ market share.

This is the essence of Israeli-style innovation.

Research and development powerhouse

A strong education system provides a pipeline of skilled talents that supports Israel’s innovative sectors. According to OECD’s 2014 report, 46% of the country’s adults have completed tertiary education, with half of them majoring in STEM subjects. At 7.3% of GDP, Israel’s spending on educational institutions is fifth among OECD members. Several of its universities are highly ranked in the world and five Israeli-born citizens have won the Nobel Prize since 2002.

Israel universities are also highly geared towards basic and applied research, especially in technical fields. The country invests 4.2% of its GDP in R&D(the highest in the world), with 30% of it being channeled through its universities. As a result, Tel Aviv University, the Weizmann Institute, and the Technion are all among the top ten patent applicants in the U.S.

More importantly, Israeli universities have taken the lead in commercializing their research output. Starting with the Weizmann Institute in 1959, Israeli universities have created their own technology transfer companies, which either patent the research and license them out or start new companies themselves. Such a strong connection between academia and industry has given rise to many innovative products, ranging from cherry tomatoes to barcode scanners.

Yissum, the technology transfer company of the Hebrew University of Jerusalem, has over 9,300 patents and 110 spin-offs to its name. The 52-year old company–the third oldest in the world of its kind–works closely with researchers at the university and connects them to commercial partners such as Intel INTC +0.21% and Google. It also creates an average of 10 new companies per annum, with some like Mobileye valued at over $9 billion today.

According to Yissum’s vice-president of marketing Dana Gavish-Fridman, Yissum-commercialized products generate over $2 billion in annual sales, with the company receiving a healthy three to five percent in royalties. Other sources of income include equity and investments by industry players.

Gavish-Fridman explains the company owes its success to “an ecosystem within Hebrew University that supports innovation”. Researchers are evaluated based on their patent portfolios for staff positions or promotions. They form an integral part of the commercializing journey, whether in go-to-market strategy or product design.

Ultimately, Yissum’s success improves research quality. Sixty percent of the company’s income goes towards researchers and their laboratories, creating 300 new positions each year, with the rest recycled back into the company and the university. “[Researchers] are not in for the money,” says Gavish-Fridman. “They’re there to see their inventions enjoyed by the public. That’s their main interest.”

Another major source of Israel’s R&D strength is its military. Soon after its establishment in 1948, Israel realized the strategic importance of building its own military-industrial complex – it had to be constantly prepared for major conflicts with its neighbors, yet foreign arms suppliers were not always reliable. Given its size, it also had to maintain a decisive technological edge to deter or overcome any potential adversary.

Military R&D in Israel grew steadily in the 1960s and 1970s, accounting for 30% of all military expenditures. Aided by industrial grants from the government, some enterprising individuals began transferring defense innovations to civilian projects. Pattern recognition technologies were applied to identify defects in manufacturing, while data storage expertise was used to invent the USB flash drive.

According to Zack Weisfeld, the founder of Microsoft MSFT +0.68% Ventures, Israel’s military needs have led to cutting edge technologies in machine learning and vision–or analyzing large amounts of data or images to create insights. As many Internet businesses today mine data for consumer analytics, they have turned to Israeli companies for big data capabilities.

Protecting confidential information is just as important as analyzing them. While working on a project to secure classified networks, an Israeli soldier named Gil Shwed developed the idea for a firewall which later grew into Check Point, one of the world’s largest cybersecurity companies. Others in the defense industry have similarly brought their technical expertise and project management experience to the private sector, creating and building new innovative products.

Many technology firms have built their offices around Israel’s military bases to take advantage of the spillover effects from defense-related R&D. When the Israel Defense Force decided to relocate many of its bases to Be’er Sheva, a city in the Negev desert, companies such as Deutsche Telekom and IBM IBM -0.10% followed. As Shelly Gotman, managing director of Lockheed MartinLMT +0.20% Israel, explained to the Wall Street Journal, “It was natural for us to pick Be’er Sheva because of the ecosystem being formed there by the army, the industry and the university.”

The military as an incubator

Among the entrepreneurs, executives, and policymakers that I spoke to, almost all cited Israel’s conscription set-up as a crucial driver of its vibrant start-up scene. Indeed, with a large proportion of its youths drafted into mandatory military service (three years for men, two for women), serving in the military has become a rite of passage to adulthood and an incubator for like-minded conscripts to discuss the next big idea.

Although the IDF maintains a relatively small standing force, it leverage its fighting capabilities through training and technology. To this end, it maintains a rigorous sorting process to place conscripts in divisions where they are most needed. Since the IDF essentially has its pick of the best and brightest young minds in the country, it takes care to draft the most promising high schoolers into specialized elite units.

One such unit is 8200, a top-secret intelligence division that is equivalent in function to the U.S. National Security Agency. Each year, through an elaborate system of standardized exams, psychometric tests and internal recommendations, Unit 8200 identifies the most promising recruits for final-round interviews with commanders on the team. They would then examine candidates for their leadership, creativity, communication skills and speed of learning, eventually only selecting a few whom they believe would thrive in Unit 8200’s challenging and intense environment.

A colonel heading the cyber division in the IDF Intelligence corps, who declines to be named due to security restrictions, says recruiting is a “very demanding process” and personally spends many hours interviewing candidates. “Every now and then we look at exams and correlation between grades and performance at work, to improve our prediction of soldier success,” he explains. “Our main business is to pick the best and brightest young men and women with a very efficient selection process and send them to an effective training program. When you put both together, you get a very powerful engine.”

Once recruits report to Unit 8200, they are given intensive training and handed the most difficult problems to solve. A junior soldier, for example, might be developing cutting edge systems to encrypt the army’s top secrets. “The problems are very hard to solve and you have to give an answer,” describes Avner Aizendorf, the head of development at BioCatch, an online authentication service that provides biometric security to e-commerce and banking websites. “But you do amazing things you don’t get to do anywhere else at 18, which have enormous impact on others and on your country.”

Recruits learn about taking real responsibilities from day one. “When you’re in 8200, what you risk is human life. It’s not an app that crashes anytime,” describes Itay Glick, the co-founder and chief executive of cybersecurity startup Votiro, of the unit’s aim for perfection. “It demands 100%. No bugs.” Responsibilities also get heavier with time. In his first year, Glick was part of a team working on a project with a $3 million annual budget. As he proved himself, he was soon asked to lead teams on bigger, more expensive projects – which he relished and excelled in. “You know it comes from taxpayers’ money so you don’t want to waste it. Everything goes back to you,” says Glick.

Natia Golan, the director of product management at BioCatch and also a Unit 8200 alumnus, agrees that given the imperative to develop the best technology with limited resources, soldiers are forced to be creative to find new solutions. “One of the most important things [in Unit 8200] was to be open-minded, to think about every problem in a different way and not to give an answer at the beginning,” says Golan. “A lot of the best solutions in the unit was because people thought of solving thing in very different ways. We do new stuff all the time.”

Follow David Yin @davidyin44.