Start-up Nation

by Dan Senor, Saul Singer

  After properly building the drama, Chambers walked over to a large closetlike enclosure and opened the doors to reveal three complicated-looking boxes, each about the size and shape of a refrigerator. It was the CRS-1, in all its glory.

  Most people do not know what a router is, and so might have trouble relating to Chambers’s excitement. A router is something like the old modems we used to use to connect our computers to the Internet. If the Internet is like a mighty river of information that all of our computers connect into, then routers are at all the junctions of the tributaries that feed in, and are the main bottleneck that determines the capacity of the Internet as a whole.

  Only a few companies can build the highest-end routers, and Cisco—like Microsoft for operating systems, Intel for chips, and Google for Internet searches—dominates this market. Upon its unveiling, the CRS-1, which took four years and $500 million to develop, earned a place in the current volume of Guinness World Records as the fastest router in the world. “We liked this entry, because the numbers are so huge,” said David Hawksett, science and technology editor at Guinness World Records. “I just installed a wireless network at home and was quite pleased with 54 megabits per second of throughput, but 92 terabits is just incredible.”2

  The tera in terabit means “trillion,” so one terabit is a million megabits. According to Cisco, the CRS-1 has the capacity to download the entire printed collection of the U.S. Library of Congress in 4.6 seconds. Doing this with a dial-up modem would take about eighty-two years.

  A chief proponent of the CRS-1 was an Israeli named Michael Laor. After earning an engineering degree at Ben-Gurion University in Beersheba, Israel, Laor went to work for Cisco in California for eleven years, where he became director of engineering and architecture. In 1997, he decided he wanted to return to Israel, and Cisco, rather than lose one of its leading engineers, agreed that he would open an R&D center for the company in Israel—its first outside the United States.

  At around this time, Laor started to argue for the need for a massive router like the CRS-1. Back then the Internet was still quite young and the idea that there might be a market for a router this big seemed far-fetched. “People thought we were a little nuts to be developing this product four years ago,” Cisco’s Tony Bates said at the time. “They said, ‘You’re biting off more than you can chew,’ and they asked, ‘Who is going to need all that capacity?’ ”3

  Laor argued that, to paraphrase the movie Field of Dreams, if Cisco built it, the Internet would come. It was hard to see back then that the Internet, which was just starting off with e-mail and the first Web sites, would in a few years balloon exponentially with an insatiable need to move the massive data flows produced by pictures, videos, and games.

  Though the CRS-1 was the company’s biggest ever and thus a company-wide project, Laor’s team in Israel was pivotal in designing both the chips and the architecture needed to bring the technology to a new level. In the end, when Chambers unveiled the CRS-1 at the 2004 conference, he was right to be enthusiastic. Fully configured, the routers sold for about $2 million each. Yet by the end of 2004, the company had sold the first six machines. And in April 2008, the company announced that CRS-1 sales had doubled in less than nine months.4

  By 2008, the center opened by Laor a decade earlier had seven hundred employees. It had swelled quickly with Cisco’s acquisition of nine Israeli start-ups, more companies than Cisco had bought anywhere else in the world. In addition, Cisco’s investment arm made another $150 million in direct investments in other Israeli start-ups, and also put $45 million into Israel-focused venture capital funds. All told, Cisco has spent about $1.2 billion to buy and invest in Israeli companies.5

  Yoav Samet, a graduate of the IDF’s elite 8200 intelligence technology unit who now runs Cisco’s acquisitions department for Israel, the former Soviet Union, and central Europe, says that Cisco Israel is among the company’s largest overseas centers, along with those in India and China. “But,” he notes, “whereas in China and in India there is quite a bit of engineering work done, when it comes to pure innovation and acquisition activity, Israel is still holding the front line.”6

  It is unlikely that Cisco would have become so deeply invested in Israel, and that its Israeli team would have almost immediately become central to the company’s core business, if Michael Laor had not decided it was time to come home. As with Dov Frohman of Intel and many others, Laor’s decision to gain knowledge and experience in the United States or elsewhere ultimately redounded to the benefit of both the multinational company he worked for and the Israeli economy.

  While many countries, including Israel, bemoan the fact that some of their brightest academics and entrepreneurs go abroad, people like Michael Laor show that the “brain drain” is not a one-way street. In fact, international-migration researchers are increasingly noting a phenomenon they call “brain circulation,” whereby talented people leave, settle down abroad, and then return to their home countries, and yet are not fully “lost” to either place. As Richard Devane writes in a study issued by the World Bank, “China, India, and Israel enjoyed investment or technology booms over the past decade, and these booms are linked . . . by expatriate leadership in all three countries.”7

  AnnaLee Saxenian is an economic geographer at U.C. Berkeley and author of The New Argonauts. “Like the Greeks who sailed with Jason in search of the Golden Fleece,” Saxenian writes, “the new Argonauts [are] foreign-born, technically skilled entrepreneurs who travel back and forth between Silicon Valley and their home countries.” She points out that the growing tech sectors in China, India, Taiwan, and Israel—particularly the last two countries—have emerged as “important global centers of innovation” whose output “exceeded that of larger and wealthier nations like Germany and France.” She contends that the pioneers of these profound transformations are people who “marinated in the Silicon Valley culture and learned it. This really began in the late ’80s for the Israelis and Taiwanese, and not until the late ’90s or even the beginning of the ’00s for the Indians and Chinese.”8

  Michael Laor at Cisco and Dov Frohman at Intel were classic new Argonauts. Even while gaining knowledge and status within their major international companies, they always intended to return to Israel. When they did, they not only became catalysts for Israel’s technological development but founded Israeli operations that provided critical breakthroughs for the companies they worked for.

  The new Argonaut, or “brain circulation,” model of Israelis going abroad and returning to Israel is one important part of the innovation ecosystem linking Israel and the Diaspora. Another Diaspora network is a non-Israeli Jewish Diaspora.

  Israel owes much of its success to a deep Diaspora network that other countries, from Ireland to India and China, have also developed. Yet the non-Israeli Jewish Diaspora ties are not automatic, nor are they the key catalysts to the development of the tech sector in Israel. In fact, whereas China’s Diaspora is the source of 70 percent of foreign direct investment (FDI) into China and India’s Diaspora did much to help build its homeland’s high-tech infrastructure when the country’s economy and legal system were both underdeveloped, Israel’s experience has been different. The vast majority of American Jewish investors historically would not touch the Israeli economy. It was not until much later, when Israel became more successful, that many Diaspora Jews started looking at Israel as a place to do business, not just as a draw for their sympathy and philanthropy.

  So it has required creativity for Israel to learn how to use its Diaspora community in order to catalyze its economy. The tradition of Israelis’ tapping into a very small but passionate subset of the Jewish Diaspora to help build the state has its roots in institutions like Israel’s start-up air force.

  The fantasy of an Israeli aircraft industry took shape on a bumpy flight over the North Pole in 1951, inside what was to become the first aircraft in Israel’s new national airline. The conversation was between a pair of opposites: Shimon Peres, the erudite
future president of Israel, who in 1951 was the chief arms buyer for the new Jewish state, and Al Schwimmer, a swashbuckling American aviation engineer from Los Angeles, whose pals included Howard Hughes and Kirk Kerkorian. Schwimmer’s first name was Adolph, but against the backdrop of World War II, he’d opted for Al.9

  Peres and Schwimmer were on one of their many flights over the Arctic tundra in used planes purchased for Israel’s fledgling air force. Flying over the North Pole was dangerous, but they took the risk because the route was shorter—no small consideration when piloting planes that were falling apart.

  Al Schwimmer was a raconteur who’d been captivated by the airline business in its earliest days, when flying machines were an exotic novelty. He was working for TWA when the United States entered World War II and the entire airline was drafted into the war effort. Though not officially in the U.S. Air Force, Schwimmer and his fellow fliers were given military ranks and uniforms and spent the war ferrying troops, equipment, and the occasional movie star all over the world.

  During the war, Schwimmer’s identity as a Jew meant little to him and had almost no influence on his thinking or way of life. But seeing a liberated concentration camp and the newsreel footage of countless bodies and speaking with Jewish refugees in Europe trying to reach Palestine transformed him. Almost overnight, Schwimmer became a committed Zionist.

  When he heard that the British in Palestine were turning back ships full of European Jewish refugees, Schwimmer came up with what he was convinced was a better way: fly over the British navy patrols and smuggle the Jews in by landing them at hidden airfields. He tracked down Ben-Gurion’s secret emissary in New York and pitched him the idea. For months, the representative of the Haganah, the main underground Jewish army in Palestine, sat on the idea. But when it became clear that the British would soon withdraw and a full-scale Arab-Jewish war over Israel’s independence would ensue, the Haganah contacted Schwimmer.

  By this time they had an even more urgent need than smuggling refugees: building an air force. The Haganah did not have a single aircraft and would be completely exposed to the Egyptian air force. Could Schwimmer buy and repair fighter planes and smuggle them into Israel?

  Schwimmer told Ben-Gurion’s agents that he’d start immediately, even though he knew he would be violating the 1935 Neutrality Act, which prohibited U.S. citizens from exporting weaponry without government authorization. This wasn’t just chutzpah. This was criminal.

  Within days, Schwimmer had tracked down a handful of Jewish pilots and mechanics from the United States and the United Kingdom for what he told them would be the first civilian Jewish airline. He was obsessed with secrecy, and did not even want to bring them into the fold about the idea of building fighter planes. Few were even informed that the planes were destined for Israel. When outsiders inquired, the cover story was that they were building a national airline for Panama and would ferry cattle to Europe.

  Though the FBI impounded the largest aircraft he bought—three Constellations—Schwimmer and his gang succeeded in smuggling out other aircraft, some by literally flying over the heads of the FBI agents who’d demanded that the planes be grounded. At the last minute, the Haganah cut a separate deal to buy German Messerschmitts from Czechoslovakia, which Schwimmer was also drafted to fly to Israel.

  When the 1948 War of Independence came, Schwimmer’s aircraft fought off Egyptian planes that were bombing Tel Aviv. In certain battles, the barely trained Israeli pilots were instrumental in ensuring that the Negev Desert—a relatively large triangular swath of land starting a few miles south of Jerusalem and Tel Aviv, between the Egyptian Sinai and Jordan—became part of Israel.

  After Israel prevailed in the War of Independence, Schwimmer returned to the United States, despite being a wanted man. The FBI had figured out the smuggling scheme, and the U.S. Justice Department had built a criminal case against him. His trial, along with those of a number of the pilots he had recruited, was a public sensation. The defendants pleaded not guilty, on the grounds that the law itself was unjust. Schwimmer got off with paying a fine, which was widely seen as exoneration.

  Once Schwimmer was cleared, it didn’t take him long to get back into the smuggling game. By 1950, Schwimmer had joined forces with Shimon Peres, then a young Ben-Gurion protégé working for the new Israeli Defense Ministry. Peres had tried to buy thirty surplus Mustang aircraft for the Israeli Air Force, but the United States had decided to destroy the planes instead. Their wings were sliced off and their fuselages cut in two.

  So Schwimmer’s team bought the cut-up planes at cost from a Texas junk dealer, reconstructed them, and made sure they had all their parts and were operational. Then the team disassembled the planes again, packed them in crates marked “Irrigation Equipment,” and shipped them to Israel.

  But because of the urgency with which they had to get the aircraft to Israel, a few of the planes were left assembled, and Schwimmer and Peres flew these to Tel Aviv. And that is how they found themselves in 1951 talking about a future Israeli aviation industry. Peres became captivated by Schwimmer’s ideas for creating an aircraft industry in Israel that would serve a purpose beyond short-term military strategy. It was part of Peres’s fascination with creating industries in Israel.

  Schwimmer insisted that in a world flooded with surplus aircraft from the war, there was no reason why Israel could not buy planes cheaply, repair and improve them, and sell them to militaries and airlines in many countries, while building Israel’s own commercial industry. Shortly after they returned to the United States, Peres took Schwimmer to meet Ben-Gurion, who was on his first visit to America as Israel’s prime minister.

  “You learning Hebrew now?” was Ben-Gurion’s first question when Schwimmer reached out his hand to greet him; they had met repeatedly during the War of Independence. Schwimmer laughed and changed the subject: “Nice girls here in California, don’t ya think, Mr. Prime Minister?”

  Ben-Gurion wanted to know what Schwimmer was working on. Schwimmer told him about the renovations he was carrying out.

  “What? With this tiny collection of machines you can renovate planes?”

  Schwimmer nodded.

  “We need something like this in Israel. Even more. We need a real aviation industry. We need to be independent,” Ben-Gurion said. This was exactly what Schwimmer had discussed with Peres, while flying over the tundra. “So, what do you think?”

  Unbeknownst to Schwimmer, Ben-Gurion had recently instructed the Technion to build an aeronautical engineering department. In giving the order, he’d said, “A high standard of living; a rich culture; spiritual, political and economic independence . . . are not possible without aerial control.”

  “Sure, I think you’re right,” said Schwimmer, falling into the prime minister’s trap.

  “I’m glad you think so. We’ll expect you to come back to Israel to build one for us.”

  Schwimmer stared dumbfounded at Peres.

  “Just do it, Al,” said Peres. Schwimmer resisted. He immediately began thinking of the run-ins he would have with the Israeli Air Force chiefs and the small but powerful Israeli establishment. Plus, he didn’t speak Hebrew. He wasn’t a party insider. He hated politics and bureaucracy. And the Israeli combination of socialist economic planning and cronyist politics could be stifling for anyone, let alone someone trying to build an aviation industry.

  He told Ben-Gurion that he could build the company only if it would be free from cronyism—no political hacks getting jobs. A private company, organized along commercial lines, he told Ben-Gurion.

  “You’re just right for Israel. Come,” Ben-Gurion responded.

  Schwimmer did go to Israel. Within five years, Bedek, the airplane-maintenance company he founded with two Israelis, became the largest private employer in the country.

  By 1960, Bedek was producing a modified version of the French Fouga fighter plane. At an official unveiling and test flight of the plane, dubbed Tzukit (“swallow” in Hebrew), Ben-Gurion told Schwimmer, “Th
is place isn’t just Bedek anymore. You’ve gone beyond repairs. You guys have built a jet. The new name should be Israel Aircraft Industries.” Peres, who by now was deputy defense minister, translated the new company name.

  Peres and Ben-Gurion had managed to recruit an American Jew to help provide one of the biggest long-term jolts to Israel’s economy, all without asking anyone for one investment dollar.

  CHAPTER 9

  The Buffett Test

  For our customers around the world, there was no war.

  —EITAN WERTHEIMER

  WE’RE NOT HERE TO STEAL WORKERS FROM MICROSOFT,” said Google’s Yoelle Maarek. “But,” she continued, grinning mischievously, “if they think they’ll be happier with us, they’re welcome.”1 Only ten weeks earlier, Hezbollah missiles had been raining down on Haifa, home to the Google R&D center she headed. Now she was in Tel Aviv, opening Google’s second research facility in the space of a year.

  Yoelle Maarek grew up in France, where she studied engineering, then earned her PhD in computer science at Columbia University and the Technion in Haifa. Before being tapped to head Google Israel’s R&D operations, she worked at IBM Research for seventeen years, specializing in a field called “search” before Google existed and when the Internet was in its infancy.

  To Maarek, the roots of search go deep into history. Scholars in the sixteenth century would consult a Bible concordance to see where Moses was mentioned and in which context. A concordance is “basically an index, which is the data structure that every search engine is using. Five centuries ago, people would do that manually. . . . As Israelis and as Jews, we are the people of the Book. We like to consult texts. We like to search,” Maarek said.

  In 2008 Google Israel sold $100 million in advertising, about double the previous year and 10 percent of the total advertising market in Israel—a higher market share than Google has in most countries.