Dan Singer - Start-up Nation

Since he founded JVP, in 1994, Margalit has raised hundreds of millions of dollars from France Telecom SA, Germany’s Infineon Technologies AG, as well as Reuters, Boeing, Columbia University, MIT, and the Singapore government, to name a few sources. He has backed dozens of companies, many of which have held public offerings (IPOs) or been sold to international players, producing windfall returns. JVP was behind PowerDsine, Fundtech, and Jacada, all currently listed on the NASDAQ. One of its big hits was Chromatis Networks, an optical networking company, which was sold to Lucent for $4.5 billion.

In 2007, Forbes ranked Margalit sixty-ninth on its Midas List of “the world’s best venture capitalists.” He is among three Israelis on this top one hundred list, which is populated mostly by Americans.

But Margalit’s contribution to Israel goes beyond business. He is investing huge sums of his personal fortune—and entrepreneurial know-how—to revitalize Jerusalem’s arts scene. He launched the Maabada, the Jerusalem Performing Arts Lab, which is leading in the exploration of the link between technology and art, and is colocating artists and technologists side by side in a way not done anywhere else in the world.

Next door to the nonprofit theater he founded, which was built in an abandoned warehouse, Margalit has converted a printing house into the headquarters for a burgeoning animation company, Animation Lab, which aims to compete with Pixar and others in the production of full-length animated films.

Jerusalem might seem like the last place to build a world-class movie studio. As a center for the three monotheist religions, the ancient city of Jerusalem is about as different from Hollywood as one could imagine. Filmmaking is not an Israeli specialty, though Israeli movies have recently been prominently featured in international film festivals. Further complicating matters is the fact that the Israeli arts scene is centered in secular Tel Aviv, rather than Jerusalem, known more for holy sites, tourists, and government offices. But Margalit’s vision for creating companies, jobs, industries, and creative outlets was specifically a vision for Jerusalem .

This cultural commitment can be central to the success of economic clusters , of which Israel’s high-tech industry is a case in point. A cluster, as described by the author of the concept, Harvard Business School professor Michael Porter, is a unique model for economic development because it’s based on “geographic concentrations” of interconnected institutions—businesses, government agencies, universities—in a specific field. 1Clusters produce exponential growth for their communities because people living and working within the cluster are in some way connected to each other.

An example, according to Porter, is northern California’s “wine cluster,” which is populated by hundreds of wineries and thousands of independent grape growers. There are also suppliers of grape stock, manufacturers of irrigation and harvesting equipment, producers of barrels, and designers of bottle labels, not to mention an entire local media industry, with winery advertising firms and wine trade publications. The University of California at Davis, also near this area, has a world-renowned viticulture and oenology program. The Wine Institute is just south, in San Francisco, and the California legislature, in nearby Sacramento, has special committees dealing with the wine industry. Similar community structures exist around the world: in Italy’s fashion cluster, Boston’s biotech cluster, Hollywood’s movie cluster, New York City’s Wall Street cluster, and northern California’s technology cluster.

Porter argues that an intense concentration of people working in and talking about the same industry provides companies with better access to employees, suppliers, and specialized information. A cluster does not exist only in the workplace; it is part of the fabric of daily life, involving interaction among peers at the local coffee shop, when picking up kids from school, and at church. Community connections become industry connections, and vice versa.

As Porter says, “the social glue” that binds a cluster together also facilitates access to critical information. A cluster, he notes, must be built around “personal relationships, face-to-face contact, a sense of common interest, and ‘insider’ status.” This sounds just like what Yossi Vardi described: in Israel “everybody knows everybody, and there is a very high degree of transparency.”

Margalit would point out that Israel has just the right mix of conditions to produce a cluster of this kind—and that’s rare. After all, attempts to create clusters don’t always succeed. Take, for example, Dubai. Searching for a Dubai equivalent of Erel Margalit, one thinks of Mohammed Al Gergawi. Al Gergawi is the chairman and chief executive of Dubai Holding, one of the larger businesses owned by Sheikh Mohammed bin Rashid Al Maktoum, the ruler of Dubai (and also the prime minister and defense minister of the United Arab Emirates). For all intents and purposes, Sheikh Mohammed is the chairman of “Dubai Inc.” There is no distinction between Dubai’s public finances and the sheikh’s private wealth.

Al Gergawi’s leap to prominence came in 1997 when he went to meet Sheikh Mohammed in the majlis , a forum for average citizens to come to see the sheikh—think of it as the Arab world’s version of a town hall meeting, only far less interactive. During the visit, Sheikh Mohammed pointed out Al Gergawi and declared, “I know you and you’ll go far.” 2

It turns out that Al Gergawi, then a midlevel government bureaucrat, had been identified months earlier by one of Sheikh Mohammed’s “mystery shoppers,” whose job it is to scour the kingdom for potential business leaders. Soon after the majlis meeting, Al Gergawi was put on an accelerated path to management of one of the sheikh’s three major companies. Others within Dubai’s government told us that Al Gergawi was selected because he was regarded as a competent technocrat—he could execute extremely well but would not challenge the ruler’s vision.

Dubai’s economic system is based largely on patronage, which has kept the local citizens pliant (only 15 percent of Dubai’s 1.4 million residents are actually Emirati citizens). Like Singapore, it is an extremely orderly society, and there are no outlets for protest—even peaceful ones—against the government. Many of the founders of Dubai’s first human rights organization are also employed by the government and are dependent on Sheikh Mohammed’s largesse.

Freedom of speech is constitutionally “guaranteed,” but it does not cover criticism of the government or anything deemed offensive to Islam. When it comes to government transparency, especially as it relates to the economy, the trend is moving in the wrong direction. A new media law makes tarnishing the UAE’s reputation or economy a crime punishable by fines of up to 1 million dirhams (approximately $270,000). The government maintains a list of banned Web sites; the ban is enforced by state censorship of the Internet (users do not dial directly into the Web but go through a proxy server monitored by the state telecom monopoly). In compliance with the Arab League boycott, neither visitors nor residents can call Israel from landlines or cell phones—the 972 country code is blocked.

Sheikh Mohammed recently decreed that his twenty-five-year-old son, Sheikh Hamdan, would be crown prince; a younger son and a brother were named as his two deputies. There is no path for an Emirati equivalent of Erel Margalit to play a senior leadership role in government or run for office. Mohammed Al Gergawi himself is one of only 210,000 Emiratis in the entire country, and only people from this limited pool are eligible to serve in senior government positions or in leadership roles in the sheikh’s businesses.