From a time of draining swamps and growing oranges, today’s era of cyber security and chip designing in Israel may seem too far removed to have anything in common. But there is a thread that runs right through, say Dan Senor and Saul Singer in ‘Start-Up Nation’ (www.TwelveBooks.com). Today’s entrepreneur, inventing a new drug or a new chip is “like a ‘falah’ (farmer in Arabic), a farmer of high tech,” they add, citing Erel Margalit, one of the top entrepreneurs in the country. “Innovation and technology are the twenty-first-century version of going back to the land.”
As for farming, too, it may be amazing to know that Israel has increased its agricultural yields seventeen times, over a quarter century. Agriculture, as a quote of Shimon Peres explains, is ‘ninety-five per cent science, five per cent work.’ Leave the old industries, there are going to be five new industries, he predicts. “New forms of energy, water, biotechnology, teaching devices – there’s a shortage of teachers – and homeland security to defend against terrorism.”
While there can be debate on the list of future’s industries, the authors delve into the question of what makes the country innovative and entrepreneurial. The most obvious explanation, they note, lies in a classic cluster of the type Harvard professor Michael Porter has championed, Silicon Valley embodies, and Dubai has tried to create. “It consists of the tight proximity of great universities, large companies, start-ups, and the ecosystem that connects them – including everything from suppliers, an engineering talent pool, and venture capital.”
A deeper answer that Senor and Singer find is the cultural core built on ‘a rich stew of aggressiveness and team orientation, on isolation and connectedness, and on being small and aiming big.’
Two types of people
The book opens with the meeting between a small guy, Shvat Shaked of a start-up called Fraud Sciences, and a big guy, Scott Thompson, president and former chief technology officer of PayPal, the largest Internet payment system in the world. The kid had ‘claimed to have a solution to the problem of online payment scams, credit card fraud, and electronic identity theft.’
What was Shvat’s model? “Our idea is simple,” he begins, even as Thompson is eager to get the meeting over with. “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.”
This was too much for Thompson, who suppressed his frustration. For, PayPal had 2,000, including some 50 of its 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.’
Digital footprints
But how was Shvat segregating the bad from the good? Good people leave traces of themselves on the Internet – digital footprints – because they have nothing to hide, he tells Thompson. “Bad people don’t, because they try to hide themselves. All we do is look for footprints. If you can find them, you can minimise risk to an acceptable level and underwrite it. It really is that simple.”
What was he talking about? Wasn’t fighting fraud a painstaking process of checking background, wading through credit histories, building sophisticated algorithms to determine trustworthiness, wondered Thompson? “You wouldn’t walk into NASA and say, ‘Why build all those fancy spaceships when all you need is a slingshot?’”
Okay, where did Shvat learn the technique, Thompson was curious to know? “Hunting down terrorists,” was the matter-of-fact answer. His unit in the army had been tasked with helping to catch terrorists by tracking their online activities, informs the book. “Terrorists move money through the Web with fictitious identities. Shvat’s job was to find them online.” Having applied the technique on 40,000 transactions over five years, he reported that his company was right about all of them but four.
Test run
The meeting was drawing to a close, and so Thompson suggested that PayPal could give Fraud Sciences one hundred thousand transactions to analyse. “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.’”
Giving the transaction data on a Thursday, Thompson thought he’d never hear from Shvat again, at least not for months. To his surprise, on Sunday, an email from Fraud Sciences said, ‘We’re done.’ Taking up the work, PayPal’s PhDs took a week to match up the results with theirs, though by Wednesday, the engineers were amazed at what they had seen so far because the small team had produced more accurate results than PayPal had, in a shorter amount of time, and with incomplete data.
Interestingly, Fraud Sciences performed 17 per cent better on the transactions that gave PayPal the most trouble – the category of applicants initially rejected where it was later realised that the rejections were a mistake. “They are good customers. We should never have rejected them. They slipped through our system. But how did they not slip through Shaked’s system?” asked a puzzled Thompson. In his estimate ‘Fraud Sciences was five years ahead of PayPal in the effectiveness of its system. His previous company, Visa, would never have been able to come up with such thinking, even if given ten or fifteen years to work on it.’
Valuation logic
More interesting is the discussion of deal negotiation in the chapter, when PayPal decided to acquire Fraud Sciences. The offer was $79 million, but the Fraud Sciences board, which included the Israeli venture firm BRM Capital, believed the 55-person company was worth at least $200 million.
The logic behind the valuation – as Eli Barkat, one of the founding partners of BRM, outlines to the authors – considers how the first generation of technology security was protecting against a virus invading your PC, and the second generation was building a firewall against hackers. The third generation of security, in Barkat’s view, would be protecting against hacking into ecommerce activity. “And this would be the biggest market yet, because up until then, hackers were just having fun – it was a hobby. But with ecommerce taking off, hackers could make real money.”
Big impressions
After the deal was closed at $169 million, Thompson took a 24-hour flight from San Francisco to Tel Aviv and arrived at the company he had purchased. The first big impression was in the parking lot, where every car had a PayPal bumper sticker on it. “You’d never see that kind of pride or enthusiasm at an American company,” he reminisces. The next big thing that struck him was the demeanour of the employees during the all-hands meeting.
Each face was turned raptly to Thompson, and no one was texting, surfing or dozing off; the intensity only increased when he opened the discussion period, the book narrates. “Every question was penetrating. I actually started to get nervous up there. I’d never before heard so many unconventional observations – one after the other. And these weren’t peers or supervisors, these were junior employees. And they had no inhibition about challenging the logic behind the way we at PayPal had been doing things for years.” This kind of ‘completely unvarnished, unintimidated, and undistracted attitude’ made him think, ‘Who works for whom?’
Dose of chutzpah
That was a dose of Israeli chutzpah, write Senor and Singer. The Yiddish word means gall, brazen nerve, effrontery, incredible ‘guts,’ presumption plus arrogance such as no other word and no other language can do justice to, they define. An outsider would see this everywhere in the country, they instruct – ‘in the way university students speak with their professors, employees challenge their bosses, sergeants question their generals, and clerks second-guess government ministers.’ Just the normal mode of being, and reticence can be something that risks your being left behind! To add to that, everybody in a position of power has a nickname used by all.
An insight of significance is that such an attitude and informality flows from a cultural tolerance to ‘constructive failures’ or ‘intelligent failures.’ True innovation, as the authors remind, is not possible without tolerating a large number of these failures, because there is something to be learned as long as the risk was taken intelligently.
The second case study in chutzpah is that of Intel’s Israeli operation – ‘the largest private sector employer in the country – which today exports $1.53 billion annually…’
Imperative read.
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Tailpiece
“To encourage entrepreneurs look at newer technologies…”
“You are expecting tax sop?”
“Yes, and also that awards be instituted before they start up!”
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