Start-up Nation

by Dan Senor, Saul Singer

  Israeli attitude and informality flow also from a cultural tolerance for what some Israelis call “constructive failures” or “intelligent failures.” Most local investors believe that without tolerating a large number of these failures, it is impossible to achieve true innovation. In the Israeli military, there is a tendency to treat all performance—both successful and unsuccessful—in training and simulations, and sometimes even in battle, as value-neutral. So long as the risk was taken intelligently, and not recklessly, there is something to be learned.

  As Harvard Business School professor Loren Gary says, it is critical to distinguish between “a well-planned experiment and a roulette wheel.”3 In Israel, this distinction is established early on in military training. “We don’t cheerlead you excessively for a good performance, and we don’t finish you off permanently for a bad performance,” one air force trainer told us.4

  Indeed, a 2006 Harvard University study shows that entrepreneurs who have failed in their previous enterprise have an almost one-in-five chance of success in their next start-up, which is a higher success rate than that for first-time entrepreneurs and not far below that of entrepreneurs who have had a prior success.5

  In The Geography of Bliss, author Eric Weiner describes another country with a high tolerance for failure as “a nation of born-agains, though not in a religious sense.”6 This is certainly true for Israeli laws regarding bankruptcy and new company formation, which make it the easiest place in the Middle East—and one of the easiest in the world—to birth a new company, even if your last one went bankrupt. But this also contributes to a sense that Israelis are always hustling, pushing, and looking for the next opportunity.

  Newcomers to Israel often find its people rude. Israelis will unabashedly ask people they barely know how old they are or how much their apartment or car cost; they’ll even tell new parents—often complete strangers on the sidewalk or in a grocery store—that they are not dressing their children appropriately for the weather. What is said about Jews—two Jews, three opinions—is certainly true of Israelis. People who don’t like this sort of frankness can be turned off by Israel, but others find it refreshing, and honest.

  “We did it the Israeli way; we argued our case to death.”7 That’s how Shmuel “Mooly” Eden (he has a nickname, too) glibly sums up a historic showdown between Intel’s top executives in Santa Clara and its Israeli team. It, too, was a case study in chutzpah.

  The survival of Intel would turn on the outcome. But this fierce, months-long dispute was about more than just Intel; it would determine whether the ubiquitous laptop computer—so much taken for granted today—would ever exist.

  Eden is a leader of Intel’s Israeli operation—the largest private-sector employer in the country—which today exports $1.53 billion annually.8 He told us the story of Intel in Israel, and Intel’s battles with Israel.

  Throughout most of the history of modern computing, the speed of data processing—how much time it takes your computer to do anything—was determined by the speed of a chip’s transistors. The transistors flipped on and off, and the order in which they did so produced a code, much like letters are used to make words. Together, millions of flips could record and manipulate data in endless ways. The faster the transistors could be made to flip on and off (the transistor’s “clock speed”), the more powerful the software they could run, transforming computers from glorified calculators to multimedia entertainment and enterprise machines.

  But until the 1970s, computers were used predominantly by rocket scientists and big universities. Some computers took up whole rooms or even buildings. The idea of a computer on your office desk or in your home was the stuff of science fiction. All that began to change in 1980, when Intel’s Haifa team designed the 8088 chip, whose transistors could flip almost five million times per second (4.77 megahertz), and were small enough to allow for the creation of computers that would fit in homes and offices.

  IBM chose Israel’s 8088 chip as the brains for its first “personal computer,” or PC, launching a new era of computing. It was also a major breakthrough for Intel. According to journalist Michael Malone, “With the IBM contract, Intel won the microprocessor wars.”9

  From then on, computing technology continued to get smaller and faster. By 1986, Intel’s only foreign chip factory was producing the 386 chip. Built in Jerusalem, its processing speed was 33 megahertz. Though a small fraction of today’s chip speeds, Intel called it “blazing”—it was almost seven times faster than the 8088. The company was solidly on the path imagined by one of its founders, Gordon Moore, who predicted that the industry would shrink transistors to half their size every eighteen to twenty-four months, roughly doubling a chip’s processing speed. This constant halving was dubbed “Moore’s law,” and the chip industry was built around this challenge to deliver faster and faster chips. IBM, Wall Street, and the business press all caught on, too—clock speed and size was how they measured the value of new chips.

  This was proceeding well until about 2000, when another factor came into the mix: power. Chips were getting smaller and faster, just as Moore had predicted. But as they did, they also used more power and generated more heat. Chips overheating would soon become a critical problem. The obvious solution was a fan, but, in the case of laptops, the fan needed to cool the chips would be much too big to fit inside. Industry experts dubbed this dead end the “power wall.”

  Intel’s Israeli team was the first group within the company to see this coming. Many late nights at Intel’s Haifa facility were dedicated to hot coffee, cold takeout, and ad hoc brainstorming sessions about how to get around the power wall. The Israeli team was more focused than anyone on what the industry called “mobility”—designing chips for laptop computers and, eventually, for all sorts of mobile devices. Noticing this tendency, Intel put their Israeli branch in charge of building mobility chips for the whole company.

  Even given this responsibility, Israelis still resisted fitting into the Intel mainstream. “The development group in Israel, even before it was tasked as the mobility group, pushed ideas for mobility that went against the common wisdom at Intel,” explained Intel Israel’s chief, David “Dadi” Perlmutter, a graduate of the Technion (Israel’s MIT) who’d started designing chips at Intel Israel in 1980.10 One of these unconventional ideas was a way to get around the power wall. Rony Friedman was one of Intel Israel’s top engineers at the time. Just for fun, he had been tinkering with a way to produce low-power chips, which went blatantly against the prevailing orthodoxy that the only way to make chips faster was to deliver more power to their transistors. This, he thought, was a bit like making cars go faster by revving their engines harder. There was definitely a connection between the speed of the engine and the speed of the car, but at some point the engine would go too fast, get too hot, and the car would have to slow down.11

  Friedman and the Israeli team realized that the solution to the problem was something like a gear system in a car: if you could change gears, you could run the engine more slowly while still making the car go faster. In a chip, this was accomplished differently, by splitting the instructions fed into the chip. But the effect was similar: the transistors in Intel Israel’s low-power chips did not need to flip on and off as fast, yet, in a process analogous to shifting a car into high gear, they were able to run software faster.

  When Intel’s Israel team euphorically introduced its innovation to headquarters in Santa Clara, the engineers thought their bosses would be thrilled. What could be better than a car that goes faster without overheating? Yet what the Israeli team saw as an asset—that the engine turned more slowly—headquarters saw as a big problem. After all, the entire industry measured the power of chips by how fast the engine turned: clock speed.

  It did not matter that Israeli chips ran software faster. The computer’s engine—composed of its chip’s transistors—wasn’t turning on and off fast enough. Wall Street analysts would opine on the attractiveness (or unattractiveness) of Intel’s stock base
d on performance along a parameter that said, Faster clock speed: Buy; Slower clock speed: Sell. Trying to persuade the industry and the press that this metric was obsolete was a nonstarter. This was especially the case because Intel had itself created—through Moore’s law—the industry’s Pavlovian attachment to clock speed. It was tantamount to trying to convince Ford to abandon its quest for more horsepower or telling Tiffany’s that carat size does not matter.

  “We weren’t in the mainstream—clock speed was king and we were on the outside,” Israel’s Rony Friedman recalls.12

  The head of Intel’s chip division, Paul Otellini, tried to mothball the whole project. The clock-speed doctrine was enshrined among Intel’s brass, and they weren’t about to hold a seminar to decide whether or not to change it.

  The “seminar” is part of a culture that Israelis know well, going back to the founding of the state. From the end of March to the end of May 1947, David Ben-Gurion—Israel’s George Washington—conducted an inquiry into the military readiness of Jewish Palestine, in anticipation of the war he knew would come when Israel declared independence. He spent days and nights meeting with, probing, and listening to military men up and down the ranks. More than six months before the United Nations passed its partition plan for dividing Palestine into a Jewish and an Arab state, Ben-Gurion was keenly aware that the next phase in the Arab-Israeli conflict would be very different from the war the pre-state Jewish militias had been fighting; they needed to step back, in the midst of ongoing fighting, and plan for the existential threats that were nearing.

  At the end of the seminar, Ben-Gurion wrote of the men’s confidence in their readiness: “We have to undertake difficult work—to uproot from the hearts of men who are close to the matter the belief that they have something. In fact, they have nothing. They have good will, they have hidden capacities, but they have to know: to make a shoe one has to study cobbling.”13

  Intel’s Otellini didn’t know it, but his Israeli team was giving him a similar message. They saw that Intel was headed for the “power wall.” Instead of waiting to ram into it, the Israelis wanted Otellini to avert it by taking a step back, discarding conventional thinking, and considering a fundamental change in the company’s technological approach.

  The executives in Santa Clara were ready to strangle the Israeli team, according to some of those on the receiving end of Intel Israel’s “pestering.” The Israelis were making the twenty-hour trip between Tel Aviv and California so frequently that they seemed omnipresent, always ready to corner an executive in the hallway or even a restroom—anything to argue their case. David Perlmutter spent one week each month in the Santa Clara headquarters, and he used much of his time there to press the Israeli team’s case.

  One point the Israelis tried to make was that while there was risk in abandoning the clock-speed doctrine, there was even greater risk in sticking with it. Dov Frohman, the founder of Intel Israel, later said that to create a true culture of innovation, “fear of loss often proves more powerful than the hope of gain.”14

  Frohman had long tried to cultivate a culture of disagreement and debate at Intel Israel, and he had hoped this ethos would infect Santa Clara. “The goal of a leader,” he said, “should be to maximize resistance—in the sense of encouraging disagreement and dissent. When an organization is in crisis, lack of resistance can itself be a big problem. It can mean that the change you are trying to create isn’t radical enough . . . or that the opposition has gone underground. If you aren’t even aware that the people in the organization disagree with you, then you are in trouble.”

  In time, the Israelis outlasted—and outargued—their U.S. supervisors. Each time the Israelis showed up, they had better research and better data, one Intel executive recalled. Soon they had a seemingly bulletproof case as to where the industry was heading. Intel could either lead in that direction, the Israelis told management, or become obsolete.

  Finally, this time as CEO, Otellini changed his mind. It had become impossible to counter the Israelis’ overwhelming research—not to mention their persistence. In March 2003, the new chip—code-named Banias after a natural spring in Israel’s north—was released as the Centrino chip for laptops. Its clock speed was only a bit more than half of the reigning 2.8 gigahertz Pentium chips for desktops, and it sold for more than twice the price. But it gave laptop users the portability and speed they needed.

  The switch to the Israeli-designed approach came to be known in Intel and the industry as the “right turn,” since it was a sharp change in approach from simply going for higher and higher clock speeds without regard to heat output or power needs. Intel began to apply the “right turn” paradigm not just to chips for laptops but to chips for desktops, as well. Looking back, the striking thing about Intel Israel’s campaign for the new architecture was that the engineers were really just doing their jobs. They cared about the future of the whole company; the fight wasn’t about winning a battle within Intel, it was about winning the war with the competition.

  As a result, the new Israeli-designed architecture, once derided within the company, was a runaway hit. It became the anchor of Intel’s 13 percent sales growth from 2003 to 2005. But Intel was not clear of industry threats yet. Despite the initial success, by 2006, new competition caused Intel’s market share to plummet to its lowest point in eleven years. Profits soon plunged 42 percent as the company cut prices to retain its dominant position.15

  The bright spot in 2006, however, came in late July when Otellini unveiled the Core 2 Duo chips, Intel’s successors to the Pentium. The Core Duo chips applied Israel’s “right turn” concept plus another Israeli development, called dual-core processing, that sped chips up even further. “These are the best microprocessors we’ve ever designed, the best we’ve ever built,’’ he told an audience of five hundred in a festive tent at Intel’s Santa Clara headquarters. “This is not just incremental change; it’s a revolutionary leap.” Screens lit up with images of the proud engineers behind the new chip; they were joining the celebration via satellite, from Haifa, Israel. Though Intel’s stock was down 19 percent over the whole year, it jumped 16 percent after the July announcement. Intel went on to release forty new processors over a one-hundred-day period, most of them based on the Israeli team’s design.

  “It’s unbelievable that, just a few years ago, we were designing something that no one wanted,” says Friedman, who is still based in Haifa but now leads development teams for Intel around the world. “Now we’re doing processors that should carry most of Intel’s revenue—we can’t screw up.”

  What began as an isolated outpost an ocean away had become Intel’s lifeline. As Doug Freedman, an analyst for American Technology Research, put it, the Israeli team “saved the company.” Had midlevel developers in the Haifa plant not challenged their corporate superiors, Intel’s global position today would be much diminished.

  Intel Israel’s search for a way around the power wall also produced another dividend. We don’t think of computers as using a lot of electricity—we leave them on all the time—but, collectively, they do. Intel’s ecotechnology executive, John Skinner, calculated the amount of power that Intel’s chips would have used if the company had kept developing them in the same way, rather than making the “right turn” toward the Israeli team’s low-power design: a saving of 20 terawatt hours of electricity over a two-and-a-half-year period. That’s the amount of power it would take to run over 22 million 100-watt bulbs for an entire year, twenty-four hours a day, seven days a week. Skinner noted, “We calculated about a $2 billion savings in electricity costs. . . . It’s equivalent to a small number of coal-fired power plants or taking a few million cars off the road. . . . We’re very proud that we are dramatically reducing the carbon dioxide footprint of our own company.”16

  The significance of the Intel Israel story is not, however, just that the team in Haifa came up with a revolutionary solution that turned the company around. A good idea alone could not have carried the day against a seeming
ly intransigent management team. There had to be willingness to take on higher authorities, rather than simply following directives from the top. Where does this impudence come from?

  Dadi Perlmutter recalls the shock of an American colleague when he witnessed Israeli corporate culture for the first time. “When we all emerged [from our meeting], red faced after shouting, he asked me what was wrong. I told him, ‘Nothing. We reached some good conclusions.’ ”

  That kind of heated debate is anathema in other business cultures, but for Israelis it’s often seen as the best way to sort through a problem. “If you can get past the initial bruise to the ego,” one American investor in Israeli start-ups told us, “it’s immensely liberating. You rarely see people talk behind anybody’s back in Israeli companies. You always know where you stand with everyone. It does cut back on the time wasted on bullshit.”

  Perlmutter later moved to Santa Clara and became Intel’s executive vice president in charge of mobile computing. His division produces nearly half of the company’s revenues. He says, “When I go back to Israel, it’s like going back to the old culture of Intel. It’s easier in a country where politeness gets less of a premium.”

  The cultural differences between Israel and the United States are actually so great that Intel started running “cross-cultural seminars” to bridge them. “After living in the U.S. for five years, I can say that the interesting thing about Israelis is the culture. Israelis do not have a very disciplined culture. From the age of zero we are educated to challenge the obvious, ask questions, debate everything, innovate,” says Mooly Eden, who ran these seminars.

  As a result, he adds, “it’s more complicated to manage five Israelis than fifty Americans because [the Israelis] will challenge you all the time—starting with ‘Why are you my manager; why am I not your manager?’ ”17

  CHAPTER 2