It is true that there are many models of entrepreneurship, including microentrepreneurship (the launching of household businesses) and the establishment of small companies that fill a niche and never grow beyond it. But Israel specializes in high-growth entrepreneurship—start-ups that wind up transforming entire global industries. High-growth entrepreneurship is distinct in that it uses specialized talent—from engineers and scientists to business managers and marketers—to commercialize a radically innovative idea.
This is not to suggest that Israelis are immune from the universally high failure rate of start-ups. But Israeli culture and regulations reflect a unique attitude to failure, one that has managed to repeatedly bring failed entrepreneurs back into the system to constructively use their experience to try again, rather than leave them permanently stigmatized and marginalized.
As a recent report by the Monitor Group, a global management consulting firm, described it, “When [entrepreneurs] succeed, they revolutionize markets. When they fail, they still [keep] incumbents under constant competitive pressure and thus stimulate progress.” And the Monitor study shows that entrepreneurship is the main engine for economies to “evolve and regenerate.”24
The question has become, as a BusinessWeek cover put it, “Can America Invent Its Way Back?”25 The magazine observed that “beneath the gloom, economists and business leaders across the political spectrum are slowly coming to an agreement: Innovation is the best—and maybe the only—way the U.S. can get out of its economic hole.”
In a world seeking the key to innovation, Israel is a natural place to look. The West needs innovation; Israel’s got it. Understanding where this entrepreneurial energy comes from, where it’s going, how to sustain it, and how other countries can learn from the quintessential start-up nation is a critical task for our times.
PART I
The Little Nation That Could
CHAPTER 1
Persistence
Four guys are standing on a street corner . . .
an American, a Russian, a Chinese man, and an Israeli. . . .
A reporter comes up to the group and says to them:
“Excuse me. . . . What’s your opinion on the meat shortage?”
The American says: What’s a shortage?
The Russian says: What’s meat?
The Chinese man says: What’s an opinion?
The Israeli says: What’s “Excuse me”?
—MIKE LEIGH, Two Thousand Years
SCOTT THOMPSON LOOKED AT HIS WATCH.1 He was running behind. He had a long list of to-dos to complete by the end of the week, and it was already Thursday. Thompson is a busy guy. As president and former chief technology officer of PayPal, the largest Internet payment system in the world, he runs the Web’s alternative to checks and credit cards. But he’d promised to give twenty minutes to a kid who claimed to have a solution to the problem of online payment scams, credit card fraud, and electronic identity theft.
Shvat Shaked did not have the brashness of an entrepreneur, which was just as well, since most start-ups, Thompson knew, didn’t go anywhere. He did not look like he had the moxie of even a typical PayPal junior engineer. But Thompson wasn’t going to say no to this meeting, not when Benchmark Capital had requested it.
Benchmark had made a seed investment in eBay, back when it was being run out of the founders’ apartment as a quirky exchange site for collectible Pez dispensers. Today, eBay is an $18 billion public company with sixteen thousand employees around the world. It’s also PayPal’s parent company. Benchmark was considering an investment in Shaked’s company, Israel-based Fraud Sciences. To help with due diligence, the Benchmark partners asked Thompson, who knew a thing or two about e-fraud, to check Shaked out.
“So what’s your model, Shvat?” Thompson asked, eager to get the meeting over with. Shifting around a bit like someone who hadn’t quite perfected his one-minute “elevator pitch,” Shaked began quietly: “Our idea is simple. We believe that the world is divided between good people and bad people, and the trick to beating fraud is to distinguish between them on the Web.”
Thompson suppressed his frustration. This was too much, even as a favor to Benchmark. Before PayPal, Thompson had been a top executive at credit card giant Visa, an even bigger company that was no less obsessed with combating fraud. A large part of the team at most credit card companies and online vendors is devoted to vetting new customers and fighting fraud and identity theft, because that’s where profit margins can be largely determined and where customer trust is built or lost.
Visa and the banks it partnered with together had tens of thousands of people working to beat fraud. PayPal had two thousand, including some fifty of their best PhD engineers, trying to stay ahead of the crooks. And this kid was talking about “good guys and bad guys,” as if he were the first to discover the problem.
“Sounds good,” Thompson said, not without restraint. “How do you do that?”
“Good people leave traces of themselves on the Internet—digital footprints—because they have nothing to hide,” Shvat continued in his accented English. “Bad people don’t, because they try to hide themselves. All we do is look for footprints. If you can find them, you can minimize risk to an acceptable level and underwrite it. It really is that simple.”
Thompson was beginning to think that this guy with the strange name had flown in not from a different country but rather a different planet. Didn’t he know that fighting fraud is a painstaking process of checking backgrounds, wading through credit histories, building sophisticated algorithms to determine trustworthiness? You wouldn’t walk into NASA and say, “Why build all those fancy spaceships when all you need is a slingshot?”
Still, out of respect for Benchmark, Thompson thought he’d indulge Shaked for a few more minutes. “So where did you learn how to do this?” he asked.
“Hunting down terrorists,” Shaked said matter-of-factly. His unit in the army had been tasked with helping to catch terrorists by tracking their online activities. Terrorists move money through the Web with fictitious identities. Shvat’s job was to find them online.
Thompson had heard enough from this “terrorist hunter,” too much even, but he had a simple way out. “Have you tried this at all?” he asked.
“Yes,” Shaked said with quiet self-assurance. “We’ve tried it on thousands of transactions, and we were right about all of them but four.”
Yeah, right, Thompson thought to himself. But he couldn’t help becoming a bit more curious. How long did that take? he asked.
Shaked said his company had analyzed forty thousand transactions over five years, since its founding.
“Okay, so here’s what we’re going to do,” Thompson said, and he proposed that he give Fraud Sciences one hundred thousand PayPal transactions to analyze. These were consumer transactions PayPal had already processed. PayPal would have to scrub some of the personal data for legal privacy reasons, which would make Shvat’s job more difficult. “But see what you can do,” Thompson offered, “and get back to us. We’ll compare your results with ours.”