Copyright

Copyright©2009byDanSenorandSaulSingerAllrightsreserved.ExceptaspermittedundertheU.S.CopyrightActof1976,nopartofthispublicationmaybereproduced,distributed,ortransmittedinanyformorbyanymeans,orstoredinadatabaseorretrievalsystem,withoutthepriorwrittenpermissionofthepublisher.

TwelveHachetteBookGroup237ParkAvenueNewYork,NY10017Visitourwebsiteatwww.HachetteBookGroup.com.www.twitter.com/grandcentralpub.

TwelveisanimprintofGrandCentralPublishing.TheTwelvenameandlogoaretrademarksofHachetteBookGroup,Inc.

FirsteBookEdition:November2009

ISBN:978-0-446-55831-0

http://www.HachetteBookGroup.comhttp://www.twitter.com/grandcentralpub

ToCampbellBrownandWendySinger,whosharedourenthusiasmforthisstory.

ToJamesSenorandAlexSinger,whowouldhavemarveledatwhattheyworkedto

create.

CONTENTS

COPYRIGHT

AUTHORS’NOTE

MAPS

Introduction

PartI:TheLittleNationThatCould

Chapter1:Persistence

Chapter2:BattlefieldEntrepreneurs

PartII:SeedingaCultureofInnovation

Chapter3:ThePeopleoftheBook

Chapter4:Harvard,Princeton,andYale

Chapter5:WhereOrderMeetsChaos

PartIII:Beginnings

Chapter6:AnIndustrialPolicyThatWorked

Chapter7:Immigration

Chapter8:TheDiaspora

Chapter9:TheBuffettTest

Chapter10:Yozma

PartIV:CountrywithaMotive

Chapter11:BetrayalandOpportunity

Chapter12:FromNoseConestoGeysers

Chapter13:TheSheikh’sDilemma

Chapter14:ThreatstotheEconomicMiracle

Conclusion:FarmersofHighTech

ACKNOWLEDGMENTS

NOTES

BIBLIOGRAPHY

ABOUTTHEAUTHORS

ABOUTTHETWELVE

AUTHORS’NOTE

Thisisabookaboutinnovationandentrepreneurship,andhowonesmallcountry,Israel,cametoembodyboth.

Thisisnotabookabouttechnology,eventhoughwefeaturemanyhigh-techcompanies.Whilewearefascinatedbytechnologyanditsimpactonthemodernage,ourfocusistheecosystemthatgeneratesradicallynewbusinessideas.

Thisbookispartexploration,partargument,andpartstorytelling.Thereadermightexpectthebooktobeorganizedchronologically,aroundcompanies,oraccordingtothevariouskeyelementsthatwehaveidentifiedinIsrael’smodelforinnovation.Theseorganizationalblueprintstemptedus,butweultimatelyrejectedthemallinfavorofamoremosaiclikeapproach.

Weexaminehistoryandculture,anduseselectedstoriesofcompaniestotrytounderstandwhereallofthiscreativeenergycamefromandtheformsinwhichitisexpressed.Wehaveinterviewedeconomistsandstudiedtheirperspectives,butwecomeatoursubjectasstudentsofhistory,business,andgeopolitics.Oneofus(Dan)hasabackgroundinbusinessandgovernment,theother(Saul)ingovernmentandjournalism.DanlivesinNewYorkandhasstudiedinIsraelandlived,worked,andtraveledintheArabworld;SaulgrewupintheUnitedStatesandnowlivesinJerusalem.

DanhasinvestedinIsraelicompanies.Noneofthesecompaniesareprofiledinthisbook,butsomepeopleDanhasinvestedwithare.Wewillnotethiswhereappropriate.

WhileouradmirationfortheuntoldstoryofwhatIsraelhasaccomplishedeconomicallywasabigpartofwhatmotivatedustowritethisbook,wedocoverareaswhereIsraelhasfallenbehind.WealsoexaminethreatstoIsrael’scontinuedsuccess—mostofwhichwilllikelysurprisethereader,sincetheydonotrelatetothosethatgenerallypreoccupytheinternationalpress.

Wedelvebrieflyintotwootherareas:whyAmericaninnovationindustrieshavenottakenbetteradvantageoftheentrepreneurialtalentofferedbythose

withU.S.militarytrainingandexperience,incontrasttothepracticeintheIsraelieconomy;andwhytheArabworldishavingdifficultyinfosteringentrepreneurship.Thesesubjectsdeservein-depthtreatmentbeyondthescopeofthisbook;entirebookscouldbewrittenabouteach.

Finally,ifthereisonestorythathasbeenlargelymisseddespitetheextensivemediacoverageofIsrael,itisthatkeyeconomicmetricsdemonstratethatIsraelrepresentsthegreatestconcentrationofinnovationandentrepreneurshipintheworldtoday.

Thisbookisourattempttoexplainthatphenomenon.

Israel.©2003–2009KoretCommunicationsLtd.www.koret.com.Reprintedbypermission.

Israelandtheregion.©2003–2009KoretCommunicationsLtd.www.koret.com.Reprintedbypermission.

Introduction

Nicespeech,butwhatareyougoingtodo?

—SHIMONPEREStoSHAIAGASSI

THETWOMENMADEANODDCOUPLEastheysat,waiting,inanelegantsuiteintheSheratonSeehof,highupintheSwissAlps.Therewasnotimetocutthetensionwithsmalltalk;theyjustexchangednervousglances.Theolderman,morethantwicetheageoftheyoungerandnotonetobecomeeasilydiscouraged,wasthecalmerofthetwo.Theyoungermannormallyexudedtheself-confidencethatcomeswithbeingthesmartestpersonintheroom,butrepeatedrejectionshadbeguntofosterdoubtinhismind:Wouldhereallybeabletopulloffreinventingthreemegaindustries?Hewasanxiousforthenextmeetingtobegin.

Itwasnotclearwhytheoldermanwassubjectinghimselftothiskindofhassleandtotheriskofhumiliation.Hewastheworld’smostfamouslivingIsraeli,aneruditetwo-timeprimeministerandNobelPrizewinner.Ateighty-threeyearsold,ShimonPerescertainlydidnotneedanotheradventure.

Justsecuringthesemeetingshadbeenachallenge.ShimonPereswasaperennialfixtureattheannualDavosWorldEconomicForum.Forthepress,waitingtoseewhetherthisorthatArabpotentatewouldshakePeres’shandwasaneasysourceofdramaatwhatwasotherwiseadressed-upbusinessconference.HewasoneofthefamousleadersCEOstypicallywantedtomeet.

SowhenPeresinvitedtheCEOsoftheworld’sfivelargestcarmakerstomeetwithhim,heexpectedthattheywouldshowup.Butitwasearly2007,theglobalfinancialcrisiswasnotyetonthehorizon,theautoindustrywasnotfeelingthepressureitwouldayearlater,andtheAmericanBigThree—GM,Ford,andChrysler—didn’tbothertorespond.Anothertopautomakerhadarrived,buthe’dspenttheentiretwenty-fiveminutesexplainingthatPeres’sideawouldneverwork.Hewasn’tinterestedinhearingabouttheIsraelileader’s

utopianschemetoswitchtheworldovertofullyelectricvehicles,andevenifhehadbeen,hewouldn’tdreamoflaunchingitinatinycountrylikeIsrael.“Look,I’vereadShai’spaper,”theautoexecutivetoldPeres,referringtothewhitepaperPereshadsentwiththeinvitation.“He’sfantasizing.Thereisnocarlikethat.We’vetriedit,anditcan’tbebuilt.”Hewentontoexplainthathybridcarsweretheonlyrealisticsolution.

ShaiAgassiwastheyoungermanmakingthepitchalongsidePeres.Atthetime,AgassiwasanexecutiveatSAP,thelargestenterprisesoftwarecompanyintheworld.AgassihadjoinedtheGermantechgiantin2000,afteritboughthisIsraelistart-up,TopTierSoftware,for$400million.Thesalehadprovedthatthoughthetechbubblehadjustburst,someIsraelicompaniescouldstillgarnerprecrashvalues.

AgassifoundedTopTierwhenhewastwenty-four.Fifteenyearslater,heheadedtwoSAPsubsidiaries,wastheyoungestandonlynon-GermanmemberofSAP’sboard,andhadbeenshort-listedforCEO.Evenifhemissedtheringatthirty-nine,hecouldbeprettyconfidentthatsomedayitwouldbehis.

YethereAgassiwas,withthenextpresidentofIsrael,tryingtoinstructanautoexecutiveonthefutureoftheautoindustry.Evenhewasbeginningtowonderifthisentireideawaspreposterous,especiallysinceithadbegunasnothingmorethanathoughtexperiment.

AtwhatAgassicalls“BabyDavos”—theForumforYoungLeaders—twoyearsbefore,hehadtakenseriouslyachallengetothegrouptocomeupwithawaytomaketheworlda“betterplace”by2030.Mostparticipantsproposedtweakstotheirbusinesses.Agassicameupwithanideasoambitiousthatmostpeoplethoughthimnaive.“Idecidedthatthemostimportantthingtodowastofigureouthowtotakeasinglecountryoffofoil,”hetoldus.

Agassibelievedthatifjustonecountrywasabletobecomecompletelyoil-independent,theworldwouldfollow.Thefirststepwastofindawaytoruncarswithoutoil.

Thisalonewasnotarevolutionaryinsight.Heexploredsomeexotictechnologiesforpoweringcars,suchashydrogen

fuelcells,buttheyallseemedliketheywouldforeverbetenyearsaway.SoAgassidecidedtofocusonthesimplestsystemofall:battery-poweredelectricvehicles.Theconceptwasonethathadbeenrejectedinthepastastoolimitingandexpensive,butAgassithoughthehadasolutiontomaketheelectriccarnotjustviableforconsumersbutpreferable.Ifelectriccarscouldbeascheap,convenient,andpowerfulasgascars,whowouldn’twantone?

Somethingaboutcomingfromanembattledsliverofacountry—hometojustoneone-thousandthoftheworld’spopulation—makesIsraelisskepticalofconventionalexplanationsaboutwhatispossible.IftheessenceoftheIsraelicondition,asPereslatertoldus,wastobe“dissatisfied,”thenAgassitypifiedIsrael’snationalethos.

ButifnotforPeres,evenAgassimightnothavedaredtopursuehisownidea.AfterhearingAgassimakehispitchforoilindependence,Perescalledhimandsaid,“Nicespeech,butwhatareyougoingtodo?”1

Untilthatpoint,Agassisays,he“wasmerelysolvingapuzzle”—theproblemwasstilljustathoughtexperiment.ButPeresputthechallengebeforehiminclearterms:“Canyoureallydoit?Isthereanythingmoreimportantthangettingtheworldoffoil?Whowilldoitifyoudon’t?”Andfinally,Peresadded,“WhatcanIdotohelp?”2

Pereswasseriousabouthelping.JustafterChristmas2006andintothefirstfewdaysof2007,heorchestratedforAgassiawhirlwindofmorethanfiftymeetingswithIsrael’stopindustryandgovernmentleaders,includingtheprimeminister.“Eachmorning,wewouldmeetathisofficeandIwoulddebriefhimonthepreviousday’smeetings,andhe’dgetonthephoneandbeginschedulingthenextday’smeetings,”Agassitoldus.“TheseareappointmentsIcouldneverhavegottenwithoutPeres.”

Peresalsosentletterstothefivebiggestautomakers,alongwithAgassi’sconceptpaper,whichwashowtheyfoundthemselvesinaSwisshotelroom,waitingonwhatwaslikelytobetheirlastchance.“Upuntilthatfirstmeeting,”Agassisaid,“Pereshadonlyheardabouttheconceptfromme,asoftwareguy.WhatdidIknow?Buthetookariskonme.”TheDavosmeetingswerethefirsttimePereshadpersonallytestedtheideaonpeoplewhoactuallyworkedintheautoindustry.Andthefirstindustryexecutivethey’dmethadnotonlyshotdowntheideabutspentmostofthemeetingtryingtotalkPeresoutofpursuingit.Agassiwasmortified.“Ihadcompletelyembarrassedthisinternationalstatesman,”hesaid.“Imadehimlooklikehedidnotknowwhathewastalkingabout.”

Butnowtheirsecondappointmentwasabouttobegin.CarlosGhosn,theCEOofRenaultandNissan,hadareputationinthebusinessworldasapremierturnaroundartist.BorninBraziltoLebaneseparents,heisfamousinJapanfortakingchargeofNissan,whichwassufferingmassivelosses,andintwoyearsturningaprofit.ThegratefulJapanesereciprocatedbybasingacomic-bookseriesonhislife.

PeresbegantospeaksosoftlythatGhosncouldbarelyhearhim,butAgassiwasastounded.Afterthepoundingtheyhadjustreceivedinthepreviousmeeting,AgassiexpectedthatPeresmightsaysomethinglike,“Shaihasthiscrazyideaaboutbuildinganelectricgrid.I’lllethimexplainit,andyoucantellhimwhatyouthink.”Butratherthanpullingback,Peresgrewevenmoreenergeticthanbeforeinmakingthepitch,andmoreforceful.

Oilisfinished,hesaid;itmaystillbecomingoutoftheground,buttheworlddoesn’twantitanymore.Moreimportantly,PerestoldGhosn,itisfinancinginternationalterrorismandinstability.“Wedon’tneedtodefendagainstincomingKatyusharockets,”hepointedout,“ifwecanfigureouthowtocutoffthefundingthatlaunchestheminthefirstplace.”

ThenPerestriedtopreempttheargumentthatthetechnologyalternativejustdidn’texistyet.Heknewthatallthebigcarcompanieswereflirtingwithabizarrecropofelectricmutations—hybrids,plug-inhybrids,tinyelectricvehicles—butnoneofthemheraldedanewerainmotorvehicletechnology.

Justthen,againaboutfiveminutesintoPeres’spitch,thevisitorstoppedhim.“Look,Mr.Peres,”Ghosnsaid,“IreadShai’spaper”—AgassiandPerestriednottowince,buttheyfelttheyknewwherethismeetingwasheading—“andheisabsolutelyright.Weareexactlyonthesamepage.Wethinkthefutureiselectric.Wehavethecar,andwethinkwehavethebattery.”

Pereswasalmostcaughtspeechless.Justminutesagothey’dreceivedanimpassionedlectureonwhythefullyelectriccarwouldneverworkandwhyhybridswerethewaytogo.ButPeresandAgassiknewthathybridswerearoadtonowhere.What’sthepointofacarwithtwoseparatepowerplants?Existinghybridscostafortuneandincreasefuelefficiencybyonly20percent.Theywouldn’tgetcountriesoffoil.InPeresandAgassi’sview,hybridswereliketreatingagunshotwoundwithaBand-aid.

Buttheyhadneverheardallthisfromanactualcarmaker.Perescouldn’thelpblurtingout,“Sowhatdoyouthinkofhybrids?”

“Ithinktheymakenosense,”Ghosnsaidconfidently.“Ahybridislikeamermaid:ifyouwantafish,yougetawoman;ifyouwantawoman,yougetafish.”

ThelaughterfromPeresandAgassiwasgenuine,mixedwithalargedoseofrelief.Hadtheyfoundatruepartnerfortheirvision?NowitwasGhosn’sturntobeworried.Thoughhewasoptimistic,alltheclassicobstaclestoelectricvehiclesstillremained:thebatteriesweretooexpensive,theyhadarangelessthanhalfthatofatankofgas,andtheytookhourstorecharge.Solongas

consumerswerebeingaskedtopayapremiuminpriceandconvenience,cleancarswouldremainanichemarket.

Peressaidthathe’dhadallthesamemisgivings,untilhehadmetAgassi.ThiswasAgassi’scuetoexplainhowalltheseliabilitiescouldbeaddressedusingexistingtechnology,notsomemiraclebatterythatwouldn’tbeavailablefordecades.

Ghosn’sattentionshiftedfromPerestoAgassi,whodoverightin.Agassiexplainedhisidea,assimpleasitwasradical:electriccarsseemed

expensiveonlybecausebatterieswereexpensive.Butsellingthecarwiththebatteryisliketryingtosellgascarswithenoughgasolinetorunthemforseveralyears.Whenyoufactorinoperatingcosts,electriccarsareactuallymuchcheaper—sevencentsamileforelectric(includingboththebatteryandtheelectricitytochargeit)comparedtotencentsamileforgas,assuminggascosts$2.50agallon.Ifthepriceofgasisashighas$4.00pergallon,thiscostgapbecomesachasm.Butwhatifyoudidn’thavetopayforthebatterywhenyouboughtthecarand—aswithanyotherfuel—spreadthecostofthebatteryoverthelifeofthecar?Electriccarscouldbecomeatleastascheapasgasolinecars,andthecostofthebatterywiththeelectricitytochargeitwouldbesignificantlycheaperthanwhatpeoplewereusedtopayingatthepump.Suddenly,theeconomicsoftheelectriccarwouldturnupsidedown.Furthermore,overthelongrun,thisalreadysizableelectriccostadvantagewouldbecertaintoincreaseasbatteriesbecamecheaper.

Overcomingthepricebarrierwasthebiggestbreakthrough,butitwasn’tsufficientforelectricvehiclestobecome,asAgassicalledit,the“Car2.0”thatwouldreplacethetransportationmodelintroducedbyHenryFordalmostacenturyago.Afive-minutefill-upwilllastagascarthreehundredmiles.How,Ghosnwondered,cananelectriccarcompetewiththat?

Agassi’ssolutionwasinfrastructure:wirethousandsofparkingspots,buildbatteryswapstations,andcoordinateitalloveranew“smartgrid.”Inmostcases,chargingthecarathomeandtheofficewouldeasilybeenoughtogetyouthroughtheday.Onlongerdrives,youcouldpullintoaswapstationandbeoffwithafullychargedbatteryinthetimeittakestofillatankofgas.He’drecruitedaformerIsraeliarmygeneral—amanskilledatmanagingcomplexmilitarylogistics—tobecomethecompany’slocalIsraeliCEOandleadtheplanningforthegridandthenationalnetworkofcharging/parkingspots.

Thekeytothemodelwouldbethatconsumerswouldowntheircars,butAgassi’sstart-up,calledBetterPlace,wouldownthebatteries.“Here’showit

works,”helaterexplained.“Thinkcellphones.Yougotoacellprovider.Ifyouwant,youcanpayfullpriceforaphoneandmakenocommitment.Butmostpeoplecommitfortwoorthreeyearsandgetasubsidizedorfreephone.Theyenduppayingforthephoneastheypayfortheirminutesofairtime.”3

Electricvehicles,Agassiexplained,couldworkthesameway:BetterPlacewouldbelikeacellularprovider.Youwouldwalkintoacardealer,signupforaplanbasedonmilesinsteadofminutes,andgetanelectriccar.Butthebuyerwouldn’townthecarbattery;BetterPlacewould.Sothecompanycouldspreadthecostofthebattery—andthecar,too—overfourormoreyears.Forthepriceconsumersareusedtopayingeachmonthforgas,theycouldpayforthebatteryandtheelectricityneededtorunit.“Yougettogocompletelygreenforlessthanitcoststobuyandrunagascar,”Agassisaid.

AgassipickedupwherePereshadleftoffonanotherquestion:WhystartwithIsrael,ofallplaces?Thefirstreasonwassize,hetoldGhosn.Israelwastheperfect“beta”countryforelectriccars.Notonlywasitsmallbut,duetothehostilityofitsneighbors,itwasasealed“transportationisland.”BecauseIsraeliscouldnotdrivebeyondtheirnationalborders,theirdrivingdistanceswerealwayswithinoneoftheworld’ssmallestnationalspaces.ThislimitedthenumberofbatteryswapstationsBetterPlacewouldhavetobuildintheearlyphase.ByisolatingIsrael,Agassitolduswithanimpishsmile,Israel’sadversarieshadactuallycreatedtheperfectlaboratorytotestideas.

Second,Israelisunderstandnotonlythefinancialandenvironmentalcostsofbeingdependentonoilbutalsothesecuritycostsofpumpingmoneyintothecoffersofless-than-savoryregimes.Third,Israelisarenaturalearlyadopters—theywererecentlynumberoneintheworldintimespentontheInternetandhaveacellphonepenetrationof125percent,meaninglotsofpeoplehavemorethanone.

Nolessimportantly,AgassiknewthatinIsraelhewouldfindtheresourcesheneededtotacklethetrickysoftwarechallengeofcreatinga“smartgrid”thatcoulddirectcarstoopenchargingspotsandmanagethechargingofmillionsofcarswithoutoverloadingthesystem.Israel,thecountrywiththehighestconcentrationofengineersandresearchanddevelopmentspendingintheworld,wasanaturalplacetoattemptthis.Agassiactuallywantedtogoevenfurther.Afterall,ifIntelcouldmass-produceitsmostsophisticatedchipsinIsrael,whycouldn’tRenault-Nissanbuildcarsthere?Ghosn’sresponsewasthatitwouldworkonlyiftheycouldproduceatleastfiftythousandcarsayear.Peresdidn’tblink,andcommittedtoanannualproductionofonehundredthousandcars.

Ghosnwasonboard,providedPerescouldmakegoodonhispromise.Agassiwascaughtbetweenthreepossiblecommitments.Heneededa

country,acarcompany,andthemoney,buttogetanyoneofthemhefirstneededtheothertwo.Forexample,whenPeresandAgassihadgonetothenprimeministerEhudOlmerttosecurehiscommitmenttomakeIsraelthefirstcountrytofreeitselffromoil,thepremierhadsettwoconditions:Agassihadtosignonatop-fivecarmakerandraisethe$200millionneededtodevelopthesmartgrid,turninghalfamillionparkingspacesintochargingspots,andbuildingswapstations.NowAgassihadthecarmaker,anditwastimetofulfillOlmert’ssecondcondition:money.

Still,Agassihadheardenoughtobelievethathisideacouldtakeoff.Stunningthetechworld,hequithisjobatSAPtofoundBetterPlace.(IttookfourconversationstoconvincetheSAPmanagementthathewasseriousaboutquitting.)

Butinvestorsaroundtheglobewerenotjumpingataplanthatinvolvedreimaginingsomeofthelargest,mostpowerfulindustriesintheworld:cars,oil,andelectricity.Plus,sincethecarswereuselesswithouttheinfrastructure,thecharginggridwouldhavetobedevelopedanddeployedbeforethecarswerereleasedinsignificantnumbers.Thatmeantspendingmostofthe$200milliontowiretheentirecountryupfront—anenormouscapitalexpenditurethatwouldmakeinvestors’headsspin.Eversincethetechbubblehadburstin2000,venturecapitalistsweremuchlessventuresome;noonewantedtospendtonsofmoneyupfront,wellbeforethefirstdollarofrevenueshowedup.

Exceptforoneinvestor,thatis—IsraelibillionaireIdanOfer,whohadjustmadethelargesteverIsraeliinvestmentinChinabybuyingamajorstakeintheChinesecarmanufacturerCheryAutomobile.Sixmonthsbefore,Oferhadalsoboughtanoilrefinery.Soheknewathingortwoabouttheautoandoilindustries.WhenMikeGranoff,anearlyAmericaninvestorinBetterPlace,suggestedtappingOfer,Agassisaid,“Whywouldhehelpmeputhimoutofhistwonewestbusinesses?”ButAgassihadnothingtolose.

Forty-fiveminutesintotheirmeeting,OfertoldAgassihewasinfor$100million.Helaterincreasedhisstakebyanother$30millionandtoldhisChineseautoteamhewantedittobuildelectriccars.

Agassiraisedthe$200million,makingBetterPlacethefifth-largeststart-upinhistory.4WithIsraelinplaceasthefirsttestcase,otherswerequicktofollow.Asofthiswriting,Denmark,Australia,theSanFranciscoBayArea,Hawaii,andOntario—Canada’smostpopulousprovince—haveallannouncedthattheywill

jointheBetterPlaceplan.BetterPlacewastheonlyforeigncompanyaskedtocompeteindevelopinganelectricvehiclesystemforJapan,ahighlyunusualstepforthehistoricallyprotectionistJapanesegovernment.

AmongthemanyskepticsisThomasWeber,theMercedesresearchanddevelopmentchief.Hesaidthatin1972hiscompanyhadactuallybuiltanelectricbuswithaswappablebattery,calledtheLE306,anddiscoveredthatchangingabatterycouldcauseelectrocutionorfire.

BetterPlace’sanswerhasbeenaworkingbatteryswapstation.Usingoneislikepullingintoacarwash.Only,oncethedriverpullsin,alargerectangularmetalplate—muchliketheliftsatthebackendofmovingtrucks—risesupfromunderneaththecar.Thecarthenretractsthethicktwo-inchmetalhookssecuringtheenormousbluebattery,releasingitsoitrestsontheplate.Theplatemovesbackdown,dropsthespentbatteryinachargingstation,picksupafullbattery,andliftsitintoplaceunderthecar.Totaltimeforthecompletedautomatedswap:sixty-fiveseconds.

Agassiisproudofhowhisteamsolvedtheengineeringproblemofprecisely,instantly,andreliablyreleasingabatterythatweighshundredsofpounds.Theyemployedthesamehooksusedtoholdfive-hundred-poundbombsinplaceonairforcebombers.Therewasnoroomforerrorinabomb-releasemechanism;thebatterywouldbejustassecure,yetremovable,inelectriccars.

Ifitsucceeds,theglobalimpactofBetterPlaceoneconomics,politics,andtheenvironmentmightwelltranscendthatofthemostimportanttechnologycompaniesintheworld.AndtheideawillhavespreadfromIsraelthroughouttheworld.

CompanieslikeBetterPlaceandentrepreneurslikeShaiAgassidon’tappeareveryday.YetaglanceatIsraelshowswhyitisnotsosurprisingthat,asBoston’sBatteryVenturesinvestorScottTobinpredicted,“thenextbigideawillcomefromIsrael.”5

TechnologycompaniesandglobalinvestorsarebeatingapathtoIsraelandfindinguniquecombinationsofaudacity,creativity,anddriveeverywheretheylook.Whichmayexplainwhy,inadditiontoboastingthehighestdensityofstart-upsintheworld(atotalof3,850start-ups,oneforevery1,844Israelis),6moreIsraelicompaniesarelistedontheNASDAQexchangethanallcompaniesfromtheentireEuropeancontinent.

Andit’snotjusttheNewYorkstockexchangesthathavebeendrawntoIsrael,butalsothemostcriticalandfungiblemeasureoftechnologicalpromise:venturecapital.

In2008,percapitaventurecapitalinvestmentsinIsraelwere2.5timesgreaterthanintheUnitedStates,morethan30timesgreaterthaninEurope,80timesgreaterthaninChina,and350timesgreaterthaninIndia.Comparingabsolutenumbers,Israel—acountryofjust7.1millionpeople—attractedcloseto$2billioninventurecapital,asmuchasflowedtotheUnitedKingdom’s61millioncitizensortothe145millionpeoplelivinginGermanyandFrancecombined.7AndIsraelistheonlycountrytoexperienceameaningfulincreaseinventurecapitalfrom2007to2008,asfigureI.1shows.8

FigureI.1.Sources:DowJones,VentureSource;ThomsonReuters;U.S.CentralIntelligenceAgency,WorldFactBook,

2007,2008.

AftertheUnitedStates,IsraelhasmorecompanieslistedontheNASDAQthananyothercountryintheworld,includingIndia,China,Korea,Singapore,andIreland,asfigureI.2shows.And,asfigureI.3makesclear,Israelistheworldleaderinthepercentageoftheeconomythatisspentonresearchanddevelopment.

FigureI.2.Source:NASDAQ,http://www.nasdaq.com/asp/NonUsOutput.asp,May2009.

FigureI.3.Source:UNDP(UnitedNationsDevelopmentProgramme)Report,2007/2008.

Israel’seconomyhasalsogrownfasterthantheaverageforthedevelopedeconomiesoftheworldinmostyearssince1995,asachartonpage14illustrates(figureI.4).

EventhewarsIsraelhasrepeatedlyfoughthavenotslowedthecountrydown.Duringthesixyearsfollowing2000,IsraelwashitnotjustbytheburstingoftheglobaltechbubblebutbythemostintenseperiodofterroristattacksinitshistoryandbythesecondLebanonwar.YetIsrael’sshareoftheglobalventure

http://www.nasdaq.com/asp/ NonUsOutput.asp

capitalmarketdidnotdrop—itdoubled,from15percentto31percent.AndtheTelAvivstockexchangewashigheronthelastdayoftheLebanonwarthanonthefirst,asitwasafterthethree-weekmilitaryoperationintheGazaStripin2009.

FigureI.4.Sources:“MiraclesandMirages,”Economist,April13,2008;“GDPGrowthRatesbyCountryandRegion,

1970–2007,”Swivel,http://www.swivel.com/data_columns/spreadsheet/2085677.

TheIsraelieconomicstorybecomesevenmorecuriouswhenoneconsidersthenation’sdirestatejustalittleoverahalfcenturyago.ShaiAgassi’sfamilyimmigratedtoIsraelfromIraqin1950,twoyearsafterIsrael’sfounding.TheAgassiswerepartofafloodofamillionrefugeesfleeingasawaveofviolentpogromsswepttheArabworldaftertheStateofIsrael’sfounding.Atthetime,thefledglingJewishstatesimultaneouslyfacedtwoseeminglyinsurmountablechallenges:fightinganexistentialwarforindependenceandabsorbingmassesofrefugeesfrompostwarEuropeandthesurroundingArabcountries.

Israel’spopulationdoubledinthefirsttwoyearsofitsexistence.Overthenextsevenyears,thecountrygrewbyanotherthird.TwooutofthreeIsraeliswerenewarrivals.Rightofftheboat,manyrefugeesweregivenaguntheyhadnoideahowtouseandsenttofight.SomeofthosewhohadsurvivedNaziconcentrationcampsfellinbattleevenbeforetheirnamescouldberecorded.Proportionately,moreIsraelisdiedinthewarforIsrael’sestablishmentthan

http://www.swivel.com/data_columns/spreadsheet/2085677

Americansinbothworldwarscombined.Thosewhosurvivedhadtostruggletothriveinastagnanteconomy.

“Everythingwasrationed,”complainedonenewarrival.“Wehadcouponbooks,oneeggaweek,longlines.”9TheaveragestandardoflivingforIsraeliswascomparabletothatofAmericansinthe1800s.10How,then,didthis“start-up”statenotonlysurvivebutmorphfromabesiegedbackwatertoahigh-techpowerhousethathasachievedfiftyfoldeconomicgrowthinsixtyyears?HowdidacommunityofpennilessrefugeestransformalandthatMarkTwaindescribedasa“desolatecountry...asilent,mournfulexpanse,”11intooneofthemostdynamicentrepreneurialeconomiesintheworld?

ThefactthatthisquestionhasbeentreatedonlyinpiecemealfashionisunbelievabletoIsraelipoliticaleconomistGidiGrinstein:“Look,wedoubledoureconomicsituationrelativetoAmericawhilemultiplyingourpopulationfivefoldandfightingthreewars.Thisistotallyunmatchedintheeconomichistoryoftheworld.”And,hetoldus,theIsraelientrepreneurcontinuestoperforminunimaginableways.12

WhiletheHolyLandhasforcenturiesattractedpilgrims,latelyithasbeenfloodedbyseekersofadifferentsort.Google’sCEOandchairman,EricSchmidt,toldusthattheUnitedStatesisthenumberoneplaceintheworldforentrepreneurs,but“aftertheU.S.,Israelisthebest.”Microsoft’sSteveBallmerhascalledMicrosoft“anIsraelicompanyasmuchasanAmericancompany”becauseofthesizeandcentralityofitsIsraeliteams.13WarrenBuffett,theapostleofriskaversion,brokehisdecades-longrecordofnotbuyinganyforeigncompanywiththepurchaseofanIsraelicompany—for$4.5billion—justasIsraelbegantofightthe2006Lebanonwar.

ItisimpossibleformajortechnologycompaniestoignoreIsrael,andmosthaven’t;almosthalfoftheworld’stoptechnologycompanieshaveboughtstart-upsoropenedresearchanddevelopmentcentersinIsrael.CiscoalonehasacquirednineIsraelicompaniesandislookingtobuymore.14

“IntwodaysinIsrael,Isawmoreopportunitiesthaninayearintherestoftheworld,”saidPaulSmith,seniorvicepresidentofPhilipsMedical.15GaryShainberg,BritishTelecom’sVPfortechnologyandinnovation,toldus,“Therearemorenewinnovativeideas,asopposedtorecycledideas—oroldideasrepackagedinanewbox—comingoutofIsraelthanthereareoutin[Silicon]Valleynow.Anditdoesn’tslowduringglobaleconomicdownturns.”16

ThoughIsrael’stechnologystoryisbecomingmorewidelyknown,those

exposedtoitforthefirsttimeareinvariablybaffled.AsanNBCUniversalvicepresidentsenttoscoutforIsraelidigitalmediacompanieswondered,“WhyisallthishappeninginIsrael?I’veneverseensomuchchaosandsomuchinnovationallinonetinyplace.”17

Thatisthemysterythisbookaimstosolve.WhyIsraelandnotelsewhere?Oneexplanationisthatadversity,likenecessity,breedsinventiveness.Other

smallandthreatenedcountries,suchasSouthKorea,Singapore,andTaiwan,canalsoboastgrowthrecordsthatareasimpressiveasIsrael’s.Butnoneofthemhaveproducedanentrepreneurialculture—nottomentionanarrayofstart-ups—thatcompareswithIsrael’s.

SomepeopleconjecturethatthereissomethingspecificallyJewishatwork.ThenotionthatJewsare“smart”hasbecomedeeplyembeddedintheWesternpsyche.Wesawthisourselves;whenwetoldpeoplewewerewritingabookaboutwhyIsraelissoinnovative,manyreactedbysaying,“It’ssimple—Jewsaresmart,soit’snosurprisethatIsraelisinnovative.”ButpinningIsrael’ssuccessonastereotypeobscuresmorethanitreveals.

Forstarters,theideaofaunitaryJewishness—whethergeneticorcultural—wouldseemtohavelittleapplicabilitytoanationthat,thoughsmall,isamongthemostheterogeneousintheworld.Israel’stinypopulationismadeupofsomeseventydifferentnationalities.AJewishrefugeefromIraqandonefromPolandorEthiopiadidnotsharealanguage,education,culture,orhistory—atleastnotforthetwopreviousmillennia.AsIrisheconomistDavidMcWilliamsexplains,“Israelisquitetheoppositeofauni-dimensional,Jewishcountry....Itisamonotheisticmeltingpotofadiasporathatbroughtbackwithittheculture,languageandcustomsofthefourcornersoftheearth.”18

Whileacommonprayerbookandasharedlegacyofpersecutioncountforsomething,itwasfarfromclearthatthisdisparategroupcouldformafunctioningcountryatall,letaloneonethatwouldexcelat—ofallthings—teamworkandinnovation.

Indeed,Israel’ssecretseemstolieinsomethingmorethanjustthetalentofindividuals.Therearelotsofplaceswithtalentedpeople,certainlywithmanytimesthenumberofengineersthatIsraelhastooffer.Singaporeanstudents,forexample,leadtheworldinscienceandmathematicstestscores.MultinationalshavesetupshopinplaceslikeIndiaandIreland,too.“Butwedon’tsetupourmissioncriticalworkinthosecountries,”anAmericanexecutivefromeBaytoldus.“Google,Cisco,Microsoft,Intel,eBay...thelistgoeson.Thebest-keptsecretisthatweallliveanddiebytheworkofourIsraeliteams.It’smuchmore

thanjustoutsourcingcallcenterstoIndiaorsettingupITservicesinIreland.WhatwedoinIsraelisunlikewhatwedoanywhereelseintheworld.”19

AnothercommonlycitedfactorinIsrael’ssuccessisthecountry’smilitaryanddefenseindustry,whichhasproducedsuccessfulspin-offcompanies.Thisispartoftheanswer,butitdoesnotexplainwhyothercountriesthathaveconscriptionandlargemilitariesdonotseeasimilarimpactontheirprivatesectors.Pointingtothemilitaryjustshiftsthequestion:WhatisitabouttheIsraelimilitarythatseemstofosterentrepreneurship?Andevenwiththeinfluenceofthemilitary,whyisitthatdefense,counterterrorism,andhomelandsecuritycompaniestodayrepresentlessthan5percentofIsrael’sgrossdomesticproduct?

Theanswer,wecontend,mustbebroaderanddeeper.ItmustlieinthestoriesofindividualentrepreneurslikeShaiAgassi,whichareemblematicofthestateitself.Aswewillshow,itisastorynotjustoftalentbutoftenacity,ofinsatiablequestioningofauthority,ofdeterminedinformality,combinedwithauniqueattitudetowardfailure,teamwork,mission,risk,andcross-disciplinarycreativity.Israelisrepletewithsuchstories.ButIsraelisthemselveshavebeentoobusybuildingtheirstart-upstostepbackandtrytostitchtogetherhowithappenedandwhatothers—governments,largecompanies,andstart-upentrepreneurs—canlearnfromtheirexperience.

ItwouldbehardtoimagineatimewhenunderstandingthestoryofIsrael’seconomicmiraclecouldbemorerelevant.WhiletheUnitedStatescontinuestoberatedtheworld’smostcompetitiveeconomy,thereisawidespreadsensethatsomethingfundamentalhasgonewrong.

Evenbeforetheglobalfinancialcrisisthatbeganin2008,observersoftheinnovationraceweresoundingalarms.“IndiaandChinaareatsunamiabouttooverwhelmus,”predictedStanfordResearchInstitute’sCurtisCarlson.HeforecaststhatAmerica’sinformationtechnology,service,andmedical-devicesindustriesareabouttobelost,costing“millionsofjobs...likeinthe1980swhentheJapanesesurgedahead.”Theonlywayout,saysCarlson,is“tolearnthetoolsofinnovation”andforgeentirelynew,knowledge-basedindustriesinenergy,biotechnology,andotherscience-basedsectors.20

“Wearerapidlybecomingthefat,complacentDetroitofnations,”saysformerHarvardBusinessSchoolprofessorJohnKao.“Weare...milkingagingcowsonthevergeofgoingdry...[and]losingourcollectivesenseofpurposealongwithourfire,ambition,anddeterminationtoachieve.”21

Theeconomicdownturnhasonlysharpenedthefocusoninnovation.The

financialcrisis,afterall,wastriggeredbythecollapseofrealestateprices,whichhadbeeninflatedbyrecklessbanklendingandcheapcredit.Inotherwords,globalprosperityhadrestedonaspeculativebubble,notontheproductivityincreasesthateconomistsagreearethefoundationofsustainableeconomicgrowth.

AccordingtothepioneeringworkofNobelPrizewinnerRobertSolow,technologicalinnovationistheultimatesourceofproductivityandgrowth.22It’stheonlyprovenwayforeconomiestoconsistentlygetahead—especiallyinnovationbornbystart-upcompanies.RecentCensusBureaudatashowthatmostofthenetemploymentgainsintheUnitedStatesbetween1980and2005camefromfirmsyoungerthanfiveyearsold.Withoutstart-ups,theaverageannualnetemploymentgrowthratewouldactuallyhavebeennegative.EconomistCarlSchramm,presidentoftheKauffmanFoundation,whichanalyzesentrepreneurialeconomics,toldusthat“fortheUnitedStatestosurviveandcontinueitseconomicleadershipintheworld,wemustseeentrepreneurshipasourcentralcomparativeadvantage.Nothingelsecangiveusthenecessaryleverage.”23

Itistruethattherearemanymodelsofentrepreneurship,includingmicroentrepreneurship(thelaunchingofhouseholdbusinesses)andtheestablishmentofsmallcompaniesthatfillanicheandnevergrowbeyondit.ButIsraelspecializesinhigh-growthentrepreneurship—start-upsthatwinduptransformingentireglobalindustries.High-growthentrepreneurshipisdistinctinthatitusesspecializedtalent—fromengineersandscientiststobusinessmanagersandmarketers—tocommercializearadicallyinnovativeidea.

ThisisnottosuggestthatIsraelisareimmunefromtheuniversallyhighfailurerateofstart-ups.ButIsraelicultureandregulationsreflectauniqueattitudetofailure,onethathasmanagedtorepeatedlybringfailedentrepreneursbackintothesystemtoconstructivelyusetheirexperiencetotryagain,ratherthanleavethempermanentlystigmatizedandmarginalized.

AsarecentreportbytheMonitorGroup,aglobalmanagementconsultingfirm,describedit,“When[entrepreneurs]succeed,theyrevolutionizemarkets.Whentheyfail,theystill[keep]incumbentsunderconstantcompetitivepressureandthusstimulateprogress.”AndtheMonitorstudyshowsthatentrepreneurshipisthemainengineforeconomiesto“evolveandregenerate.”24

Thequestionhasbecome,asaBusinessWeekcoverputit,“CanAmericaInventItsWayBack?”25Themagazineobservedthat“beneaththegloom,economistsandbusinessleadersacrossthepoliticalspectrumareslowlycoming

toanagreement:Innovationisthebest—andmaybetheonly—waytheU.S.cangetoutofitseconomichole.”

Inaworldseekingthekeytoinnovation,Israelisanaturalplacetolook.TheWestneedsinnovation;Israel’sgotit.Understandingwherethisentrepreneurialenergycomesfrom,whereit’sgoing,howtosustainit,andhowothercountriescanlearnfromthequintessentialstart-upnationisacriticaltaskforourtimes.

PARTI

TheLittleNationThatCould

CHAPTER1

Persistence

Fourguysarestandingonastreetcorner...anAmerican,aRussian,aChineseman,andanIsraeli....

Areportercomesuptothegroupandsaystothem:“Excuseme....What’syouropiniononthemeat

shortage?”TheAmericansays:What’sashortage?

TheRussiansays:What’smeat?TheChinesemansays:What’sanopinion?TheIsraelisays:What’s“Excuseme”?

—MIKELEIGH,TwoThousandYears

SCOTTTHOMPSONLOOKEDATHISWATCH.1Hewasrunningbehind.Hehadalonglistofto-dostocompletebytheendoftheweek,anditwasalreadyThursday.Thompsonisabusyguy.AspresidentandformerchieftechnologyofficerofPayPal,thelargestInternetpaymentsystemintheworld,herunstheWeb’salternativetochecksandcreditcards.Buthe’dpromisedtogivetwentyminutestoakidwhoclaimedtohaveasolutiontotheproblemofonlinepaymentscams,creditcardfraud,andelectronicidentitytheft.

ShvatShakeddidnothavethebrashnessofanentrepreneur,whichwasjustaswell,sincemoststart-ups,Thompsonknew,didn’tgoanywhere.Hedidnot

looklikehehadthemoxieofevenatypicalPayPaljuniorengineer.ButThompsonwasn’tgoingtosaynotothismeeting,notwhenBenchmarkCapitalhadrequestedit.

BenchmarkhadmadeaseedinvestmentineBay,backwhenitwasbeingrunoutofthefounders’apartmentasaquirkyexchangesiteforcollectiblePezdispensers.Today,eBayisan$18billionpubliccompanywithsixteenthousandemployeesaroundtheworld.It’salsoPayPal’sparentcompany.BenchmarkwasconsideringaninvestmentinShaked’scompany,Israel-basedFraudSciences.Tohelpwithduediligence,theBenchmarkpartnersaskedThompson,whoknewathingortwoaboute-fraud,tocheckShakedout.

“Sowhat’syourmodel,Shvat?”Thompsonasked,eagertogetthemeetingoverwith.Shiftingaroundabitlikesomeonewhohadn’tquiteperfectedhisone-minute“elevatorpitch,”Shakedbeganquietly:“Ourideaissimple.Webelievethattheworldisdividedbetweengoodpeopleandbadpeople,andthetricktobeatingfraudistodistinguishbetweenthemontheWeb.”

Thompsonsuppressedhisfrustration.Thiswastoomuch,evenasafavortoBenchmark.BeforePayPal,ThompsonhadbeenatopexecutiveatcreditcardgiantVisa,anevenbiggercompanythatwasnolessobsessedwithcombatingfraud.Alargepartoftheteamatmostcreditcardcompaniesandonlinevendorsisdevotedtovettingnewcustomersandfightingfraudandidentitytheft,becausethat’swhereprofitmarginscanbelargelydeterminedandwherecustomertrustisbuiltorlost.

Visaandthebanksitpartneredwithtogetherhadtensofthousandsofpeopleworkingtobeatfraud.PayPalhadtwothousand,includingsomefiftyoftheirbestPhDengineers,tryingtostayaheadofthecrooks.Andthiskidwastalkingabout“goodguysandbadguys,”asifhewerethefirsttodiscovertheproblem.

“Soundsgood,”Thompsonsaid,notwithoutrestraint.“Howdoyoudothat?”

“GoodpeopleleavetracesofthemselvesontheInternet—digitalfootprints—becausetheyhavenothingtohide,”ShvatcontinuedinhisaccentedEnglish.“Badpeopledon’t,becausetheytrytohidethemselves.Allwedoislookforfootprints.Ifyoucanfindthem,youcanminimizerisktoanacceptablelevelandunderwriteit.Itreallyisthatsimple.”

Thompsonwasbeginningtothinkthatthisguywiththestrangenamehadflowninnotfromadifferentcountrybutratheradifferentplanet.Didn’theknowthatfightingfraudisapainstakingprocessofcheckingbackgrounds,wadingthroughcredithistories,buildingsophisticatedalgorithmstodetermine

trustworthiness?Youwouldn’twalkintoNASAandsay,“Whybuildallthosefancyspaceshipswhenallyouneedisaslingshot?”

Still,outofrespectforBenchmark,Thompsonthoughthe’dindulgeShakedforafewmoreminutes.“Sowheredidyoulearnhowtodothis?”heasked.

“Huntingdownterrorists,”Shakedsaidmatter-of-factly.Hisunitinthearmyhadbeentaskedwithhelpingtocatchterroristsbytrackingtheironlineactivities.TerroristsmovemoneythroughtheWebwithfictitiousidentities.Shvat’sjobwastofindthemonline.

Thompsonhadheardenoughfromthis“terroristhunter,”toomucheven,buthehadasimplewayout.“Haveyoutriedthisatall?”heasked.

“Yes,”Shakedsaidwithquietself-assurance.“We’vetrieditonthousandsoftransactions,andwewererightaboutallofthembutfour.”

Yeah,right,Thompsonthoughttohimself.Buthecouldn’thelpbecomingabitmorecurious.Howlongdidthattake?heasked.

Shakedsaidhiscompanyhadanalyzedfortythousandtransactionsoverfiveyears,sinceitsfounding.

“Okay,sohere’swhatwe’regoingtodo,”Thompsonsaid,andheproposedthathegiveFraudSciencesonehundredthousandPayPaltransactionstoanalyze.ThesewereconsumertransactionsPayPalhadalreadyprocessed.PayPalwouldhavetoscrubsomeofthepersonaldataforlegalprivacyreasons,whichwouldmakeShvat’sjobmoredifficult.“Butseewhatyoucando,”Thompsonoffered,“andgetbacktous.We’llcompareyourresultswithours.”

SinceithadtakenShvat’sstart-upfiveyearstogothroughtheirfirstfortythousandtransactions,Thompsonfiguredhewouldn’tbeseeingthekidagainanytimesoon.Buthewasn’taskinganythingunfair.Thiswasthesortofscalingnecessarytodeterminewhetherhisbizarre-soundingsystemwasworthanythingintherealworld.

ThefortythousandtransactionsFraudScienceshadpreviouslyprocessedhadbeendonemanually.ShakedknewthattomeetPayPal’schallengehewouldhavetoautomatehissysteminordertohandlethevolume,dosowithoutcompromisingreliability,andcrunchthetransactionsinrecordtime.Thiswouldmeantakingthesystemhe’dtestedoverfiveyearsandturningitupsidedown,quickly.

ThompsongavethetransactiondatatoShvatonaThursday.“IfiguredIwasoffthehookwithBenchmark,”herecalled.“We’dneverhearfromShvatagain.Oratleastnotformonths.”Sohewassurprisedwhenhereceivedane-mailfromIsraelonSunday.Itsaid,“We’redone.”

Thompsondidn’tbelieveit.FirstthingMondaymorning,hehandedFraudSciences’workovertohisteamofPhDsforanalysis;ittookthemaweektomatchtheresultsupagainstPayPal’s.ButbyWednesday,Thompson’sengineerswereamazedatwhattheyhadseensofar.ShakedandhissmallteamproducedmoreaccurateresultsthanPayPalhad,inashorteramountoftime,andwithincompletedata.ThedifferencewasparticularlypronouncedonthetransactionsthathadgivenPayPalthemosttrouble—onthese,FraudScienceshadperformed17percentbetter.Thiswasthecategoryofcustomerapplicants,Thompsontoldus,thatPayPalinitiallyrejected.ButinlightofwhatPayPalnowknowsfrommonitoringtherejectedcustomers’morerecentcreditreports,Thompsonsaid,thoserejectionswereamistake:“Theyaregoodcustomers.Weshouldneverhaverejectedthem.Theyslippedthroughoursystem.ButhowdidtheynotslipthroughShaked’ssystem?”

Thompsonrealizedthathewaslookingatatrulyoriginaltoolagainstfraud.WithevenlessdatathanPayPalhad,FraudScienceswasabletomoreaccuratelypredictwhowouldturnouttobeagoodcustomerandwhowouldnot.“Iwassittinghere,dumbfounded,”Thompsonrecalled.“Ididn’tgetit.We’rethebestinthebusinessatriskmanagement.Howisitthatthisfifty-five-personcompanyfromIsrael,withacrackpottheoryabout‘goodguys’and‘badguys,’managedtobeatus?”ThompsonestimatedthatFraudScienceswasfiveyearsaheadofPayPalintheeffectivenessofitssystem.Hispreviouscompany,Visa,wouldneverhavebeenabletocomeupwithsuchthinking,evenifgiventenorfifteenyearstoworkonit.

ThompsonknewwhathehadtotellBenchmark:PayPalcouldnotaffordtorisklettingitscompetitorsgetholdofFraudSci-ences’breakthroughtechnology.ThiswasnotacompanyBenchmarkshouldinvestin;PayPalneededtoacquirethecompany.Immediately.

ThompsonwenttoeBay’sCEO,MegWhitman,tobringherintotheloop.“ItoldScottthatitwasimpossible,”Whitmanrelated.“We’rethemarketleader.Whereonearthdidthistinylittlecompanycomefrom?”ThompsonandhisteamofPhDswalkedherthroughtheresults.Shewasastounded.

NowThompsonandWhitmanhadatrulyunexpectedproblemontheirhands.WhatcouldtheytellShvat?IfThompsontoldthisstart-up’sCEOthathehadhandilybeatentheindustryleader,thestart-up’steamwouldrealizetheyweresittingonsomethinginvaluable.ThompsonknewthatPayPalhadtobuyFraudSciences,buthowcouldhetellShvatthetestresultswithoutjackingupthecompany’spriceandnegotiatingposition?

Sohestalled.HerespondedtoShaked’sanxiouse-mailsbysayingPayPalneededmoretimeforanalysis.Finally,hesaidhewouldsharetheresultsinpersonthenexttimetheFraudSciencesteamwasinSanJose,hopingtobuymoretime.Withinadayortwo,ShakedwasonThompson’sdoorstep.

WhatThompsondidnotknow,however,wasthattheFraudSciencesfounders—ShakedandSaarWilf,whoservedtogetherinIsrael’selitearmyintelligenceunit,called8200—werenotinterestedinsellingtheircompanytoPayPal.TheyjustwantedThompson’sblessingastheyproceededdownachecklistofduediligencerequirementsforBenchmarkCapital.

ThompsonwentbacktoMeg:“Weneedtomakeadecision.They’rehere.”Shegavehimthego-ahead:“Let’sbuyit.”Aftersomevaluationwork,theyoffered$79million.Shakeddeclined.TheFraudSciencesboard,whichincludedtheIsraeliventurefirmBRMCapital,believedthecompanywasworthatleast$200million.

EliBarkat,oneofthefoundingpartnersofBRM,explainedtoushistheorybehindthecompany’sfuturevalue:“ThefirstgenerationoftechnologysecuritywasprotectingagainstavirusinvadingyourPC.Thesecondgenerationwasbuildingafirewallagainsthackers.”Barkatknewsomethingaboutboththesethreats,havingfundedandbuiltcompaniestoprotectagainstthem.Oneofthem,Checkpoint—anIsraelicompanyalsostartedbyyoungalumnifromUnit8200—isworth$5billiontoday,ispubliclytradedontheNASDAQ,andincludesamongitscustomersthemajorityofFortune100companiesandmostnationalgovernmentsaroundtheworld.Thethirdgenerationofsecuritywouldbeprotectingagainsthackingintoe-commerceactivity.“Andthiswouldbethebiggestmarketyet,”Barkattoldus,“becauseupuntilthen,hackerswerejusthavingfun—itwasahobby.Butwithe-commercetakingoff,hackerscouldmakerealmoney.”

BarkatalsobelievedthatFraudScienceshadthebestteamandthebesttechnologytodefendagainstInternetandcreditcardfraud.“You’vegottounderstandtheIsraelimentality,”hesaid.“Whenyou’vebeendevelopingtechnologytofindterrorists—whenlotsofinnocentliveshanginthebalance—thenfindingthievesisprettysimple.”

Afternegotiationsthatlastedonlyafewdays,ThompsonandShakedagreedon$169million.ThompsontoldusthatthePayPalteamthoughtitcouldgetawaywithalowerprice.WhenthenegotiatingprocessbeganandShakedstucktothehighernumber,Thompsonassumeditwasjustabluff.“IfiguredI’dneverseensuchaconvincingpokerface.Butwhatwasreallygoingonwasthatthe

FraudSciencesguyshadaviewofwhattheircompanywasworth.Theywerenotsalesguys.Theyweren’thypingit.Shakedjustplayeditstraight.Hebasicallysaidtous,‘Thisisoursolution.Weknowitisthebest.Thisiswhatwethinkit’sworth.’Andthatreallywastheendofit.Therewasamatter-of-factnessthatyoujustdon’tseethatoften.”

Soonafter,Thompsonwasonaplanetovisitthecompanyhehadjustpurchased.Duringthelastlegofthetwenty-hourflightfromSanFrancisco,aboutforty-fiveminutesbeforelanding,ashesippedhiscoffeetowakeup,hehappenedtoglanceatthescreenintheaislethatshowedtheplane’strajectoryonamap.Hecouldseethelittleairplaneiconattheendofitsflightpath,abouttolandinTelAviv.Thatwasfine,untilhenoticedwhatelsewasonthemap,whichatthispointshowedonlyplacesthatwereprettycloseby.Hecouldseethenamesandcapitalsofthecountriesintheregion,arrayedinaringaroundIsrael:Beirut,Lebanon;Damascus,Syria;Amman,Jordan;andCairo,Egypt.Foramoment,hepanicked:“Iboughtacompanythere?I’mflyingintoawarzone!”Ofcourse,he’dknownallalongwhoIsrael’sneighborswere,butithadnotquitesunkinhowsmallIsraelwasandhowcloselythoseneighborsringedit.“ItwasasifIwereflyingintoNewYorkandsuddenlysawIranwhereNewJerseywassupposedtobe,”herecalled.

Itdidn’ttakelongafterhesteppedofftheplane,however,beforehewasateaseinaplacethatwasnotshockinglyunfamiliar,andthattreatedhimtosomepleasantsurprises.HisfirstbigimpressionwasintheFraudSciencesparkinglot.EverycarhadaPayPalbumperstickeronit.“You’dneverseethatkindofprideorenthusiasmatanAmericancompany,”hetoldus.

ThenextthingthatstruckThompsonwasthedemeanoroftheFraudSciencesemployeesduringtheall-handsmeetingatwhichhespoke.Eachfacewasturnedraptlytohim.Noonewastexting,surfing,ordozingoff.Theintensityonlyincreasedwhenheopenedthediscussionperiod:“Everyquestionwaspenetrating.Iactuallystartedtogetnervousupthere.I’dneverbeforeheardsomanyunconventionalobservations—oneaftertheother.Andtheseweren’tpeersorsupervisors,thesewerejunioremployees.AndtheyhadnoinhibitionaboutchallengingthelogicbehindthewayweatPayPalhadbeendoingthingsforyears.I’dneverseenthiskindofcompletelyunvarnished,unintimidated,andundistractedattitude.Ifoundmyselfthinking,Whoworksforwhom?”

WhatScottThompsonwasexperiencingwashisfirstdoseofIsraelichutzpah.AccordingtoJewishscholarLeoRosten’sdescriptionofYiddish—theall-but-vanishedGerman-SlaviclanguagefromwhichmodernHebrewborrowed

theword—chutzpahis“gall,brazennerve,effrontery,incredible‘guts,’presumptionplusarrogancesuchasnootherwordandnootherlanguagecandojusticeto.”2AnoutsiderwouldseechutzpaheverywhereinIsrael:inthewayuniversitystudentsspeakwiththeirprofessors,employeeschallengetheirbosses,sergeantsquestiontheirgenerals,andclerkssecond-guessgovernmentministers.ToIsraelis,however,thisisn’tchutzpah,it’sthenormalmodeofbeing.Somewherealongtheway—eitherathome,inschool,orinthearmy—Israelislearnthatassertivenessisthenorm,reticencesomethingthatrisksyourbeingleftbehind.

ThisisevidenteveninpopularformsofaddressinIsrael.JonMedved,anentrepreneurandventurecapitalinvestorinIsrael,likestocitewhathecallsthe“nicknamebarometer”:“Youcantellalotaboutasocietybasedonhow[itsmembers]refertotheirelites.Israelistheonlyplaceintheworldwhereeverybodyinapositionofpower—includingprimeministersandarmygenerals—hasanicknameusedbyall,includingthemasses.”

Israel’scurrentandformerprimeministersBenjaminNetanyahuandArielSharonare“Bibi”and“Arik.”AformerLaborPartyleaderisBinyamin“Füad”Ben-Eliezer.ArecentIsraelDefenseForces(IDF)chiefofstaffisMoshe“Bogey”Yaalon.Inthe1980s,thelegendaryIDFchiefwasMoshe“MosheVeHetzi”(Moshe-and-a-Half)Levi—hewassixfootsix.OtherformerIDFchiefsinIsraelihistorywereRehavam“Gandhi”Zeevi,David“Dado”Elazar,andRafael“Raful”Eitan.TheShinuiPartyfounderwasYosef“Tommy”Lapid.AtopministerinsuccessiveIsraeligovernmentsisIsaac“Bugie”Herzog.Thesenicknamesareusednotbehindtheofficials’backsbut,rather,openly,andbyeveryone.This,Medvedargues,isrepresentativeofIsrael’slevelofinformality.

IsraeliattitudeandinformalityflowalsofromaculturaltoleranceforwhatsomeIsraeliscall“constructivefailures”or“intelligentfailures.”Mostlocalinvestorsbelievethatwithouttoleratingalargenumberofthesefailures,itisimpossibletoachievetrueinnovation.IntheIsraelimilitary,thereisatendencytotreatallperformance—bothsuccessfulandunsuccessful—intrainingandsimulations,andsometimeseveninbattle,asvalue-neutral.Solongastheriskwastakenintelligently,andnotrecklessly,thereissomethingtobelearned.

AsHarvardBusinessSchoolprofessorLorenGarysays,itiscriticaltodistinguishbetween“awell-plannedexperimentandaroulettewheel.”3InIsrael,thisdistinctionisestablishedearlyoninmilitarytraining.“Wedon’tcheerleadyouexcessivelyforagoodperformance,andwedon’tfinishyouoffpermanentlyforabadperformance,”oneairforcetrainertoldus.4

Indeed,a2006HarvardUniversitystudyshowsthatentrepreneurswhohavefailedintheirpreviousenterprisehaveanalmostone-in-fivechanceofsuccessintheirnextstart-up,whichisahighersuccessratethanthatforfirst-timeentrepreneursandnotfarbelowthatofentrepreneurswhohavehadapriorsuccess.5

InTheGeographyofBliss,authorEricWeinerdescribesanothercountrywithahightoleranceforfailureas“anationofborn-agains,thoughnotinareligioussense.”6ThisiscertainlytrueforIsraelilawsregardingbankruptcyandnewcompanyformation,whichmakeittheeasiestplaceintheMiddleEast—andoneoftheeasiestintheworld—tobirthanewcompany,evenifyourlastonewentbankrupt.ButthisalsocontributestoasensethatIsraelisarealwayshustling,pushing,andlookingforthenextopportunity.

NewcomerstoIsraeloftenfinditspeoplerude.Israeliswillunabashedlyaskpeopletheybarelyknowhowoldtheyareorhowmuchtheirapartmentorcarcost;they’lleventellnewparents—oftencompletestrangersonthesidewalkorinagrocerystore—thattheyarenotdressingtheirchildrenappropriatelyfortheweather.WhatissaidaboutJews—twoJews,threeopinions—iscertainlytrueofIsraelis.Peoplewhodon’tlikethissortoffranknesscanbeturnedoffbyIsrael,butothersfinditrefreshing,andhonest.

“WedidittheIsraeliway;wearguedourcasetodeath.”7That’showShmuel“Mooly”Eden(hehasanickname,too)gliblysumsupahistoricshowdownbetweenIntel’stopexecutivesinSantaClaraanditsIsraeliteam.It,too,wasacasestudyinchutzpah.

ThesurvivalofIntelwouldturnontheoutcome.Butthisfierce,months-longdisputewasaboutmorethanjustIntel;itwoulddeterminewhethertheubiquitouslaptopcomputer—somuchtakenforgrantedtoday—wouldeverexist.

EdenisaleaderofIntel’sIsraelioperation—thelargestprivate-sectoremployerinthecountry—whichtodayexports$1.53billionannually.8HetoldusthestoryofIntelinIsrael,andIntel’sbattleswithIsrael.

Throughoutmostofthehistoryofmoderncomputing,thespeedofdataprocessing—howmuchtimeittakesyourcomputertodoanything—wasdeterminedbythespeedofachip’stransistors.Thetransistorsflippedonandoff,andtheorderinwhichtheydidsoproducedacode,muchlikelettersareusedtomakewords.Together,millionsofflipscouldrecordandmanipulatedata

inendlessways.Thefasterthetransistorscouldbemadetofliponandoff(thetransistor’s“clockspeed”),themorepowerfulthesoftwaretheycouldrun,transformingcomputersfromglorifiedcalculatorstomultimediaentertainmentandenterprisemachines.

Butuntilthe1970s,computerswereusedpredominantlybyrocketscientistsandbiguniversities.Somecomputerstookupwholeroomsorevenbuildings.Theideaofacomputeronyourofficedeskorinyourhomewasthestuffofsciencefiction.Allthatbegantochangein1980,whenIntel’sHaifateamdesignedthe8088chip,whosetransistorscouldflipalmostfivemilliontimespersecond(4.77megahertz),andweresmallenoughtoallowforthecreationofcomputersthatwouldfitinhomesandoffices.

IBMchoseIsrael’s8088chipasthebrainsforitsfirst“personalcomputer,”orPC,launchinganeweraofcomputing.ItwasalsoamajorbreakthroughforIntel.AccordingtojournalistMichaelMalone,“WiththeIBMcontract,Intelwonthemicroprocessorwars.”9

Fromthenon,computingtechnologycontinuedtogetsmallerandfaster.By1986,Intel’sonlyforeignchipfactorywasproducingthe386chip.BuiltinJerusalem,itsprocessingspeedwas33megahertz.Thoughasmallfractionoftoday’schipspeeds,Intelcalledit“blazing”—itwasalmostseventimesfasterthanthe8088.Thecompanywassolidlyonthepathimaginedbyoneofitsfounders,GordonMoore,whopredictedthattheindustrywouldshrinktransistorstohalftheirsizeeveryeighteentotwenty-fourmonths,roughlydoublingachip’sprocessingspeed.Thisconstanthalvingwasdubbed“Moore’slaw,”andthechipindustrywasbuiltaroundthischallengetodeliverfasterandfasterchips.IBM,WallStreet,andthebusinesspressallcaughton,too—clockspeedandsizewashowtheymeasuredthevalueofnewchips.

Thiswasproceedingwelluntilabout2000,whenanotherfactorcameintothemix:power.Chipsweregettingsmallerandfaster,justasMoorehadpredicted.Butastheydid,theyalsousedmorepowerandgeneratedmoreheat.Chipsoverheatingwouldsoonbecomeacriticalproblem.Theobvioussolutionwasafan,but,inthecaseoflaptops,thefanneededtocoolthechipswouldbemuchtoobigtofitinside.Industryexpertsdubbedthisdeadendthe“powerwall.”

Intel’sIsraeliteamwasthefirstgroupwithinthecompanytoseethiscoming.ManylatenightsatIntel’sHaifafacilitywerededicatedtohotcoffee,coldtakeout,andadhocbrainstormingsessionsabouthowtogetaroundthepowerwall.TheIsraeliteamwasmorefocusedthananyoneonwhattheindustry

called“mobility”—designingchipsforlaptopcomputersand,eventually,forallsortsofmobiledevices.Noticingthistendency,IntelputtheirIsraelibranchinchargeofbuildingmobilitychipsforthewholecompany.

Evengiventhisresponsibility,IsraelisstillresistedfittingintotheIntelmainstream.“ThedevelopmentgroupinIsrael,evenbeforeitwastaskedasthemobilitygroup,pushedideasformobilitythatwentagainstthecommonwisdomatIntel,”explainedIntelIsrael’schief,David“Dadi”Perlmutter,agraduateoftheTechnion(Israel’sMIT)who’dstarteddesigningchipsatIntelIsraelin1980.10Oneoftheseunconventionalideaswasawaytogetaroundthepowerwall.RonyFriedmanwasoneofIntelIsrael’stopengineersatthetime.Justforfun,hehadbeentinkeringwithawaytoproducelow-powerchips,whichwentblatantlyagainsttheprevailingorthodoxythattheonlywaytomakechipsfasterwastodelivermorepowertotheirtransistors.This,hethought,wasabitlikemakingcarsgofasterbyrevvingtheirenginesharder.Therewasdefinitelyaconnectionbetweenthespeedoftheengineandthespeedofthecar,butatsomepointtheenginewouldgotoofast,gettoohot,andthecarwouldhavetoslowdown.11

FriedmanandtheIsraeliteamrealizedthatthesolutiontotheproblemwassomethinglikeagearsysteminacar:ifyoucouldchangegears,youcouldruntheenginemoreslowlywhilestillmakingthecargofaster.Inachip,thiswasaccomplisheddifferently,bysplittingtheinstructionsfedintothechip.Buttheeffectwassimilar:thetransistorsinIntelIsrael’slow-powerchipsdidnotneedtofliponandoffasfast,yet,inaprocessanalogoustoshiftingacarintohighgear,theywereabletorunsoftwarefaster.

WhenIntel’sIsraelteameuphoricallyintroduceditsinnovationtoheadquartersinSantaClara,theengineersthoughttheirbosseswouldbethrilled.Whatcouldbebetterthanacarthatgoesfasterwithoutoverheating?YetwhattheIsraeliteamsawasanasset—thattheengineturnedmoreslowly—headquarterssawasabigproblem.Afterall,theentireindustrymeasuredthepowerofchipsbyhowfasttheengineturned:clockspeed.

ItdidnotmatterthatIsraelichipsransoftwarefaster.Thecomputer’sengine—composedofitschip’stransistors—wasn’tturningonandofffastenough.WallStreetanalystswouldopineontheattractiveness(orunattractiveness)ofIntel’sstockbasedonperformancealongaparameterthatsaid,Fasterclockspeed:Buy;Slowerclockspeed:Sell.Tryingtopersuadetheindustryandthepressthatthismetricwasobsoletewasanonstarter.ThiswasespeciallythecasebecauseIntelhaditselfcreated—throughMoore’slaw—theindustry’sPavlovian

attachmenttoclockspeed.ItwastantamounttotryingtoconvinceFordtoabandonitsquestformorehorsepowerortellingTiffany’sthatcaratsizedoesnotmatter.

“Weweren’tinthemainstream—clockspeedwaskingandwewereontheoutside,”Israel’sRonyFriedmanrecalls.12

TheheadofIntel’schipdivision,PaulOtellini,triedtomothballthewholeproject.Theclock-speeddoctrinewasenshrinedamongIntel’sbrass,andtheyweren’tabouttoholdaseminartodecidewhetherornottochangeit.

The“seminar”ispartofaculturethatIsraelisknowwell,goingbacktothefoundingofthestate.FromtheendofMarchtotheendofMay1947,DavidBen-Gurion—Israel’sGeorgeWashington—conductedaninquiryintothemilitaryreadinessofJewishPalestine,inanticipationofthewarheknewwouldcomewhenIsraeldeclaredindependence.Hespentdaysandnightsmeetingwith,probing,andlisteningtomilitarymenupanddowntheranks.MorethansixmonthsbeforetheUnitedNationspasseditspartitionplanfordividingPalestineintoaJewishandanArabstate,Ben-GurionwaskeenlyawarethatthenextphaseintheArab-Israeliconflictwouldbeverydifferentfromthewarthepre-stateJewishmilitiashadbeenfighting;theyneededtostepback,inthemidstofongoingfighting,andplanfortheexistentialthreatsthatwerenearing.

Attheendoftheseminar,Ben-Gurionwroteofthemen’sconfidenceintheirreadiness:“Wehavetoundertakedifficultwork—touprootfromtheheartsofmenwhoareclosetothematterthebeliefthattheyhavesomething.Infact,theyhavenothing.Theyhavegoodwill,theyhavehiddencapacities,buttheyhavetoknow:tomakeashoeonehastostudycobbling.”13

Intel’sOtellinididn’tknowit,buthisIsraeliteamwasgivinghimasimilarmessage.TheysawthatIntelwasheadedforthe“powerwall.”Insteadofwaitingtoramintoit,theIsraeliswantedOtellinitoavertitbytakingastepback,discardingconventionalthinking,andconsideringafundamentalchangeinthecompany’stechnologicalapproach.

TheexecutivesinSantaClarawerereadytostrangletheIsraeliteam,accordingtosomeofthoseonthereceivingendofIntelIsrael’s“pestering.”TheIsraelisweremakingthetwenty-hourtripbetweenTelAvivandCaliforniasofrequentlythattheyseemedomnipresent,alwaysreadytocorneranexecutiveinthehallwayorevenarestroom—anythingtoarguetheircase.DavidPerlmutterspentoneweekeachmonthintheSantaClaraheadquarters,andheusedmuchofhistimetheretopresstheIsraeliteam’scase.

OnepointtheIsraelistriedtomakewasthatwhiletherewasriskin

abandoningtheclock-speeddoctrine,therewasevengreaterriskinstickingwithit.DovFrohman,thefounderofIntelIsrael,latersaidthattocreateatruecultureofinnovation,“fearoflossoftenprovesmorepowerfulthanthehopeofgain.”14

FrohmanhadlongtriedtocultivateacultureofdisagreementanddebateatIntelIsrael,andhehadhopedthisethoswouldinfectSantaClara.“Thegoalofaleader,”hesaid,“shouldbetomaximizeresistance—inthesenseofencouragingdisagreementanddissent.Whenanorganizationisincrisis,lackofresistancecanitselfbeabigproblem.Itcanmeanthatthechangeyouaretryingtocreateisn’tradicalenough...orthattheoppositionhasgoneunderground.Ifyouaren’tevenawarethatthepeopleintheorganizationdisagreewithyou,thenyouareintrouble.”

Intime,theIsraelisoutlasted—andoutargued—theirU.S.supervisors.EachtimetheIsraelisshowedup,theyhadbetterresearchandbetterdata,oneIntelexecutiverecalled.Soontheyhadaseeminglybulletproofcaseastowheretheindustrywasheading.Intelcouldeitherleadinthatdirection,theIsraelistoldmanagement,orbecomeobsolete.

Finally,thistimeasCEO,Otellinichangedhismind.IthadbecomeimpossibletocountertheIsraelis’overwhelmingresearch—nottomentiontheirpersistence.InMarch2003,thenewchip—code-namedBaniasafteranaturalspringinIsrael’snorth—wasreleasedastheCentrinochipforlaptops.Itsclockspeedwasonlyabitmorethanhalfofthereigning2.8gigahertzPentiumchipsfordesktops,anditsoldformorethantwicetheprice.Butitgavelaptopuserstheportabilityandspeedtheyneeded.

TheswitchtotheIsraeli-designedapproachcametobeknowninIntelandtheindustryasthe“rightturn,”sinceitwasasharpchangeinapproachfromsimplygoingforhigherandhigherclockspeedswithoutregardtoheatoutputorpowerneeds.Intelbegantoapplythe“rightturn”paradigmnotjusttochipsforlaptopsbuttochipsfordesktops,aswell.Lookingback,thestrikingthingaboutIntelIsrael’scampaignforthenewarchitecturewasthattheengineerswerereallyjustdoingtheirjobs.Theycaredaboutthefutureofthewholecompany;thefightwasn’taboutwinningabattlewithinIntel,itwasaboutwinningthewarwiththecompetition.

Asaresult,thenewIsraeli-designedarchitecture,oncederidedwithinthecompany,wasarunawayhit.ItbecametheanchorofIntel’s13percentsalesgrowthfrom2003to2005.ButIntelwasnotclearofindustrythreatsyet.Despitetheinitialsuccess,by2006,newcompetitioncausedIntel’smarketsharetoplummettoitslowestpointinelevenyears.Profitssoonplunged42percent

asthecompanycutpricestoretainitsdominantposition.15Thebrightspotin2006,however,cameinlateJulywhenOtelliniunveiled

theCore2Duochips,Intel’ssuccessorstothePentium.TheCoreDuochipsappliedIsrael’s“rightturn”conceptplusanotherIsraelidevelopment,calleddual-coreprocessing,thatspedchipsupevenfurther.“Thesearethebestmicroprocessorswe’veeverdesigned,thebestwe’veeverbuilt,’’hetoldanaudienceoffivehundredinafestivetentatIntel’sSantaClaraheadquarters.“Thisisnotjustincrementalchange;it’sarevolutionaryleap.”Screenslitupwithimagesoftheproudengineersbehindthenewchip;theywerejoiningthecelebrationviasatellite,fromHaifa,Israel.ThoughIntel’sstockwasdown19percentoverthewholeyear,itjumped16percentaftertheJulyannouncement.Intelwentontoreleasefortynewprocessorsoveraone-hundred-dayperiod,mostofthembasedontheIsraeliteam’sdesign.

“It’sunbelievablethat,justafewyearsago,weweredesigningsomethingthatnoonewanted,”saysFriedman,whoisstillbasedinHaifabutnowleadsdevelopmentteamsforIntelaroundtheworld.“Nowwe’redoingprocessorsthatshouldcarrymostofIntel’srevenue—wecan’tscrewup.”

WhatbeganasanisolatedoutpostanoceanawayhadbecomeIntel’slifeline.AsDougFreedman,ananalystforAmericanTechnologyResearch,putit,theIsraeliteam“savedthecompany.”HadmidleveldevelopersintheHaifaplantnotchallengedtheircorporatesuperiors,Intel’sglobalpositiontodaywouldbemuchdiminished.

IntelIsrael’ssearchforawayaroundthepowerwallalsoproducedanotherdividend.Wedon’tthinkofcomputersasusingalotofelectricity—weleavethemonallthetime—but,collectively,theydo.Intel’secotechnologyexecutive,JohnSkinner,calculatedtheamountofpowerthatIntel’schipswouldhaveusedifthecompanyhadkeptdevelopingtheminthesameway,ratherthanmakingthe“rightturn”towardtheIsraeliteam’slow-powerdesign:asavingof20terawatthoursofelectricityoveratwo-and-a-half-yearperiod.That’stheamountofpoweritwouldtaketorunover22million100-wattbulbsforanentireyear,twenty-fourhoursaday,sevendaysaweek.Skinnernoted,“Wecalculatedabouta$2billionsavingsinelectricitycosts....It’sequivalenttoasmallnumberofcoal-firedpowerplantsortakingafewmillioncarsofftheroad....We’reveryproudthatwearedramaticallyreducingthecarbondioxidefootprintofourowncompany.”16

ThesignificanceoftheIntelIsraelstoryisnot,however,justthattheteaminHaifacameupwitharevolutionarysolutionthatturnedthecompanyaround.A

goodideaalonecouldnothavecarriedthedayagainstaseeminglyintransigentmanagementteam.Therehadtobewillingnesstotakeonhigherauthorities,ratherthansimplyfollowingdirectivesfromthetop.Wheredoesthisimpudencecomefrom?

DadiPerlmutterrecallstheshockofanAmericancolleaguewhenhewitnessedIsraelicorporatecultureforthefirsttime.“Whenweallemerged[fromourmeeting],redfacedaftershouting,heaskedmewhatwaswrong.Itoldhim,‘Nothing.Wereachedsomegoodconclusions.’”

Thatkindofheateddebateisanathemainotherbusinesscultures,butforIsraelisit’softenseenasthebestwaytosortthroughaproblem.“Ifyoucangetpasttheinitialbruisetotheego,”oneAmericaninvestorinIsraelistart-upstoldus,“it’simmenselyliberating.Yourarelyseepeopletalkbehindanybody’sbackinIsraelicompanies.Youalwaysknowwhereyoustandwitheveryone.Itdoescutbackonthetimewastedonbullshit.”

PerlmutterlatermovedtoSantaClaraandbecameIntel’sexecutivevicepresidentinchargeofmobilecomputing.Hisdivisionproducesnearlyhalfofthecompany’srevenues.Hesays,“WhenIgobacktoIsrael,it’slikegoingbacktotheoldcultureofIntel.It’seasierinacountrywherepolitenessgetslessofapremium.”

TheculturaldifferencesbetweenIsraelandtheUnitedStatesareactuallysogreatthatIntelstartedrunning“cross-culturalseminars”tobridgethem.“AfterlivingintheU.S.forfiveyears,IcansaythattheinterestingthingaboutIsraelisistheculture.Israelisdonothaveaverydisciplinedculture.Fromtheageofzeroweareeducatedtochallengetheobvious,askquestions,debateeverything,innovate,”saysMoolyEden,whorantheseseminars.

Asaresult,headds,“it’smorecomplicatedtomanagefiveIsraelisthanfiftyAmericansbecause[theIsraelis]willchallengeyouallthetime—startingwith‘Whyareyoumymanager;whyamInotyourmanager?’”17

CHAPTER2

BattlefieldEntrepreneurs

TheIsraelitankcommanderwhohasfoughtinoneoftheSyrianwarsisthebestengineeringexecutiveintheworld.Thetankcommandersareoperationallythebest,andtheyareextremelydetailoriented.Thisisbasedontwentyyearsofexperience—workingwiththemandobservingthem.

—ERICSCHMIDT

ONOCTOBER6,1973,astheentirenationwasshutdownfortheholiestdayoftheJewishyear,thearmiesofEgyptandSyrialaunchedtheYomKippurWarwithamassivesurpriseattack.Withinhours,EgyptianforcesbreachedIsrael’sdefensivelinealongtheSuezCanal.EgyptianinfantryhadalreadyoverrunthetankemplacementstowhichIsraeliarmoredforcesweresupposedtoraceincaseofattack,andhundredsofenemytanksweremovingforwardbehindthisinitialthrust.

ItwasjustsixyearsafterIsrael’sgreatestmilitaryvictory,theSix-DayWar,animprobablecampaignthatcapturedtheimaginationoftheentireworld.Justbeforethatwar,in1967,itlookedlikethenineteen-year-oldJewishstatewouldbecrushedbyArabarmiespoisedtoinvadeoneveryfront.Then,insixdaysofbattle,IsraelsimultaneouslydefeatedtheEgyptian,Jordanian,andSyrianforcesandexpandeditsbordersbytakingtheGolanHeightsfromSyria,theWestBankandEastJerusalemfromJordan,andtheGazaStripandSinaiPeninsulafrom

Egypt.AllthisgaveIsraelisasenseofinvincibility.Afterward,noonecould

imaginetheArabstatesriskinganotherall-outattack.Eveninthemilitary,thesensewasthatiftheArabsdaredattack,Israelwouldvanquishtheirarmiesasquicklyasithadin1967.

SoonthatOctoberdayin1973,Israelwasnotpreparedforwar.ThethinstringofIsraelifortsfacingtheEgyptiansacrosstheSuezCanalwasnomatchfortheoverwhelmingEgyptianinvasion.Behindthedestroyedfrontline,threeIsraelitankbrigadesstoodbetweentheadvancingEgyptianarmyandtheIsraeliheartland.Onlyonewasstationedclosetothefront.

Thatbrigade,whichwassupposedtodefenda120-milefrontwithjustfifty-sixtanks,wascommandedbyColonelAmnonReshef.AsheracedwithhismentoengagetheinvadingEgyptians,Reshefsawhistanksgettinghitoneafteranother.ButtherewerenoEgyptianenemytanksorantitankgunsinsight.Whatsortofdevicewasobliteratinghismen?

Atfirsthethoughtthetankswerebeinghitbyrocket-propelledgrenades(RPGs),theclassichandheldantitankweaponusedbyinfantryforces.Reshefandhismenpulledbackabit,astheyhadbeentrained,soastobeoutoftheshortrangeoftheRPGs.Butthetankskeptexploding.TheIsraelisrealizedtheywerebeinghitbysomethingelse—somethingseeminglyinvisible.

Asthebattleraged,aclueemerged.Thetankoperatorswhosurvivedamissilehitreportedtotheothersthatthey’dseennothing,butthosenexttothemmentionedhavingseenaredlightmovingtowardthetargetedtanks.WireswerefoundonthegroundleadingtostrickenIsraelitanks.ThecommandershaddiscoveredEgypt’ssecretweapon:theSagger.

DesignedbySergeiPavlovichNepobedimyi,whoselastnameliterallymeans“undefeatable”inRussian,theSaggerwascreatedin1960.ThenewweaponhadinitiallybeenprovidedtoWarsawPactcountries,butitwasfirstputtosustaineduseincombatbytheEgyptianandSyrianarmiesduringtheYomKippurWar.TheIDF’saccountofitsownlossesonboththesouthernandnorthernfrontswas400tanksdestroyedand600disabledbutreturnedtobattleafterrepairs.OftheSinaidivision’s290tanks,180wereknockedoutthefirstday.TheblowtotheIDF’sauraofinvincibilitywassubstantial.AbouthalfofthelossescamefromRPGs,theotherhalffromtheSagger.

TheSaggerwasawire-guidedmissilethatcouldbefiredbyasinglesoldierlyingontheground.Itsrange—thedistancefromwhichitcouldhitanddestroyatank—was3,000meters(or1.86miles),tentimesthatofanRPG.TheSagger

wasalsofarmorepowerful.1Eachshootercouldworkaloneanddidnotevenneedabushtohidebehind

—ashallowdepressioninthedesertsandwoulddo.Ashooterhadonlytofireinthedirectionofatankanduseajoysticktoguidetheredlightatthebackofthemissile.Solongasthesoldiercouldseetheredlight,thewirethatremainedconnectedtothemissilewouldallowhimtoguideitaccuratelyandatgreatdistanceintothetarget.2

IsraeliintelligenceknewabouttheSaggersbeforethewar,andhadevenencounteredtheminEgyptiancross-borderattacksduringtheWarofAttrition,whichbeganjustafterthe1967war.ButthetopbrassthoughttheSaggersweremerelyanotherantitankweapon,notqualitativelydifferentfromwhattheyhadsuccessfullycontendedwithinthe1967war.Thus,intheirview,doctrinestoopposethemalreadyexisted,andnothingwasdevelopedtospecificallyaddresstheSaggerthreat.

Reshefandhismenhadtodiscoverforthemselveswhattypeofweaponwashittingthemandhowtocopewithit,allintheheatofbattle.

Drawingonthemen’sreports,Reshef’sremainingofficersrealizedthattheSaggershadsomeweaknesses:theyflewrelativelyslowly,andtheydependedontheshooter’sretainingeyecontactwiththeIsraelitank.SotheIsraelisdevisedanewdoctrine:whenanytanksawaredlight,allwouldbeginmovingrandomlywhilefiringinthedirectionoftheunseenshooter.

Thedustkickedupbythemovingtankswouldobscuretheshooter’slineofsighttothemissile’sdeadlyredlight,andthereturnfiremightalsopreventtheshooterfromkeepinghiseyeonthelight.

Thisbrand-newdoctrineprovedsuccessful,andafterthewaritwaseventuallyadoptedbyNATOforces.Ithadnotbeenhonedoveryearsofgamingexercisesinwarcollegesorprescribedoutofanoperationsmanual;ithadbeenimprovisedbysoldiersatthefront.

AsusualintheIsraelimilitary,thetacticalinnovationcamefromthebottomup—fromindividualtankcommandersandtheirofficers.Itprobablyneveroccurredtothesesoldiersthattheyshouldasktheirhigher-upstosolvetheproblem,orthattheymightnothavetheauthoritytoactontheirown.Nordidtheyseeanythingstrangeintheirtakingresponsibilityforinventing,adopting,anddisseminatingnewtacticsinrealtime,onthefly.

Yetwhatthesesoldiersweredoingwasstrange.Iftheyhadbeenworkinginamultinationalcompanyorinanynumberofotherarmies,theymightnothavedonesuchthings,atleastnotontheirown.AshistorianMichaelOren,who

servedintheIDFasaliaisontoothermilitaries,putit,“TheIsraelilieutenantprobablyhasgreatercommanddecisionlatitudethanhiscounterpartinanyarmyintheworld.”3

Thislatitude,evidencedinthecorporatecultureweexaminedinthepreviouschapter,isjustasprevalent,ifnotmoreso,intheIsraelimilitary.Normally,whenonethinksofmilitaryculture,onethinksofstricthierarchies,unwaveringobediencetosuperiors,andanacceptanceofthefactthateachsoldierisbutasmall,uninformedcoginabigwheel.ButtheIDFdoesn’tfitthatdescription.AndinIsraelprettymucheveryoneservesinthemilitary,whereitscultureisworkedintoIsrael’scitizensoveracompulsorytwo-tothree-yearservice.

TheIDF’sdownwarddelegationofresponsibilityisbothbynecessityandbydesign.“Allmilitariesclaimtovalueimprovisation:readwhattheChinese,French,orBritishmilitariessay—theyalltalkaboutimprovisation.Butthewordsdon’ttellyouanything,”saidEdwardLuttwak,amilitaryhistorianandstrategistwhowroteThePentagonandtheArtofWarandco-wroteTheIsraeliArmy.“Youhavetolookatstructure.”4

Tomakehispoint,Luttwakbeganrattlingofftheratiosofofficerstoenlistedpersonnelinmilitariesaroundtheworld,endingwithIsrael,whosemilitarypyramidisexceptionallynarrowatthetop.“TheIDFisdeliberatelyunderstaffedatseniorlevels.Itmeansthattherearefewerseniorofficerstoissuecommands,”saysLuttwak.“Fewerseniorofficialsmeansmoreindividualinitiativeatthelowerranks.”

LuttwakpointsoutthattheIsraeliarmyhasveryfewcolonelsandanabundanceoflieutenants.TheratioofseniorofficerstocombattroopsintheU.S.Armyis1to5;intheIDF,it’s1to9.ThesameistrueintheIsraeliAirForce(IAF),which,thoughlargerthanFrenchandBritishairforces,hasfewerseniorofficers.TheIAFisheadedbyatwo-stargeneral,alowerrankthanistypicalinotherWesternmilitaries.

FortheUnitedStates,themoretop-heavyapproachmaywellbenecessary;afterall,theU.S.militaryismuchlarger,fightsitswarsasfaraseightthousandmilesfromhome,andfacestheuniquelogisticalandcommandchallengesofdeployingovermultiplecontinents.

Yetregardlessofwhethereachforceistherightsizeandstructureforthetasksitfaces,thefactthattheIDFislighteratthetophasimportantconsequences.ThebenefitwasilluminatedforusbyGiladFarhi,athirty-year-oldmajorintheIDF.Hiscareerpathwasfairlytypical:fromasoldierinacommandounitatageeighteen,tocommandinganinfantryplatoon,thena

company,hewasnextappointedaspokesmanoftheSouthernCommand.AfterthathebecamethedeputycommanderofHaruv,aninfantrybattalion.NowheisthecommanderofanincomingclassofoneoftheIDF’smostrecentinfantryregiments.

WemethimatabaseonabarrenedgeoftheJordanValley.Ashestrodetowardus,neitherhisyouthnorhisattire(arumpledstandard-issueinfantryuniform)wouldhavepeggedhimascommanderofthebase.Weinterviewedhimthedaybeforehisnewclassofrecruitswastoarrive.Forthenextsevenmonths,Farhiwouldbeinchargeofbasictrainingfor650soldiers,mostofthemfreshoutofhighschool,plusabout120officers,squadcommanders,sergeants,andadministrativestaff.5

“Themostinterestingpeopleherearethecompanycommanders,”Farhitoldus.“Theyareabsolutelyamazingpeople.Thesearekids—thecompanycommandersaretwenty-three.Eachofthemisinchargeofonehundredsoldiersandtwentyofficersandsergeants,threevehicles.Additupandthatmeansahundredandtwentyrifles,machineguns,bombs,grenades,mines,whatever.Everything.Tremendousresponsibility.”

Companycommanderisalsothelowestrankthatmusttakeresponsibilityforaterritory.AsFarhiputit,“Ifaterroristinfiltratesthatarea,there’sacompanycommanderwhosenameisonit.Tellmehowmanytwenty-three-year-oldselsewhereintheworldlivewiththatkindofpressure.”

Farhiillustratedafairlytypicalchallengefacingthesetwenty-three-year-olds.DuringanoperationintheWestBankcityofNablus,oneofFarhi’scompanieshadaninjuredsoldiertrappedinahouseheldbyaterrorist.Thecompanycommanderhadthreetoolsathisdisposal:anattackdog,hissoldiers,andabulldozer.

Ifhesentthesoldiersin,therewasahighriskofadditionalcasualties.Andifhesentthebulldozertodestroythehouse,thiswouldriskharmingtheinjuredsoldier.

Tofurthercomplicatematters,thehousesharedawallwithaPalestinianschool,andchildrenandteacherswerestillinside.Fromtheroofoftheschool,journalistsweredocumentingthewholescene.Theterrorist,meanwhile,wasshootingatboththeIsraeliforcesandthejournalists.

Throughoutmuchofthestandoff,thecompanycommanderwasonhisown.Farhicouldhavetriedtotakechargefromafar,butheknewhehadtogivehissubordinatelatitude:“Therewereaninfinitenumberofdilemmasthereforthecommander.Andtherewasn’tatextbooksolution.”Thesoldiersmanagedto

rescuetheinjuredsoldier,buttheterroristremainedinside.Thecommanderknewthattheschoolstaffwasafraidtoevacuatetheschool,despitethedanger,becausetheydidnotwanttobebranded“collaborators”bytheterrorists.Andheknewthatthejournalistswouldnotleavetheroofoftheschool,becausetheydidn’twanttomissbreakingnews.Thecommander’ssolution:emptytheschoolusingsmokegrenades.

Oncethestudents,teachers,andjournalistshadbeensafelyevacuated,thecommanderdecideditwassafetosendinthebulldozertodrivetheterroristoutoftheadjacentbuilding.Oncethebulldozerbeganbitingintothehouse,thecommanderunleashedthedogtoneutralizetheterrorist.Butwhilethebulldozerwasknockingdownthehouse,anotherterroristtheIsraelisdidn’tknowaboutcameoutoftheschoolnextdoor.Thesoldiersoutsideshotandkilledthissecondterrorist.Theentireoperationtookfourhours.“Thistwenty-three-year-oldcommanderwasaloneformostofthefourhoursuntilIgotthere,”Farhitoldus.

“Afteraneventlikethat,thecompanycommandergoesbacktothebaseandhissoldierslookathimdifferently,”Farhicontinued.“Andhehimselfisdifferent.Heisontheline—responsibleforthelivesofalotofpeople:hissoldiers,Palestinianschoolchildren,journalists.Look,hedidn’tconquerEasternEurope,buthehadtocomeupwithacreativesolutiontoaverycomplexsituation.Andheisonlytwenty-threeyearsold.”

WethenheardfromabrigadiergeneralaboutYossiKlein,atwenty-year-oldhelicopterpilotinthe2006Lebanonwar.HewasorderedtoevacuateawoundedsoldierfromdeepinsouthernLebanon.Whenhepilotedhischoppertothebattlefield,thewoundedsoldierlayonastretchersurroundedbyadenseovergrowthofbushesthatpreventedthehelicopterfromlandingorhoveringcloseenoughtothegroundtopullthestretcheronboard.6

Therewerenomanualsonhowtodealwithsuchasituation,butiftherehadbeen,theywouldnothaverecommendedwhatKleindid.Heusedthetailrotorofhishelicopterlikeaflyinglawnmowertochopdownthefoliage.Atanypoint,therotorcouldhavebrokenoff,sendingthehelicoptercrashingintotheground.ButKleinsucceededintrimmingthebushesenoughsothat,byhoveringclosetotheground,hecouldpickupthewoundedsoldier.ThesoldierwasrushedtothehospitalinIsraelandhislifewassaved.

Speakingofthecompanycommanderswhoservedunderhim,Farhiasked,“Howmanyoftheirpeersintheirjunioryearincollegeshavebeentestedinsuchaway?...Howdoyoutrainandmatureatwenty-year-oldtoshouldersuchresponsibility?”

ThedegreetowhichauthoritydevolvestosomeofthemostjuniormembersofthemilitaryhasattimessurprisedevenIsraelileaders.In1974,duringthefirstpremiershipofYitzhakRabin,ayoungfemalesoldierfromtheIDF’sUnit8200—thesameunitinwhichthefoundersofFraudScienceslaterserved—waskidnappedbyterrorists.MajorGeneralAharonZeevi-Farkash(knownasFarkash),whoheadedtheunit—Israel’sparalleltotheU.S.NationalSecurityAgency—recalledRabin’sdisbelief:“Thekidnappedgirlwasasergeant.Rabinaskedustoprovidehimanitemizationofwhatsheknew.Hewasworriedaboutthedepthofclassifiedinformationthatcouldbeforcedoutofher.Whenhesawthebriefingpaper,Rabintoldusweneededanimmediateinvestigation;it’simpossiblethatasergeantwouldknowsomanysecretsthatarecriticaltoIsrael’ssecurity.Howdidthishappen?”

Rabin’sreactionwasespeciallysurprisingsincehehadbeentheIDFchiefofstaffduringIsrael’sSix-DayWar.Farkashcontinuedthestory:“SoItoldhim,‘Mr.PrimeMinister,thisindividualsergeantisnotalone.Itwasnotamistake.AllthesoldiersinUnit8200mustknowthesethingsbecauseifwelimitedsuchinformationtoofficers,wesimplywouldnothaveenoughpeopletogettheworkdone—wedon’thaveenoughofficers.’Andinfact,thesystemwasnotchanged,becauseit’simpossibleforus,giventhemanpowerconstraints,tobuildadifferentsystem.”7

Farkash,whotodayrunsacompanythatprovidesinnovativesecuritysystemsforcorporateandresidentialfacilities,quippedthatcomparedtothemajorpowers,Israelismissingfour“generals”:“generalterritory,generalmanpower,generaltime,andgeneralbudget.”Butnothingcanbedoneabouttheshortageofgeneralmanpower,Farkashsays.“Wecannotallocateasmanyofficersasothercountriesdo,sowehavesergeantsthataredoingtheworkoflieutenantcolonels,really.”

ThisscarcityofmanpowerisalsoresponsibleforwhatisperhapstheIDF’smostunusualcharacteristic:theroleofitsreserveforces.Unlikeinothercountries,reserveforcesarethebackboneofIsrael’smilitary.

Inmostmilitaries,reserveforcesareconstructedasappendagestothestandingarmy,whichisthenation’smainlineofdefense.Israel,however,issosmallandoutnumberedbyitsadversariesthat,aswasclearfromthebeginning,nostandingarmycouldbelargeenoughtodefendagainstanall-outassault.ShortlyaftertheWarofIndependence,Israel’sleadersdecidedonauniquereserves-dominatedmilitarystructure,wherebyreservistswouldnotonlymanwholeunitsbutwouldbecommandedbyreserveofficersaswell.Reserveunits

ofothermilitariesmayormaynotbecommandedbyofficersfromthestandingarmy,buttheyaregivenweeksorevenmonthsofrefreshertrainingbeforebeingsentintobattle.“Noarmyhadreliedforthemajorityofitstroopsonmenwhoweresentintocombatoneortwodaysaftertheirrecall,”saysLuttwak.

NoonereallyknewwhetherIsrael’suniquereservesystemwouldwork,becauseithadneverbeentried.Eventoday,Israelistheonlyarmyintheworldtohavesuchasystem.AsU.S.militaryhistorianFredKaganexplained,“It’sactuallyaterriblewaytomanageanarmy.ButtheIsraelisareexcellentatitbecausetheyhadnootherchoice.”8

Israel’sreservesystemisnotjustanexampleofthecountry’sinnovation;itisalsoacatalystforit.Becausehierarchyisnaturallydiminishedwhentaxidriverscancommandmillionairesandtwenty-three-year-oldscantraintheiruncles,thereservesystemhelpstoreinforcethatchaotic,antihierarchicalethosthatcanbefoundineveryaspectofIsraelisociety,fromwarroomtoclassroomtoboardroom.

NatiRonisalawyerinhiscivilianlifeandalieutenantcolonelwhocommandsanarmyunitinthereserves.“Rankisalmostmeaninglessinthereserves,”hetoldus,asifthiswerethemostnaturalthingintheworld.“Aprivatewilltellageneralinanexercise,‘Youaredoingthiswrong,youshoulddoitthisway.’”9

AmosGoren,aventurecapitalinvestorwithApaxPartnersinTelAviv,agrees.Heservedfull-timeintheIsraelicommandosforfiveyearsandwasinthereservesforthenexttwenty-fiveyears.“Duringthatentiretime,Ineversalutedanybody,ever.AndIwasn’tevenanofficer.Iwasjustarank-and-filesoldier.”10

Luttwaksaysthat“inthereserveformations,theatmosphereremainsresolutelycivilianinthemidstofallthetrappingsofmilitarylife.”

Thisisnottosaythatsoldiersaren’texpectedtoobeyorders.But,asGorenexplainedtous,“Israelisoldiersarenotdefinedbyrank;theyaredefinedbywhattheyaregoodat.”Or,asLuttwaksaid,“Ordersaregivenandobeyedinthespiritofmenwhohaveajobtodoandmeantodoit,butthehierarchyofrankisofsmallimportance,especiallysinceitoftencutsacrosssharpdifferencesinageandsocialstatus.”

WhenweaskedMajorGeneralFarkashwhyIsrael’smilitaryissoantihierarchicalandopentoquestioning,hetoldusitwasnotjustthemilitarybutIsrael’sentiresocietyandhistory.“Ourreligionisanopenbook,”hesaid,inasubtleEuropeanaccentthattracesbacktohisearlyyearsinTransylvania.The

“openbook”hewasreferringtowastheTalmud—adenserecordingofcenturiesofrabbinicdebatesoverhowtointerprettheBibleandobeyitslaws—andthecorrespondingattitudeofquestioningisbuiltintoJewishreligion,aswellasintothenationalethosofIsrael.

AsIsraeliauthorAmosOzhassaid,JudaismandIsraelhavealwayscultivated“acultureofdoubtandargument,anopen-endedgameofinterpretations,counter-interpretations,reinterpretations,opposinginterpretations.FromtheverybeginningoftheexistenceoftheJewishcivilization,itwasrecognizedbyitsargumentativeness.”11

Indeed,theIDF’slackofhierarchypervadescivilianlife.Itcanevenbreakdowncivilianhierarchies.“Theprofessoracquiresrespectforhisstudent,thebossforhishigh-rankingclerk....EveryIsraelihashisfriends‘fromthereserves’withwhomhemightnototherwisehaveanykindofsocialcontact,”saysLuttwak.“Sleepinginbarehutsortents,eatingdullarmyfood,oftengoingwithoutashowerfordays,reservistsofwidelydifferentsocialbackgroundsmeetonanequalfooting;Israelisstillasocietywithfewerclassdifferencesthanmost,andthereservesystemhascontributedtokeepingitthatway.”

Thedilutionofhierarchyandrank,moreover,isnottypicalofothermilitaries.HistorianandIDFreserveofficerMichaelOren—nowservingasIsrael’sambassadortotheUnitedStates—describedatypicalsceneatanIsraeliarmybasefromwhenhewasinamilitaryliaisonunit:“YouwouldsitaroundwithabunchofIsraeligenerals,andweallwantedcoffee.Whoeverwasclosesttothecoffeepotwouldgomakeit.Itdidn’tmatterwho—itwascommonforgeneralstobeservingcoffeetotheirsoldiersorviceversa.Thereisnoprotocolaboutthesethings.ButifyouwerewithAmericancaptainsandamajorwalkedin,everyonewouldstiffen.Andthenacolonelwouldwalkinandthemajorwouldstiffen.It’sextremelyrigidandhierarchicalintheU.S.Rankisvery,veryimportant.AstheysayintheAmericanmilitary,‘Yousalutetherank,nottheperson.’”12

IntheIDF,thereareevenextremelyunconventionalwaystochallengeseniorofficers.“IwasinIsraeliarmyunitswherewethrewouttheofficers,”Orentoldus,“wherepeoplejustgottogetherandvotedthemout.Iwitnessedthistwicepersonally.Iactuallylikedtheguy,butIwasoutvoted.Theyvotedoutacolonel.”WhenweaskedOrenindisbeliefhowthisworked,heexplained,“Yougoandyousay,‘Wedon’twantyou.You’renotgood.’Imean,everyone’sonafirst-namebasis....Yougotothepersonabovehimandsay,‘Thatguy’sgottogo.’...It’smuchmoreperformance-orientedthanitisaboutrank.”

RetiredIDFGeneralMoshe“Bogey”Yaalon,whoservedaschiefofstaffofthearmyduringthesecondintifada,toldusasimilarstoryfromthesecondLebanonwar.“TherewasanoperationconductedbyareserveunitintheLebanesevillageofDabu.Nineofoursoldiersandofficerswerekilled,andotherswereinjured,includingmynephew.Andthesurvivingsoldiersblamedthebattalioncommanderforhisincompetentmanagementoftheoperation.Thesoldiersatthecompanylevelwenttothebrigadecommandertocomplainaboutthebattalioncommander.Now,thebrigadecommander,ofcourse,didhisowninvestigation.Butthebattalioncommanderwasultimatelyforcedtostepdownbecauseofaprocessthatwasinitiatedbyhissubordinates.”13

YaalonbelievesthatthisuniquefeatureofIsrael’smilitaryiscriticaltoitseffectiveness:“Thekeyforleadershipisthesoldiers’confidenceintheircommander.Ifyoudon’ttrusthim,ifyou’renotconfidentinhim,youcan’tfollowhim.Andinthiscase,thebattalioncommanderfailed.Itmightbeaprofessionalfailure,likeinthiscase.Itmightbeamoralfailureinanothercase.Eitherway,thesoldierhastoknowthatitisacceptable—andencouraged—forhimtocomeforwardandtotalkaboutit.”

FormerWestPointprofessorFredKaganconcedesthatAmericanscanlearnsomethingfromtheIsraelis.“Idon’tthinkit’shealthyforacommandertobeconstantlyworryingifhissubordinateswillgooverhishead,liketheydointheIDF,”hetoldus.“Ontheotherhand,theU.S.militarycouldbenefitfromsomekindof360-degreeevaluationduringthepromotionboardprocessforofficers.Rightnowinoursystemtheincentivesareallone-sided.Togetpromoted,anofficerjusthastopleasemoreseniorofficers.Thejuniorguysgetnoinput.”

TheconclusionOrendrawsfromdisplaysofwhatmostmilitaries—andFredKagan—wouldcallinsubordinationisthattheIDFisinfact“muchmoreconsensualthantheAmericanarmy.”Thismightseemstrange,sincetheU.S.Armyiscalleda“volunteer”army(notunpaid,butinthesenseoffreechoice),whiletheIDFisbuiltonconscription.

Yet,Orenexplains,“inthiscountrythere’sanunwrittensocialcontract:wearegoingtoserveinthisarmyprovidedthegovernmentandthearmyareresponsibletowardus....TheIsraeliarmyismoresimilar,Iwouldimagine,totheContinentalArmyof1776thanitistotheAmericanarmyof2008....Andbytheway,GeorgeWashingtonknewthathis‘general’rankdidn’tmeanverymuch—thathehadtobeagreatgeneral,andthatbasicallypeoplewerethereoutofvolition.”

TheContinentalArmywasanextremeexampleofwhatOrenwas

describing,sinceitssoldierswoulddecideonanalmostdailybasiswhethertocontinuetovolunteer.Butitwasa“people’sarmy,”andsoistheIDF.AsOrendescribesit,liketheContinentalArmy,theIDFhasascrappy,lessformal,moreconsensualqualitybecauseitssoldiersarefightingfortheexistenceoftheircountry,anditsranksarecomposedofabroadcrosssectionofthepeopletheyarefightingfor.

It’seasytoimaginehowsoldiersunconcernedwithrankhavefewerqualmsabouttellingtheirboss,“You’rewrong.”Thischutzpah,moldedthroughyearsofIDFservice,givesinsightintohowShvatShakedcouldhavelecturedPayPal’spresidentaboutthedifferencebetween“goodguysandbadguys”ontheWeb,orhowIntelIsrael’sengineersdecidedtofomentarevolutiontooverturnnotonlythefundamentalarchitectureoftheircompany’smainproductbutthewaytheindustrymeasuredvalue.Assertivenessversusinsolence;critical,independentthinkingversusinsubordination;ambitionandvisionversusarrogance—thewordsyouchoosedependonyourperspective,butcollectivelytheydescribethetypicalIsraelientrepreneur.

PARTII

SeedingaCultureofInnovation

CHAPTER3

ThePeopleoftheBook

Gofar,staylong,seedeep.—OUTSIDEMAGAZINE

THEELEVATIONOFLAPAZ,BOLIVIA,is11,220feetandElLoboisonefloorhigher.ElLoboisarestaurant,hostel,socialclub,andtheonlysourceofIsraelifoodintown.Itisrunbyitsfounders,DoritMoralliandherhusband,Eli,bothfromIsrael.1

AlmosteveryIsraelitrekkerinBoliviaislikelytocomethroughElLobo,butnotjusttogetfoodthattasteslikeit’sfromhome,tospeakHebrew,andtomeetotherIsraelis.Theyknowtheywillfindsomethingelsethere,somethingevenmorevaluable:theBook.Thoughspokenofinthesingular,theBookisnotonebookbutanamorphousandevolvingcollectionofjournals,dispersedthroughoutsomeofthemostremotelocationsintheworld.Eachjournalisahandwritten“Bible”ofadvicefromonetravelertoanother.AndwhiletheBookisnolongerexclusivelyIsraeli,itsauthorsandreaderstendtobefromIsrael.

ElLobo’sincarnationoftheBookwascreatedin1986,Doritrecalls,justonemonthafterherrestaurantopened.FourIsraelibackpackerscameinandasked,“Where’stheBook?”Whenshelookedmystified,theyexplainedthattheymeantabookwherepeoplecouldleaverecommendationsandwarningsforothertravelers.Th