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Israel's innovation success shows Michigan could use more political courage

Nov 23, 2015

The Next Idea

Only a few decades ago, Israel was a virtual ghost town for business. Now, it’s considered one of the most innovative and energetic economies in the world, earning the nickname “Start-up Nation.”

In November, a group of Michigan CEOs traveled to Israel to see firsthand what makes the country so ideal for new businesses — and what lessons we might take to heart here in Michigan.

Credit flickr user James Emery / http://michrad.io/1LXrdJM

Led by Meijer President Mark Murray, the group consisted of CEOs from a variety of different industries and backgrounds, including the automotive industry, and venture capitalists.  

Detroit News business columnist Daniel Howes accompanied them and wrote a series of columns about what he learned.

“The intent was to go to a place that has built a reputation for growth,” Howes says. “Israel has really come to the top there.”

But this didn’t happen overnight. Israel reached this point by being what analysts call a "healthy innovation ecosystem," a place where innovation is encouraged in much the same way a gardener has to make sure their plants have adequate water and sunlight to grow.

According to Jeff DeGraff, our partner at The Next Idea, you need several things for an innovation ecosystem: research universities for “investigation and incubation,” venture capital to fund start-ups, and a united focus on science and technologies. Howes adds that you also need the culture to promote entrepreneurship, not discourage it.

Israel stands out in all of these areas.

“One of the most memorable meetings that the group had was with the chief scientist of the state of Israel,” says Howes. The office, which is located in the Ministry of the Economy, has $500 million a year to invest in startups. It’s a portion of a remarkable amount of money Israel puts in to a sovereign wealth fund, a fund earmarked by the government to invest in businesses. This isn’t unique to Israel; many states have their own sovereign wealth funds, including our own Michigan Economic Development Corporation (MEDC).

It’s just that Israel’s sovereign wealth fund is particularly robust, and also well-supported. “If an angel investor makes, say, a $100,000 investment, they get to write 100% of that off in their income taxes in that year,” says Howes.

According to Howes, this is because Israelis understand the role of failure in innovation: in order to find the product that works, you first have to find the five or six that don’t. “That’s not unique to Israel,” Howes explains. “People who know Silicon Valley really well will talk about failure as part of the currency. But in [Israeli] culture, it’s very much expected.”

Both Howes and DeGraff link this attitude to Israel’s compulsory service.

"Government doesn't have to be the enemy. One of the things we saw in Israel is that they can be a catalyst to change and they can support change in strategic ways."

“One guy explained, ‘once you’ve risked your life in the military, the risk in failing a business enterprise is really not a big deal,” says Howes.

Michigan stands in stark contrast. Howes and DeGraff think there is a lot that our lawmakers can learn from Israel’s example.

“You have to have capital, venture capital.” says DeGraff. “And that’s going to be a big issue in Michigan. We had some, but it’s been disconnected.”

The MEDC has faced a 27% budget cut over the past year, going so far as to lay off 65 employees earlier this fall. Howes sees this as a symptom of a fundamental problem in our priorities.

“In Israel, there is a national sense of purpose that you get the impression is nonpartisan,” says Howes. “But I think in Michigan, we are driven very much by the partisan, by who’s in charge.”

DeGraff says this keeps us from becoming more innovative.

“What you’re trying to build in innovation is you’re trying to build something with a long horizon,” he says. “So you invest in research universities, you invest in sovereign wealth funds.… You invest in technologies that look promising or strategically focused to the state.”

“Michigan needs to understand that it has some phenomenal assets. The auto industry is one of them,” says Howes. “I think too many people have become too cynical in Michigan, and they say ‘we need to get away from the auto industry.’ No you don’t. You need to double down on what’s really important.”

But perhaps the most important model that Israel provides, according to Howes, is in its governing. “Government doesn’t have to be the enemy. One of the things we saw in Israel is that they can be a catalyst to change and they can support change in strategic ways. Not do it for people, not write all the checks, but create an environment.”

“Government can create an environment that can draw more kinds of investment,” says Howes. “And encourage people to become a player and to stay here."

Jeff DeGraff and Daniel Howes tell us more about what Michigan can learn from Israel in our full conversation 

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