Start-up Nation

Bertelsmann, CNBC, MBC, Arabian Radio Network, and other media companies all have a major presence).

DIC’s director of marketing, Wadi Ahmed, a British citizen of Arab origin, explains, “We have made Porter’s [cluster] theory a reality. If you bring all the companies from the same segment together . . . opportunities materialize. It’s real-life networking. It is bringing the integrator together with the software developers. Our cluster includes six hundred companies working within two kilometers of each other. . . . Silicon Valley has some similarities but it is an area, not a single managed entity.”³

It is true that Dubai had at first posted impressive growth rates and that it turned itself into an important commercial hub in a short time. But there was never any comparability between the number of start-ups in Israel and in Dubai, or the amount of venture capital Dubai has been able to attract compared to Israel, not to mention the number of new inventions and patents. So what makes Israel and Dubai different in this way?

Drill down a bit into what is going on in Dubai’s Internet City, for example, and the answer begins to emerge. In DIC you will not find any R&D or new innovation-based companies. Dubai opened its doors to innovative global companies, and many have come. But they have come to spread innovations made elsewhere to a particular regional market. Dubai, therefore, has not created any thriving innovative clusters; rather, it has built large, successful service hubs. So when Mohammed Al Gergawi was handpicked by Sheikh Mohammed to help catalyze Dubai’s economic miracle, the job was to grow and manage this exciting, but not necessarily innovation-generating, venture.

In Israel the story is different. Margalit is one of tens of thousands of serial entrepreneurs. No one picked him; he picked himself. All of his success came from creating innovative companies and hooking into a global venture and tech ecosystem that is constantly searching for new products and markets. And while the physical infrastructure that facilitated this process in Israel may have been inferior to Dubai’s, the cultural infrastructure has proved to be vastly richer soil on which to cultivate innovation.

Attracting new members to a cluster by offering a less expensive way to do business might be sufficient to create a cluster, but not to sustain it. If price is a cluster’s only competitive edge, some other country will always come along to do it more cheaply. The other qualitative elements—such as tight-knit communities whose members are committed to living and working and raising families in the cluster—are what contribute to sustainable growth. Crucially, a cluster’s sense of shared commitment and destiny, which transcends day-to-day business rivalries, is not easy to manufacture.

The obstacles for Dubai, in this sense, are profound. Foreign nationals—European and Persian Gulf business adventurers or South Asian and Arab temporary laborers—are there to make money, period. Once they’ve done so, they have typically returned home or moved on to their next adventure. They have a transactional relationship with Dubai; they are not part of a tight-knit community, and they are not collectively laying roots or building anything new. They evaluate their standing and accomplishments vis-a-vis the communities in their home countries, not those in Dubai. Their emotional commitment and sense of rootedness lie elsewhere. This, we believe, is a fundamental obstacle to a fully functioning cluster, and it may also be an impediment to cultivating a high-growth entrepreneurial economy.

“If there is an Internet bubble in Israel, then Yossi Vardi is the bubble.”⁴ So says Google cofounder Sergey Brin, referring to Vardi’s role in helping to rebuild Israel’s Internet sector from the ashes of the global technology market crash of 2000. Vardi’s name has become synonymous with the world of Israeli Internet start-ups. He is best known for ICQ, the Internet chat program founded by his son Arik Vardi and three pals when they were in their early twenties. Isaac Applbaum of The Westly Group says that ICQ—once the world’s most popular chat program —was one of a handful of companies that “transformed technology forever,” along with Netscape, Google, Apple, Microsoft, and Intel.

ICQ (a play on “I seek you”) was introduced in November 1996, with seed funding from Vardi. It was the first program to allow Windows users to communicate with one another live. America Online (AOL) invented its own chat program, called Instant Messenger (AIM), at about the same time, but at first AOL’s program was available only to its subscribers.

The Israeli program spread much faster than AOL’s. By June 1997, close to half a year after ICQ’s launch— when only 22 percent of American homes had Internet access—ICQ had over a million users. In six months the number of users had jumped to 5 million, and ten months later to 20 million. By the end of 1999, ICQ had a total of 50 million registered users, making it the largest international online service. ICQ became the most downloaded program in the history of CNET.com, with 230 million downloads.

Back in mid-1998, when ICQ hit about 12 million users, AOL bought the start-up for what at the time was the largest amount paid for an Israeli tech company: $407 million. (They wisely insisted on taking all cash instead of stock.)

Though Israel was already well into its high-tech swing by then, the ICQ sale was a national phenomenon. It inspired many more Israelis to become entrepreneurs. The founders, after all, were a group of young hippies. Exhibiting the common Israeli response to all forms of success, many figured, If these guys did it, I can do it better. Further, the sale was a source of national pride, like winning a gold medal in the world’s technology Olympics. One local headline declared that Israel had become an Internet “superpower.”⁵

Vardi invests in Internet start-ups because he believes in them. But his dogged focus on the Internet when