Dan Breznitz, you're a professor of innovation. How did you come to work in this field?
"It was actually a mistake. I was born in Israel, in Jerusalem. After demobilization from the IDF, I started studying at the Hebrew University, and in 1993 the big faculty strike at the universities broke out. And so, together with three friends, we founded a software company. Why do I call it 'a software company?' Because in 1993, no one knew what a startup was. We had no experience with venture capital. We'd barely heard of this thing called the Chief Scientist. We were around 21 or 23 years old."
And how did the connection to innovation happen?
"After my first degree [in sociology and political science - H.W. & A.G.] I was accepted to doctoral studies in political economy at MIT. Around the year 2000, during a break, I came back to Israel on a visit. The change, compared with what I had known, was amazing. Not only were there suddenly many startups, but even high schoolers could talk to me about venture capital. It was eye-opening. I started thinking about the change that happened in Israel, how it had happened. I started researching it historically, and realized that it hadn’t just happened here.
"My doctorate was a comparative study, and was called 'Innovation and the state: development strategies for high technology industries in a world of fragmented production: Israel, Ireland, and Taiwan,' and it was also the basis of my first book. It dealt with the different roles that each of the countries had in the development of their local high-tech industries. When Israel was just starting to develop the field, it was called 'knowledge-intensive industries,' because no one knew what high-tech was, nor did they collect data on high-tech, low-tech, or mid-tech. That's how I got to innovation."
You claim that the fruits of innovation in Taiwan, for example, trickle down to various strata of the population. Who in Israel and Silicon Valley benefits from the success of high-tech?
"Very few people. Mainly research and development engineers, graduates of the best universities. In the US, these are graduates of MIT, Stanford, maybe Berkeley. In Israel, everyone knows which universities are the best, from which graduates may have served in specific IDF units. These are not exactly the people I worry about. After all, if you've been accepted to MIT, Stanford or Berkeley, you're not exactly an incompetent."
Meaning, these are workers who, in any case, come from the strongest population strata.
"Yes. Tel Aviv is like Silicon Valley on steroids. The techies who are graduates of the best universities will get excellent jobs that will turn them into millionaires at worst, and at best - thanks to the shares or options given to workers, that are effectively lottery tickets - even billionaires, if there’s an exit. That’s great for them, for the venture capital funds, and maybe for some lawyers, and some celebrity chefs. They live the good life. But what about all the other 85% of the population?"
In short, in Israel and Silicon Valley, the current model increases inequality.
"The situation in Israel isn’t bad. When you focus just on this stage of innovation, you generate a great deal of wealth, especially for that small segment of the population. Those who get rich start demanding expensive services. The problem is that this raises the cost of living for everyone. The remaining 85% of the population still have salaries from the 70s and 80s. In 2021, "The Economist" ranked Tel Aviv as the most expensive city in the world, and today it’s the third most expensive city, with New York and Singapore in first place. The 85%? They have no employment horizon. They will never be able to earn salaries like the techies, yet they’re supposed to live together, in the same place, with people who earn $2-3 million a year?"
Not just R&D, not just VC
The fact that Israel's economy, as well as its security, depends on just one or one-and-a-half sectors is undoubtedly problematic. What do you see in other countries?
"The first thing, and this is something people are trying to do, is to establish larger companies. Because as soon as you have more than just a development center in Israel, then you start hiring employees in management, business development, customer support. Employees who are not engineers. Many countries are trying to figure out which areas of high-tech have more employment possibilities for people with abilities that are not only research and development.
"Israel is currently full of people who really know how to make the best hardware and software in the world, and they are the ones who come up with more and more products, and R&D. Then the question arises: if you already have a venture capital industry that gives more money per person, or thereabouts, than anywhere else in the world - isn't it the government’s role to invest much, much more money in technological development in other areas, for example, in agriculture? An interesting question that has been asked many times, but the State of Israel has chosen never to answer it."
In other words, Israel needs to build companies for the long-term, instead of today’s companies, most of which are exit-focused.
"Yes, and for that to happen, we need to talk about something that people don't like to talk about, and that is how we finance our high-tech companies."
Meaning?
"Venture capital's real purpose is to make money. How does it make money? It makes money by selling the companies in which the fund has invested. Many of my best friends are venture capitalists, and they are not bad people."
But that’s the model.
"The model is not only that. Even investors who look long-term - let's say they have a fund that is generally for seven to ten years - they need to show successes before the end of the period, and that’s so that they can raise the new fund. And from the company's point of view, once it has received venture capital investment, it needs to provide these investors with an exit. This isn’t going to change in Israel, there’s no way it will change, and it doesn’t need to change. What can be done is to postpone the exit as much as possible, so that the company can grow as much as possible."
Meaning, the Chief Scientist should give money to growth companies?
"Not just to hand out money and not just the Chief Scientist. You have to start thinking about whether there can be financial institutions here that will give loans, and won’t want equity."
What can the state do?
"The state can connect banks with industries. Talk to the finance people at startups, accountants, and others. They know how to work with venture capital investors but they have no idea how to work with debt. They need to learn that. The banks, for their part, have no idea how work with these sorts of companies.
"The state can also decide that the Innovation Authority should invest much more in areas that venture capital won’t touch. So far, we’ve had 60-70 years of experience with venture capital making money in software, hardware and maybe a little biotech. Not anywhere else. If the State of Israel wants to have knowledge-intensive industries that are not hardware software and maybe a little biotech, a different financial model is needed. And it’s the state's role to find it."
Nowadays that sounds like science fiction - having a dialogue between bankers, politicians, and entrepreneurs. Prime Minister Netanyahu hasn’t met with the high-tech leadership since their [anti-judicial reform] protests commenced in January 2023, and some bank CEOs were also involved in the protest.
"Yes. I can say one thing is clear. In the case of a protest like this, if I'm in the high-tech industry, I'm going to reduce the risk of being in Israel. How? I'll do the exact opposite of what we just talked about. What does Israel have that I really want? Research and development. Everything else is out. And we're already seeing that.
"From the investors' point of view, uncertainty in Israel has increased, and increased uncertainty is worse even than increased risk. If they still think they can make money here, they will strive to insure themselves as much as possible. What will they do? Exactly the same: I just want the companies here that I think I can sell the fastest, that aren’t even considering developing manufacturing here. They’re built as Delaware companies headquartered in the US or maybe Europe, and Israel will have only the research and development. That’s the optimal case. The non-optimal case is that we establish a kibbutz or a colony in Toronto."
Over the years, Israel has tried to diversify the high-tech worker population. In your view, this is a worthy undertaking, but insufficient.
"What can be said to the credit of the governments of the past few years, until the current government, is that there has been a fundamental, positive change in education in the Arab sector. This has happened mainly during the last 20 years. As for the haredim, there is a problem in that their political leadership opposes the core curriculum. In any case, even among Arabs and haredim, and perhaps other vulnerable populations, when there is a political crisis like now, they will be the first to be affected."
Apropos the haredim and the core curriculum, a political decision was made to exempt an entire population from studying English and mathematics. Is this unique to Israel?
"Definitely unique. Let's be precise: almost everywhere, including in Canada, there are populations that are discriminated against. But not because their leaders demand that they shouldn’t learn basic subjects. That is unique to Israel."
On the same subject, what do you think about the approximately NIS 14 billion in coalition funds in the current budget to be directed to items that suppress growth, such as haredi educational institutions that do not teach the core curriculum?
"When you look at Israel today from the outside, you wonder why a country that is finally successful and with a stable security situation would commit collective suicide. I and many others could talk for weeks on end, and still not understand how a budget that is so bad for the future of the country was passed. I have no words."
What do you think about the recent NIS 100 million cut to the Innovation Authority budget for 2024?
"The budget cut of the only organization responsible for securing the future and sustainable growth of the high-tech industry, which is already in crisis, while at the same time the government increases the budgets of organizations that will reduce labor productivity and increase inequality - all this shows that the current government has no interest in the future prosperity of Israeli society".
Outsiders understand even less
As an Israeli who has been living in Canada for a decade, have you recently received inquiries from Israelis who are considering taking similar steps?
"I receive a call almost every other day from people asking me about how to immigrate. The stream of calls began, more or less, a day after the current government was formed. By the way, the flood of calls hasn’t slowed, even after Netanyahu's statement about delaying the judicial reform."
Who’s calling?
"They're all from high-tech. They're educated. They also work at the right companies, from Google to Microsoft to Facebook. The folks who founded startups and made exits don't need to call me. They already know exactly how to move to the US or Canada. Most likely they’ve already left."
How do Canadians view the recent political upheavals in Israel? What do your university colleagues say?
"How do we look in their eyes? A bit bizarre, I have no other way of putting it. My family and friends in Israel tell me that most Israelis also don’t understand how everything suddenly blew up so quickly. When you look from the outside, it’s even less understandable. Even if tomorrow morning Bibi says, 'I was wrong, it's over. We won’t make a judicial revolution', the question remains: how exactly do you turn Israel into a single, united society that wants to succeed together? No one here knows."
They say that you can leave Israel, but Israel never leaves you. Does the heart always yearn for home?
"Israel has changed. If you're out of the country long enough, your heart may yearn for something, but the heart always yearns for childhood. If I go back to Jerusalem today, it will no longer be the Jerusalem I remember. The thing you pine for doesn’t exist anymore. We Jews always complain, but I don't think anyone goes back."
Published by Globes, Israel business news - en.globes.co.il - on June 7, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.