Start-up Nation (26 page)

Ruti Alon of Pitango Venture Capital, which has invested in six of Gross’s seventeen start-ups, argues that his multidisciplinary
approach is the key to his success. “He has training in aeronautical engineering and electronics. He also knows a lot about
physics, flow, and hemodynamics, and these things can be very helpful when thinking about devices that need to be implanted
in the human body.” Plus, Alon reminded, “he knows a lot of doctors.”
⁵

Some of Gross’s companies combine such wildly diverse technologies that they border on science fiction. Beta-O
₂
, for example, is a start-up working on an implantable “bioreactor” to replace the defective pancreas in diabetes patients.
Diabetics suffer from a disorder that causes their beta cells to cease producing insulin. Transplanted beta cells could do
the trick, but even if the body didn’t reject them, they cannot survive without a supply of oxygen.

Gross’s solution was to create a self-contained micro-environment that includes oxygen-producing algae from the geysers of
Yellowstone Park. Since the algae need light to survive, a fiber-optic light source is included in the pacemaker-sized device.
The beta cells consume oxygen and produce carbon dioxide; the algae does just the opposite, creating a self-contained miniature
ecosystem. The whole bioreactor is designed to be implanted under the skin in a fifteen-minute outpatient procedure and replaced
once a year.

Combining geothermal algae, fiber optics, and beta cells to treat diabetes is typical of Gross’s cross-technology approach.
Another of his start-ups, TransPharma Medical, combines two different innovations: using radio frequency (RF) pulses to create
temporary microchannels through the skin, and the first powder patch ever developed. “It’s a small device,” Gross explains,
“like a cell phone, that you apply to the skin for one second. It creates RF cell ablation, hundreds of microchannels in the
skin. Then we apply on top a powder patch, not a regular patch. Most patches out there are gel- or adhesive-based. We print
the drug on the patch, and it’s dry. When we apply the patch to the skin, the interstitial fluid comes out slowly from the
microchannels and pulls the lyophilized [freeze-dried] powder from the patch under the skin.”

Gross claims that this device solves one of the most intractable problems of drug delivery: how to get large molecules, such
as proteins, through the outer layer of the skin without an injection. The first products will deliver human growth hormone
and a drug for osteoporosis; patches to deliver insulin and other drugs, hormones, and molecules—most of them currently delivered
by injections—are in the works.

The Israeli penchant for technological mashups is more than a curiosity; it is a cultural mark that lies at the heart of what
makes Israel so innovative. It is a product of the multidisciplinary backgrounds that Israelis often obtain by combining their
military and civilian experiences. But it is also a way of thinking that produces particularly creative solutions and potentially
opens up new industries and “disruptive” advances in technology. It is a form of free thinking that is hard to imagine in
less free or more culturally rigid societies, including some that superficially seem to be on the cutting edge of commercial
development.

The future of the region is going to depend on our teaching our young people how to go out and create companies.

—F
ADI
G
HANDOUR

E
REL
M
ARGALIT’S BACKGROUND
would not normally predict a future in venture capital. He was born on a kibbutz, fought in Lebanon
in 1982 as an
IDF
soldier, studied math and philosophy at the Hebrew University of Jerusalem, and then pursued a doctorate in philosophy at
Columbia University. He wrote his dissertation on the attributes of historical leaders—he thinks of them as “entrepreneurial
leaders”—who profoundly affected the development of their nations or even civilizations (he profiled Winston Churchill and
David Ben-Gurion, among others, as exemplars).

Along the way, he went to work for Teddy Kollek, the mayor of Jerusalem from 1965 to 1993. Shortly before Kollek was defeated
in the 1993 municipal election, Margalit pitched an idea to help encourage start-ups in Jerusalem, which, then as now, was
struggling to keep young people from leaving for nearby Tel Aviv, Israel’s vibrant business capital. With Kollek gone, Margalit
decided to implement his plan himself, but in the private sector. He called his new venture capital fund Jerusalem Venture
Partners (JVP). It was seed-funded with capital from the Yozma program.

Since he founded
JVP
, in 1994, Margalit has raised hundreds of millions of dollars from France Telecom SA, Germany’s Infineon Technologies AG,
as well as Reuters, Boeing, Columbia University,
MIT
, and the Singapore government, to name a few sources. He has backed dozens of companies, many of which have held public offerings
(IPOs) or been sold to international players, producing windfall returns.
JVP
was behind PowerDsine, Fundtech, and Jacada, all currently listed on the NASDAQ. One of its big hits was Chromatis Networks,
an optical networking company, which was sold to Lucent for $4.5 billion.

In 2007,
Forbes
ranked Margalit sixty-ninth on its Midas List of “the world’s best venture capitalists.” He is among three Israelis on this
top one hundred list, which is populated mostly by Americans.

But Margalit’s contribution to Israel goes beyond business. He is investing huge sums of his personal fortune—and entrepreneurial
know-how—to revitalize Jerusalem’s arts scene. He launched the Maabada, the Jerusalem Performing Arts Lab, which is leading
in the exploration of the link between technology and art, and is colocating artists and technologists side by side in a way
not done anywhere else in the world.

Next door to the nonprofit theater he founded, which was built in an abandoned warehouse, Margalit has converted a printing
house into the headquarters for a burgeoning animation company, Animation Lab, which aims to compete with Pixar and others
in the production of full-length animated films.

Jerusalem might seem like the last place to build a world-class movie studio. As a center for the three monotheist religions,
the ancient city of Jerusalem is about as different from Hollywood as one could imagine. Filmmaking is not an Israeli specialty,
though Israeli movies have recently been prominently featured in international film festivals. Further complicating matters
is the fact that the Israeli arts scene is centered in secular Tel Aviv, rather than Jerusalem, known more for holy sites,
tourists, and government offices. But Margalit’s vision for creating companies, jobs, industries, and creative outlets was
specifically a vision
for Jerusalem
.

This cultural commitment can be central to the success of economic
clusters
, of which Israel’s high-tech industry is a case in point. A cluster, as described by the author of the concept, Harvard Business
School professor Michael Porter, is a unique model for economic development because it’s based on “geographic concentrations”
of interconnected institutions—businesses, government agencies, universities—in a specific field.
¹
Clusters produce exponential growth for their communities because people living and working within the cluster are in some
way connected to each other.

An example, according to Porter, is northern California’s “wine cluster,” which is populated by hundreds of wineries and thousands
of independent grape growers. There are also suppliers of grape stock, manufacturers of irrigation and harvesting equipment,
producers of barrels, and designers of bottle labels, not to mention an entire local media industry, with winery advertising
firms and wine trade publications. The University of California at Davis, also near this area, has a world-renowned viticulture
and oenology program. The Wine Institute is just south, in San Francisco, and the California legislature, in nearby Sacramento,
has special committees dealing with the wine industry. Similar community structures exist around the world: in Italy’s fashion
cluster, Boston’s biotech cluster, Hollywood’s movie cluster, New York City’s Wall Street cluster, and northern California’s
technology cluster.

Porter argues that an intense concentration of people working in and talking about the same industry provides companies with
better access to employees, suppliers, and specialized information. A cluster does not exist only in the workplace; it is
part of the fabric of daily life, involving interaction among peers at the local coffee shop, when picking up kids from school,
and at church. Community connections become industry connections, and vice versa.

As Porter says, “the social glue” that binds a cluster together also facilitates access to critical information. A cluster,
he notes, must be built around “personal relationships, face-to-face contact, a sense of common interest, and ‘insider’ status.”
This sounds just like what Yossi Vardi described: in Israel “everybody knows everybody, and there is a very high degree of
transparency.”

Margalit would point out that Israel has just the right mix of conditions to produce a cluster of this kind—and that’s rare.
After all, attempts to create clusters don’t always succeed. Take, for example, Dubai. Searching for a Dubai equivalent of
Erel Margalit, one thinks of Mohammed Al Gergawi. Al Gergawi is the chairman and chief executive of Dubai Holding, one of
the larger businesses owned by Sheikh Mohammed bin Rashid Al Maktoum, the ruler of Dubai (and also the prime minister and
defense minister of the United Arab Emirates). For all intents and purposes, Sheikh Mohammed is the chairman of “Dubai Inc.”
There is no distinction between Dubai’s public finances and the sheikh’s private wealth.

Al Gergawi’s leap to prominence came in 1997 when he went to meet Sheikh Mohammed in the
majlis
, a forum for average citizens to come to see the sheikh—think of it as the Arab world’s version of a town hall meeting, only
far less interactive. During the visit, Sheikh Mohammed pointed out Al Gergawi and declared, “I know you and you’ll go far.”
²

It turns out that Al Gergawi, then a midlevel government bureaucrat, had been identified months earlier by one of Sheikh Mohammed’s
“mystery shoppers,” whose job it is to scour the kingdom for potential business leaders. Soon after the
majlis
meeting, Al Gergawi was put on an accelerated path to management of one of the sheikh’s three major companies. Others within
Dubai’s government told us that Al Gergawi was selected because he was regarded as a competent technocrat—he could execute
extremely well but would not challenge the ruler’s vision.

Dubai’s economic system is based largely on patronage, which has kept the local citizens pliant (only 15 percent of Dubai’s
1.4 million residents are actually Emirati citizens). Like Singapore, it is an extremely orderly society, and there are no
outlets for protest—even peaceful ones—against the government. Many of the founders of Dubai’s first human rights organization
are also employed by the government and are dependent on Sheikh Mohammed’s largesse.

Freedom of speech is constitutionally “guaranteed,” but it does not cover criticism of the government or anything deemed offensive
to Islam. When it comes to government transparency, especially as it relates to the economy, the trend is moving in the wrong
direction. A new media law makes tarnishing the UAE’s reputation or economy a crime punishable by fines of up to 1 million
dirhams (approximately $270,000). The government maintains a list of banned Web sites; the ban is enforced by state censorship
of the Internet (users do not dial directly into the Web but go through a proxy server monitored by the state telecom monopoly).
In compliance with the Arab League boycott, neither visitors nor residents can call Israel from landlines or cell phones—the
972 country code is blocked.

Sheikh Mohammed recently decreed that his twenty-five-year-old son, Sheikh Hamdan, would be crown prince; a younger son and
a brother were named as his two deputies. There is no path for an Emirati equivalent of Erel Margalit to play a senior leadership
role in government or run for office. Mohammed Al Gergawi himself is one of only 210,000 Emiratis in the entire country, and
only people from this limited pool are eligible to serve in senior government positions or in leadership roles in the sheikh’s
businesses.

Other than its official leadership circles, Dubai is open to outsiders for business and has a centuries-old history as a trade
hub for everything from pearls to textiles. Sheikh Mohammed’s great-grandfather declared his city-state a tax-free port in
the early part of the twentieth century. He wanted to attract Iranian and Indian merchants.

In the 1970s, Sheikh Mohammed’s father, Rashid bin Saeed Al Maktoum, ordered the dredging of the Dubai Creek and built one
of the planet’s largest man-made harbors at Jebel Ali, twenty-two miles southwest of Dubai. By 1979, the Jebel Ali Port had
become the Middle East’s largest port and, according to some experts, ranked alongside the Great Wall of China and the Hoover
Dam as the only three man-made constructions that can be seen from space. Jebel Ali is now the world’s third-most-important
reexport center (after Hong Kong and Singapore).

For Rashid, this liberal trade outlook was based on the reality that Dubai’s economic wellspring would eventually dry up.
With only .5 percent of the oil and gas reserves of neighboring Abu Dhabi, and an even tinier fraction of Saudi Arabia’s,
Dubai’s reserves could run out as soon as 2010. As Sheikh Rashid once famously said, “My grandfather rode a camel, my father
rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.”

In addition to creating a world-class port, Sheikh Rashid also established the Middle East’s first free-trade zone, which
allowed foreigners to repatriate 100 percent of their capital and profits and allowed 100 percent foreign ownership of properties
and businesses. This sidestepped the requirement in the
UAE
and much of the Arab world that all companies be majority-owned by a local national.