Start-up Nation

Internet search engines being “in a terrible state compared to where they could be,” he also conceded that Google and Microsoft were in fierce competition. And the new battlefront was Israel. Earlier Gates had said that the “innovation going on in Israel is critical to the future of the technology business.”²

No sooner did the richest man in the world leave Israel than the second-richest, Warren Buffett, showed up. The most revered investor in America had arrived to visit the first company he’d bought outside the United States. Buffett spent fifty-two hours touring Iscar, the machine-tool company he’d purchased for $4.5 billion, and Israel, the country he had heard so much about. “You think of people walking those steps 2,000 years ago,” he said of his visit to Jerusalem, “and then you look at the Iscar factory on a mountaintop, supplying 61 countries—whether it’s Korea or the United States or Europe or you name it. It’s pretty remarkable. I don’t think you can really find that kind of combination of the past and the future, in such close proximity, virtually any place in the world.”³

But it seems unlikely that it was an appreciation of history that convinced Warren Buffett to choose Israel as the place to change his decades-long policy of not making acquisitions outside the United States. And nor was it, for this apostle of risk aversion, an indifference to Israel’s vulnerabilities.

You do not have to be Warren Buffett to worry about risk. Every company carefully considers the risks of doing business anywhere far from headquarters, let alone somewhere perceived as a war zone. The question, according to Buffett, is how you think about risk.

We sat in Jon Medved’s office—at the Vringo headquarters, in Beit Shemesh, a neighborhood between Jerusalem and Tel Aviv—to discuss the risks of investing in Israel.⁴ But before he would answer our questions, Medved posed one of his own. He pulled out one of the slides from a PowerPoint presentation, the “Israel Inside” presentation he often gives in his role as unofficial economic ambassador.

FIGURE 9.1

“Look at this graph,” he told us (figure 9.1).

“What do you see here?” Medved probed. The horizontal x-axis showed the years 2002 through 2004; the vertical y-axis was unlabeled. And there was a line heading—in a relatively linear, diagonal direction—up into the upper-right corner of the graph. But with no y-axis label, the graph was incomplete. We figured Medved had posed a trick question.

“Well, there is something increasing over the 2002-to-2004 time frame,” we hazarded. “But the vertical y-axis doesn’t tell us what the ‘it’ is.”

“Exactly,” he quickly responded. “The ‘it’ could be a number of things. For one: violence. It was, tragically, one of Israel’s most violent periods in our history, during the second intifada and leading up to the second Lebanon war. The graph illustrates the number of rockets that hit Israel over those years.”

But, Medved told us, the graph also illustrates the performance of Israel’s economy, which also rose steeply in the first half of the decade. He then pulled out another slide that was virtually identical to the first (figure 9.2 ).

FIGURE 9.2

The vertical y-axis on this next slide was labeled “Foreign Investment in Israeli High Tech.” Remarkably, during the same period, there was an increase in investments coming in as the rocket attacks were increasing.

In fact, as we researched other economic metrics, we found that a number of sets of data would fit roughly along this generic graph structure. For example, foreign direct investment (FDI)—another macroeconomic metric—measures the total amount of overseas direct investment in any form that comes into a country. During the period from 2000 to 2005, Israel’s FDI tripled, and Israel’s share of the global venture dollars invested inside Israel doubled.

Medved was not suggesting that there was a correlation between violence in Israel and its attractiveness to investors. Rather, he believes that Israel has managed to divorce the security threat from its economic growth opportunities. In other words, Israelis are confident that their start-ups will survive during war and turbulence. And Israeli entrepreneurs have managed to convince investors of this, too.

Alice Schroeder, the author of The Snowball, is the only authorized biographer of Warren Buffett. We asked her about the perceived risk of investing in Israel. “Warren has been in the insurance business for a long time, and looks at every investment decision through that lens,” she told us. “It’s all about assessing risk like you would in an insurance policy. The things you really worry about are the potential for earthquakes and hurricanes. Warren asks: What kind of catastrophic risk is there, and can I live with it?”⁵

Iscar, the Israeli company Buffett bought, has its main factory and R&D facilities in the northern part of Israel and was twice threatened by missile attacks—in 1991, when the whole country was targeted by Iraq’s Saddam Hussein during the Gulf War, and during the 2006 Lebanon war, when Hezbollah fired thousands of missiles at Israel’s northern towns. “Doesn’t this