Start-up Nation (24 page)

Because of Netanyahu’s financial-sector reforms, it also became legal for investment managers to charge performance fees.
Keinan didn’t waste any time; he founded
KCPS
, Israel’s first full-spectrum financial-asset-management firm, in Tel Aviv and New York. “The moment I read the draft law
of Bibi’s reforms, my wheels started turning,” Keinan said. “It was clear that this truly could liberate our non-high-tech
economy.”

Keinan argues that a ton of local talent was untapped. “If you think about what young Israelis learn in some of the army intelligence
units, for example . . . often highly sophisticated quantitative analytical skills—algorithms, modeling out macroeconomic
trends. If they wanted to go into high tech, there were plenty of start-ups that would gobble them up after their army service.
But if they wanted to go into finance, they’d have to leave the country. That’s now changed. Just think about this,” he continued.
“There are Israelis working on Fleet Street in London because there was no place for them here. Now, since 2003, there is
a place for them in Israel.”

The two real fathers of Israeli hi-tech are the Arab boycott and Charles de Gaulle, because they forced on us the need to
go and develop an industry.

—Y
OSSI
V
ARDI

T
HROUGHOUT THIS BOOK,
we’ve pointed to the ways the IDF’s improvisational and antihierarchical culture follows Israelis into
their start-ups and has shaped Israel’s economy. This culture, when combined with the technological wizardry Israelis acquire
in elite military units and from the state-run defense industry, forms a potent mixture. But there was nothing normal about
the birth of Israel’s defense industry. It was unheard-of for a country so small to have its own indigenous military-industrial
complex. Its origins are rooted in a dramatic, overnight betrayal by a close ally.

The best way to understand Israel’s watershed moment is through a shock to Americans that had a similar effect. During the
postwar boom years, America’s global status was suddenly punctured when the Soviet Union upstaged the United States by launching
the first space satellite—
Sputnik 1
. That the Soviets could pull ahead in the space race stunned most Americans. But in retrospect, it was a boon for the U.S.
economy.

Innovation economist John Kao says that
Sputnik
“was a wake-up call, and America answered it. We revised school curricula to emphasize the teaching of science and math.
We passed the $900 million National Defense Education Act (about $6 billion in today’s dollars), providing scholarships, student
loans, and scientific equipment for schools.”
¹
NASA
and the Apollo program were created, as was a powerful new Pentagon agency dedicated to galvanizing the civilian R&D community.

A little over a decade later, Neil Armstrong stepped onto the moon. The Apollo program and the Pentagon’s related defense
investments spurred a generation of new discoveries that were ultimately commercialized, with a transformative impact on the
economy. This concerted research and development campaign gave birth to entirely new business sectors within avionics and
telecommunications, as well as the Internet itself, and became a legacy of America’s response to
Sputnik
.

Israel had its own
Sputnik
moment, ten years after America’s. On the eve of the 1967 Six-Day War, Charles de Gaulle taught Israel an invaluable lesson
about the price of dependence.

De Gaulle, a founder of France’s Fifth Republic, had been in and out of senior military and government positions since World
War II and served as president from 1959 to 1969. After Israel’s independence, de Gaulle had forged an alliance with the Jewish
state and nurtured what Israeli leaders believed to be a deep personal friendship. The alliance included a French supply of
critical military equipment and fighter aircraft, and even a secret agreement to cooperate in the development of nuclear weapons.
²

Like many small states, Israel preferred to buy large weapon systems from other countries, rather than devote the tremendous
resources needed to produce them. But in May 1950, the United States, Britain, and France jointly issued the Tripartite Declaration
to limit arms sales to the Middle East.

With no ready supply from abroad, Israel had already begun its arms industry with underground bullet and gun factories. One
factory was literally hidden underground, beneath a kibbutz laundry; the machines were kept running to mask the banging noise
from below. This factory, built with war-surplus tools smuggled from the United States, was producing hundreds of machine
guns daily by 1948. Makeshift factories were supplemented by scattershot gunrunning across the globe. David Ben-Gurion had
sent emissaries abroad to collect weapons as far back as the 1930s. In 1936, for example, Yehuda Arazi managed to stuff rifles
into a steam boiler headed from Poland to the port of Haifa. In 1948, he posed as an ambassador from Nicaragua to negotiate
the purchase of five old French mounted guns.

The Israelis got by on these banana republic schemes until 1955, when the Soviet Union, via Czechoslovakia, ignored the leaky
Tripartite Declaration and made a massive $250 million arms sale to Egypt. In response, de Gaulle took the other side. In
April 1956, he began to transfer large quantities of modern arms to Israel. The tiny state finally had a reliable and first-rate
national arms supplier.

After Egypt nationalized the Suez Canal in 1956, the relationship only deepened. France relied on the Suez for sea transport
from the region to Europe. The
IDF
helped guarantee French access to the Suez, and France in return showered Israel with more arms. The supply only grew as
the French and the Israelis colluded on more and more operations. De Gaulle’s spy agency enlisted Israel’s help in undermining
anti-French resistance in Algeria, one of France’s colonial strongholds. In 1960, France promised to supply Israel with two
hundred AMX-13 tanks and seventy-two Mystère fighter jets over the next ten years.
³

But on June 2, 1967, three days before Israel was to launch a preemptive attack against Egypt and Syria, de Gaulle cut Israel
off cold. “France will not give its approval to—and still less, support—the first nation to use weapons,” he told his cabinet.
⁴

But there was more to de Gaulle’s decision than trying to defuse a Middle East war. New circumstances called for new French
alliances. By 1967, France had withdrawn from Algeria. With his long and bitter North African war behind him, de Gaulle’s
priority was now rapprochement with the Arab world. It was no longer in France’s interest to side with Israel. “Gaullist France
does not have friends, only interests,” the French weekly
Le Nouvel Observateur
remarked at the time.
⁵

De Gaulle’s successor, Georges Pompidou, continued the new policy after his own election in 1969. The two hundred
AMX
tanks France had originally committed to Israel were to be rerouted to Libya, and France even sent fifty Mirage jet fighters
Israel had already paid for to Syria, one of Israel’s fiercest enemies.

The Israelis quickly pursued stopgap measures. Israeli Air Force founder Al Schwimmer personally recruited a sympathetic Swiss
engineer to give him the blueprints to the Mirage engine, so Israel could copy the French fighter. Israel also returned to
its pre-state smuggling exploits. In one mission in 1969, five Israeli-manned gunboats battled twenty-foot waves on a three-thousand-mile
race from France to Israel; these naval vessels, worth millions of dollars, had been promised to Israel before the new embargo.
As
Time
magazine colorfully described it in 1970: “Not since Bismarck has there been such a sea hunt. . . . At various points, [the
Israelis] were tracked by French reconnaissance planes, an R.A.F. Canberra from Malta, Soviet tankers, the radar forests of
the U.S. Sixth Fleet, television cameramen and even Italian fishermen.”
⁶

These shenanigans, however, could not compensate for the hard truth: the Middle East arms race was accelerating just at the
moment that Israel had lost its most indispensable arms and aircraft supplier. The 1967 French embargo put Israel in an extremely
vulnerable position.

Prior to the 1967 war, the United States had already begun to sell weapons systems to Israel, starting with the transfer of
Hawk surface-to-air missiles by the Kennedy administration in 1962. Jerusalem’s first choice, then, was for the United States
to take France’s place as Israel’s main arms supplier. But the French betrayal had built a consensus in Israel that it could
no longer rely so heavily on foreign arms suppliers. Israel decided that it must move quickly to produce major weapons systems,
such as tanks and fighter aircraft, even though no other small country had successfully done so.

This drive for independence produced the Merkava tank, first released in 1978 and now in its fourth generation. It also led
to the Nesher—Israel’s version of the Mirage aircraft—and then to the Kfir, first flown in 1973.
⁷

The most ambitious project of all, however, was to produce the Lavi fighter jet, using American-made engines. The program
was jointly funded by Israel and the United States. The Lavi was designed not only to replace the Kfir but to become one of
the top-line fighters in the world.

The Lavi went into full-scale development in 1982; on the last day of 1986, the first plane took its inaugural test flight.
But in August 1987, after billions of dollars had been spent to build five planes, mounting pressure in both Israel and the
United States led to the program’s cancellation, first by the U.S. Congress and then by a 12–11 vote in the Israeli cabinet.

Many years later, the project and its cancellation still remain controversial: some people believe that it was an impossibly
ambitious boondoggle from the beginning, while others claim that it was a great opportunity missed. In a 1991 article in
Flight International
magazine, published during Operation Desert Storm, an editor wrote about his experience flying the Lavi back in 1989: “Now
when the coalition forces fight in the Gulf they miss the aircraft they really need. It’s a real shame that I had to fly the
world’s best fighter knowing it would never get into service.”
⁸

Even though the program was canceled, the Lavi’s development had significant military reverberations. First, the Israelis
had made an important psychological breakthrough: they had demonstrated to themselves, their allies, and their adversaries
that they were not dependent on anyone else to provide one of the most basic elements for national survival—an advanced fighter
aircraft program. Second, in 1988 Israel joined a club of only about a dozen nations that had launched satellites into space—an
achievement that would have been unlikely without the technological know-how accumulated during the Lavi’s development. And
third, although the Lavi was canceled, the billions invested in the program brought Israel to a new level in avionic systems
and, in some ways, helped jump-start the high-tech boom to come. When the program shut down, its fifteen hundred engineers
were suddenly out of jobs. Some of them left the country, but most did not, resulting in a large infusion of engineering talent
from the military industries into the private sector. The tremendous technological talent that had been concentrated on one
aircraft was suddenly unleashed into the economy.
⁹

Yossi Gross, one of the Lavi’s engineers, was born in Israel. His mother, who’d survived Auschwitz, emigrated from Europe
after the Holocaust. As a student in Israel, Gross trained in aeronautical engineering at the Technion and then worked at
Israel Aircraft Industries (IAI) for seven years.

Gross, a test-flight engineer at
IAI
, began in the design department. When he came up with a new idea for the landing gear, he was told by his supervisors to
not bother them with innovations but to simply copy the American F-16. “I was working in a large company with twenty-three
thousand employees, where you can’t be creative,” he recalled.
¹⁰

Shortly before the Lavi’s cancellation, Gross decided to leave not only
IAI
but the whole aeronautics field. “In aerospace, you can’t be an entrepreneur,” he explained. “The government owns the industry,
and the projects are huge. But I learned a lot of technical things there that helped me immensely later on.”

This former flight engineer went on to found seventeen start-ups and develop over three hundred patents. So, in a sense, Yossi
Gross should thank France. Charles de Gaulle hardly intended to help jump-start the Israeli technology scene. Yet by convincing
Israelis that they could not rely on foreign weapons systems, de Gaulle’s decision made a pivotal contribution to Israel’s
economy. The major increase in military R&D that followed France’s boycott of Israel gave a generation of Israeli engineers
remarkable experience. But it would not have catalyzed Israel’s start-up hothouse if it had not been combined with something
else: a profound interdisciplinary approach and a willingness to try anything, no matter how destabilizing to societal norms.

If most air forces are designed like a Formula One race car, the Israeli Air Force is a beat-up jeep with a lot of tools in
it. . . . Here, you’re going off-road from day one.

The race car is just not going to work in our environment.

—Y
UVAL
D
OTAN

D
OUG
W
OOD IS A NEW AND UNLIKELY RECRUIT
to Israel. With his calm and reflective demeanor, he stands out among his more brash
Israeli colleagues. He was hired from Hollywood to do something that’s never before been tried in Jerusalem: Wood is the director
of the first feature-length animated movie to be produced by Animation Lab, the start-up founded by Israeli venture capitalist
Erel Margalit.