What Ireland has to learn from Israel's high-tech companies

In the past 60 years Israel has had 50-fold economic growth, much of it fuelled by technology start-ups funded by venture capitalists. Are there lessons for the standard-bearers of our ‘smart economy’ or should we be careful what we wish for?

ISRAEL: IS IT the promised land of technology and innovation, the ultimate smart economy? Many people think so. If so, maybe Ireland should be following Israel’s model.

The tiny nation certainly has an extraordinary record for attracting global venture capital, sparking off leading-edge research and creating innovative companies.

Israel has experienced 50-fold economic growth in 60 years, according to Startup Nation: the Story of Israel's Economic Miracle, by Dan Senor and Saul Singer. In 2008, they write, per-capita venture-capital investments into Israel were 30 times greater than into Europe, 80 times greater than into China and even two and a half times greater than into the US. Israel has the highest density of start-ups in the world: 3,850, or "one for every 1,844 Israelis". There are more Israeli companies on the technology-focused Nasdaq exchange than all companies from all of Europe.

“Technology companies and global investors are beating a path to Israel and finding unique combinations of audacity, creativity and drive everywhere they look,” the authors say.

Or listen to the well-known technologist and author George Gilder: “During the first five years of the 21st century, venture-capital outlays in Israel rivaled venture-capital outlays in all of the US outside California, long the world’s paramount source of entrepreneurial activity in high technology,” he wrote last year. And the trend has continued. “A 2008 survey of the world’s venture capitalists by Deloitte Touche showed that in six key fields – telecoms, microchips, software, biopharmaceuticals, medical devices and clean energy – Israel ranked second only to the US in technological innovation.”

THE CONVERGENCEof globalisation and the fragmentation of production meant Israel, like Ireland, could find niches in technology, says Prof Dan Breznitz of Georgia Institute of Technology's school of public policy and Sam Nunn school of international affairs.

“In Israel they took the perspective that as long as it’s a good idea, and you can move it into a product, you don’t have to become an IBM to sell it” – a “silicon and source code” approach – he says. “Israel has become an outpost of Silicon Valley and directly chose a very specific institutional approach with a dependency on a very particular formula of venture capital and money coming from the US.”

That formula arose out of a government initiative called Yozma, established in the early 1990s and credited with opening Israel’s doors to foreign venture capital. Yozma provided matching funding for a range of venture firms. “Yozma led to more than 30 foreign-based VC funds operating in Israel. The leverage of Yozma increased from the initial $100 [million] to $250 million by 1996, and by 2001 to $2.9 billion under management,” says a British Venture Capital Association report (see above). Yozma was privatised in 2000, once a strong venture sector had been established.

If Ireland longs to have a smart economy – the holy grail held aloft by so many of our politicians – then perhaps we should be taking some pointers from Israel. It isn’t as if we haven’t been told already to look to its model. Most recently, the report from the Government’s Innovation Taskforce advised that Ireland sorely needs to increase RD and attract outside venture capital, and should perhaps consider some of the policy initiatives taken by the Israelis.

“In my view Israel has been successful in nurturing a culture of entrepreneurship and innovation,” says task-force member Chris Horn. Israel “shows what can be achieved in building from a rural, agri-food, tourism-based economy just a few decades ago”.

But be careful what you wish for, cautions Prof Breznitz, an Israeli who lived in Ireland for a time while researching his PhD at Massachusetts Institute of Technology. His doctoral work led to an award-winning book in 2007, Innovation and the State: Political Choice and Strategies for Growth in Israel, Taiwan, and Ireland. In it he argues that globalisation has created fresh opportunities for small nations and pinpoints the surprising confluence of factors that have enabled once-poor nations such as Israel, Ireland and Taiwan to become leading innovation countries filled with technology firms.

But each took a separate policy path – and he has plenty of caveats about Israel’s choices.

“If all the money is coming from abroad, most of the gains will concentrate in the few, or go back to the US investors. This has resulted in a horrific inequality in Israel,” he says. “In order to excel in that system you really need to have your private institutions tied into it. And you need lots of start-ups, because most fail.”

Venture capitalists don’t invest to support the betterment of the people or to offer jobs to the nation: they invest in companies that will offer them a good return, companies that they hope to sell to larger companies as soon as possible.

“In Israel you are no longer building great companies but [building] great companies to sell. There’s unbelievable R&D and unbelievable innovation. But it’s all in one industrial sector,” he says, referring to technology – a high-risk strategy. He says innovation should be more broadly defined.

And while Ireland definitely needs outside venture investment, he adds: “I’m unconvinced that the Israeli model of an innovation economy – of state stimulation of nationally strategic technology sectors, and of heavy dependency on US risk capital – is entirely appropriate or transformable to the Irish situation.”

IRELAND HAS SERIOUSproblems: an extremely weak venture-fund network and far too much power vested in state agencies, says Prof Breznitz. The inability of these institutions to develop new Irish companies is, he argues, highlighted by the "total stagnation" of the start-up scene in Ireland in the past decade, after a brief window of promise around 1999, the era of success for Iona Technologies, Baltimore Technologies and many smaller indigenous start-ups.

“The problem was, and is, the State had a stronghold via the IDA and Enterprise Ireland on every single level. The State was too involved. Think of the amount of money channelled into VC funds in the years since the dotcom crisis, and the Irish high-tech industry has been in stagnation, in decline. I think this was a failure of policy, because by then [the State] had a proof of concept: that Irish men and women can create very successful companies. There were seven Irish IPOs on the Nasdaq. But the industry was given a blow to the stomach by the very institutions in which it was located.”

And an over-reliance on multinationals is dangerous in times of economic trouble, because they can leave. “The US multinationals love Ireland, but they are not Irish. There is a balance needed between multinationals and local companies.”

Ireland should not look to merely emulate other nations but focus on thoroughly understanding Irish companies: how they function, the sectors in which they excel and what they need to flourish. If good home-grown companies are allowed to develop, international venture capital firms – which at any rate make not the initial investments that early start-ups need but later development investments – will follow, he says.

Horn also calls for a balanced approach. “Our opportunity in Ireland is now to augment, not diminish, our foreign-direct-investment model with private risk capital – both national and international – to be the best place in Europe for any European entrepreneur to successfully build an innovation firm.” In other words, he says, combining the best of the Irish and Israeli models.

Ace Ventures How Israel has moved from research to commerce

A 2009 REPORT for the British Venture Capital Association observes that Israel “has been a remarkable case study in the transfer of technology from the research base to commercial exploitation internationally, despite its many disadvantages, notably a small population, geographical isolation, limited natural resources and high defence expenditures”.

Venture investment, the lifeblood of high-tech innovation, has poured into Israeli companies since the late 1990s. From $440 million invested in 1997, funding grew to $1,759 billion in 2007, almost entirely into ICT or biotechnology firms.

Most commentators attribute Israel’s voracious high-tech development to effective government policies coupled with the particular circumstances and qualities of Israeli history, people and culture.

The latter include its tradition of military research spending – handy for sparking commercial products and services, just as the US’s Nasa space programme and wartime research did – and the self-discipline and teamwork that come from mandatory military service, according to the writers Dan Senor and Saul Singer.

Several authors suggest Jewish culture values education, and a need to be self-reliant, very highly. Natural ties to the US and its financial industry help, as does being a nation of immigrants – especially one that attracted many Soviet researchers and scientists last century.

As for government policy, in the early 1990s Israel went for a blend of heavy investment in universities, and research and development in technology, coupled with a come-hither approach to foreign venture capital.