Start-ups: Art, not science

ISRAEL IS not for sale. But if it were, we now know what Israel is worth, thanks to a study by the World Bank and the Tel Aviv Stock Exchange. If shares in Israel Inc. were floated on the stock exchange, they would be worth 17.6 trillion shekels (4.8 trillion dollars), claim the experts. If a buyer acquired Israel, he or she would own Israel's annual 350 billion dollar GDP. This implies a modest annual rate of return on investment of about 7 percent. Keep in mind the substantial risk premium. Just to put things in proportion, on Thursday, August 2, Apple shares closed at a record high of $207.39, bringing Apple's market value to just over 1 trillion dollars, a historical first for a single company. Hence, all of Israel is worth just a bit less than five (Macintosh) Apples. Apple employs 123,000 people. Israel's labor force is four million. So each Apple worker generates 6.8 times more wealth than each Israeli worker. Apart from my deplorable addiction to numbers, burned into all economists' DNA, there is a point to these numbers. Israel brands itself as the Start-up Nation, ever since Dan Senor and Saul Singer's blockbuster 2011 book by that name. The website they launched, Start-up Nation Central, acts as matchmaker, linking foreign investors and companies with some 5,500 Israeli start-ups. And according to Bloomberg, this is the highest number of start-ups per capita in the world. The Amazon promo for “Start-up Nation” asks rhetorically, “How is it that Israel – a country of 7.1 million [now 8.5 million], only 60 years old [now 70], surrounded by enemies, in a constant state of war since its founding, with no natural resources, [OK, we have natural gas now] – produces more start-up companies than large, peaceful, and stable nations like Japan, China, India, Korea, Canada and the UK?” Start-up Nation Central analyst Rinat Korbet has written an upbeat analysis of Israel's high-tech industry. “The first six months of 2018 were characterized by global record-breaking venture capital deal values,” she wrote. “…The Israeli high-tech industry is both growing in the amount of money raised by its tech startups, and maturing (a growing layer of maturing companies). It is enjoying the fruits of previous successes and innovations, the knowledge accumulated by serial entrepreneurs and multinationals based in Israel, also the continuous flow of capital from abroad.” Let me put these glowing words and numbers into perspective. Small nations like Israel focus on quality, not quantity. It is the quality of our start-ups that matter, not the quantity. Look at what one Apple, one Teva, one Check Point, or one Mobileye can contribute. Measured by quality, Israel's start-ups are far from world-beaters. Only 4 percent achieve profitability and sustained independent growth, according to the Israel Venture Center. Measured by successful start-ups per capita, Israel is somewhat of a bust. But why? Why do so many start-ups fail? Is it baked into the cake? Some think so. After I published an opinion piece in the business daily TheMarker bemoaning the astronomical start-up failure rate, renowned patent lawyer Dr. Esther Luzatto berated me in response, in print. She argued that “the fact that so few start-ups reach maturity is inherent in the global technology game. The fact is, private money – the litmus test of the technological system – is invested in start-ups, even in those likely to close. The venture capital model knows how to take into account success and failure.” In other words, if smart money invests in start-ups, despite the odds, why fix something that isn't broken? But I am unconvinced. After several decades as an educator at MIT and the Technion, teaching creativity and innovation, and lately, after some research, I believe I now know in part why such a high proportion of Israeli start-ups fail. Most start-ups are driven by engineering, science and technology. And most entrepreneurs are engineers or scientists. But entrepreneurship is an art, not a science. Former Apple guru Guy Kawasaki observed that “entrepreneurship is a state of mind, not a job definition.” And the state of mind is that of an artist. Suppose we decide that for entrepreneurs, quality, not quantity, of start-ups is the objective – the fraction that succeed, become profitable and achieve sustained growth. How can the quality of Israel's start-ups – their business design, strategy, and hard-headed management focus – be improved? Technology-driven entrepreneurs emerge largely from science and technology universities and faculties. This is the core of the problem. The art of entrepreneurship emerges, like a butterfly, from the cocoon of science and technology, an inherent mismatch. And partly for that reason, most start-up butterflies never fly. Science is the study of the physical and natural world and the laws that govern it. Technology is the application of science for practical purposes. And entrepreneurship? It is the art of applying creative skill and imagination to technology, in order to create value, for thousands or millions. Science seeks to discover the basic rules of nature. Entrepreneurs seek to intelligently break the rules, to create innovative, useful products and services. Kawasaki is the marketing guru who helped Apple and Steve Jobs make the Macintosh computer a huge hit. He later wrote a book, “The Art of the Start,” now updated as “The Art of the Start 2.0.” It is one of the best and most practical books on how to launch a successful start-up. The title explains itself. Science follows the rigid scientific method. Art tries to make things, and do things, differently from everyone else. If your innovation is not ten times, fifty times better than what exists, and totally unique, Kawasaki counsels, then forget it. Consider Pablo Picasso. For over 70 years, he repeatedly smashed the rules of painting and sculpture. Picasso invented constructed sculpture and co-invented the collage art style. Both broke the rules. His works thrill us not because they followed the rules of art but because they annihilated them. “If you know what you are going to do,” Picasso once said, “why bother doing it?” This is utterly contrary to the MBA approach to management, which lays down rigid rules, the right way. A study led by my Neaman Institute colleague Prof. Arnon Bentur and his team on the future of engineering education found that graduates of engineering universities lack key 'soft' skills, such as teamwork and communicating, according to industry experts who employ them. They recommend a shift to project-based learning, which simulates the way engineers (and artists) work in the real world. My Neaman Institute colleagues Tsipy Buchnik, Vered Segal and I just published a study of Technion graduates who later launched start-ups, in the Journal of Entrepreneurship Education. Technion entrepreneurs reported that the Technion activities that proved most helpful to them by far were the experiential simulations – hackathons, three-day start-ups, and the yearlong Biztech competition, in which teams of participants ideate and build businesses around those ideas. This is because the way artists learn their craft is by practicing it, in a studio setting. For instance, at Jerusalem's famed Bezalel Academy, 2,000 art students hone their creative skills in design studios, under experienced mentors. Perhaps the way budding entrepreneurs can best hone their craft is in a studio setting – by doing it, first in dry simulations and perhaps later, in 'wet' (real) ones. Isn't this why the IDF 8200 Military Intelligence unit spawns so many successful start-ups? Its graduates practice the Art of the Start in the unit, by leading projects they have dreamed up. When they finish their tour of duty and actually launch a start-up, they've already practiced the art several times and have expertise. This is how Check Point was born, in 1993. Founders Gil Schwed, Marius Nacht and Shlomo Kramer were already seasoned IDF entrepreneurs before they launched it. If building a successful start-up is an art, then it should be learned and taught as an art. This simple axiom must be more widely embraced in Israel's science and technology institutions. If it is, a higher proportion of start-ups will succeed. And quality will triumph over quantity. The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com

Start-ups: Art, not science

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