Dan Singer - Start-up Nation

Back in mid-1998, when ICQ hit about 12 million users, AOL bought the start-up for what at the time was the largest amount paid for an Israeli tech company: $407 million. (They wisely insisted on taking all cash instead of stock.)

Though Israel was already well into its high-tech swing by then, the ICQ sale was a national phenomenon. It inspired many more Israelis to become entrepreneurs. The founders, after all, were a group of young hippies. Exhibiting the common Israeli response to all forms of success, many figured, If these guys did it, I can do it better. Further, the sale was a source of national pride, like winning a gold medal in the world’s technology Olympics. One local headline declared that Israel had become an Internet “superpower.” 5

Vardi invests in Internet start-ups because he believes in them. But his dogged focus on the Internet when almost everyone else was in either classic “Israeli” sectors, such as communications and security, or hot new areas, like cleantech and biotech, is not attributable just to profit calculation. For one, Israel is his cluster, and he is conscious of his status as an “insider” in this community—a community that he wants to succeed. And with that commitment, he is also conscious of his role in sustaining this sector through a dry spell. Investing with a personal as well as a national purpose has been called “profitable patriotism,” and has been getting renewed attention of late.

More than a century ago, prominent banker J. P. Morgan almost single-handedly stabilized the U.S. economy during the Panic of 1907. At a time when there was no Federal Reserve, “Morgan was not only committing some of his own money but also organizing the entire financial community to join in the rescue,” said Ron Chernow, a business historian and biographer. 6

When the crisis of 2008 hit, Warren Buffett seemed to play a similar role, pumping $8 billion into Goldman Sachs and General Electric over just two weeks. As the panic deepened, Buffett knew that his decision to make massive investments might signal to the market that he, America’s most respected investor, was not waiting for shares to plunge further and believed that the economy was not going to collapse.

Vardi’s interventions are not on nearly as large a scale, of course, but even so, he has had an impact on the mix of Israeli start-ups by playing a leadership role in keeping the Internet segment of the pie afloat. His mere presence and steadfastness in a sector that everyone was writing off helped turn it around.

At the 2008 TechCrunch, an influential conference that singled out the fifty-one most promising start-ups in the world, seven of them were Israeli, and many of those had raised capital from Yossi Vardi. TechCrunch founder Michael Arrington is a strong supporter of Vardi’s: “You [Israel] should build a statue of Yossi Vardi in Tel Aviv,” he says. 7

In the best-selling book Built to Last , business guru James Collins identifies several enduring business successes that all have one thing in common: a core purpose articulated in one or two sentences. “Core purpose,” Collins writes, “is the organization’s fundamental reason for being. [It] reflects the importance people attach to the company’s work . . . beyond just making money.” He lists fifteen examples of core purpose statements. All of them are by companies—including Wal-Mart, McKinsey, Disney, and Sony—with one exception: Israel. Collins describes Israel’s core purpose as “to provide a secure place on Earth for the Jewish people.” Building Israel’s economy and participating in its cluster—which are interchangeable—and pitching it to the most far-flung places in the world are what in part motivates Israel’s “profitable patriots.” 8As historian Barbara Tuchman observed before Israel’s tech boom, “With all its problems, Israel has one commanding advantage: a sense of purpose. Israelis may not have affluence . . . or the quiet life. But they have what affluence tends to smother: a motive.” 9

The absence of motive is a problem in a number of the states of the Gulf Cooperation Council (GCC), which is composed of the UAE, Saudi Arabia, Bahrain, Kuwait, Qatar, and Oman. In the case of Dubai, one of the emirates in the UAE, most of the entrepreneurs that come from elsewhere are motivated by profit—which is important—but they are not also motivated by building the fabric of community in Dubai. And as we have seen in examining Michael Porter’s cluster theory, a profit motive alone will get a national economy only so far. When economic times are difficult, as has been the case in Dubai since late 2008, or security becomes dicey, those not committed to building a home, a community, and a state are often the first to flee.

In the other GCC economies, the problem is somewhat different. In our travels throughout the Arabian Peninsula, we have seen firsthand how Saudi nationals—young and old—are proud of the economic and infrastructural modernization of their economy. Many Saudis have a tribal lineage that traces back centuries, and building an advanced economy that is recognized globally is a matter of tribal and national pride.

But all of these economies also face challenges that can stifle any potential for progress.

A number of business and government leaders throughout the Arab world have turned their attention to stimulating a high-growth entrepreneurial economy, and some have been quietly studying Israel. “How else are we going to create eighty million jobs in the next decade?” Riad al-Allawi asked us. Al-Allawi is a successful Jordanian entrepreneur who has done business all over the region. Eighty million is the number we kept hearing from experts during our travels to Arab capitals.

The Arab economies of North Africa (Egypt, Algeria, Morocco, and Tunisia), the Middle East (Lebanon, Syria, Palestine, Iraq, and Jordan), and the Persian Gulf (Saudi Arabia, the UAE, Qatar, Bahrain, Kuwait, and Oman) comprise approximately 225 million people, just over 3 percent of the world’s population. And the total GDP of the Arab economies in 2007 was $1.3 trillion—almost two-fifths the size of China’s economy. But wealth distribution varies widely: there are oil-rich economies with tiny populations (such as Qatar, with 1 million people and a per capita GDP of $73,100) and oil-poor economies with large, dense populations (such as Egypt, with 77 million people but a per capita GDP of just $1,700). Generalizations about development strategies for the region are risky since the sizes, structures, and natural resources of the Arab economies vary widely.

But even with all the differences, the unifying economic challenge for the Arab Muslim world is its own demographic time bomb: approximately 70 percent of the population is under twenty-five years old. Employing all of these people will require the creation of eighty million new jobs by 2020, as al-Allawi told us. 10Meeting this goal means generating employment at twice the U.S. job growth rate during the boom decade of the 1990s. “The public sector isn’t going to create these jobs; big companies aren’t going to create these jobs,” says Fadi Ghandour, a successful Jordanian entrepreneur. “The stability and future of the region is going to depend on our teaching our young people how to go out and create companies.” 11

But entrepreneurship has played only a negligible part in Arab world economies. Even before its economy imploded less than 4 percent of the UAE’s adult population was working in early-stage or small enterprises. So what are the barriers to an Arab “start-up nation”? The answer includes oil, limits on political liberties, the status of women, and the quality of education.

The vast majority of the region’s economic activity is driven by the production and refinement of hydrocarbons. The non-oil GDP exported by the entire Arab world—with a population of approximately 250 million people—is less than that of Finland, with a population of 5 million. Outside of oil, there are some successful multinationals, such as UAE-based Emirates Airlines, Egypt-based Orascom Telecom, and Jordan-based Aramex, a logistics support provider. (Orascom and Aramex were founded and built by savvy entrepreneurs.) Family-owned service businesses are also prominent and—in the case of countries like Egypt—textiles and agriculture, too. But the oil industry is by far the biggest contributor to the region’s GDP. The region produces almost one-third of the world’s oil and 15 percent of the world’s gas.