Start-Up Nation I: The IDF

Doron, our classmate and instructor

We’re back from Israel after an intense week of classes, company visits, and group exercises. We connected the lessons of “Start-Up Nation” to the realities of the Israeli start-up ecosystem and learned even more about what makes these ventures so special. In each of the next three posts, we’ll explore an aspect of the book and its relevance in present day Israeli start-up culture. We’ll then connect those aspects to individual company visits. In our last post, we’ll examine the start-up nation as it stands today – a decade after the publishing of the original book – and hopefully make some informed predictions about what lies ahead.

The Israeli Defense Forces (IDF)

Featured prominently in the book, omnipresent in daily Israeli life, and mentioned at nearly every company visit – it would be impossible to discuss the start-up nation without discussing the IDF. Israel’s mandatory conscription (3 years for men, 2 years for women) is an incredibly formative experience for so many who will go on to become start-up founders.

In most of the world, an individual can travel through life without meaningfully engaging with people outside of their social strata. While of course minor interactions are inevitable, this is likely true when considering deep, sustained interactions over a period of time.

IDF units, however, select individuals on the bases of merit and ability – not family background. This meritocratic staffing system, combined with mandatory conscription, ultimately leads to a relative lack of social hierarchies – as are found elsewhere in the world.

This is furthered by the lack of hierarchy within the IDF. Young soldiers are given leadership positions early and are free to challenge the orders of their commanding officers. Israel realized early on that it could not afford to let its military get bogged down in unnecessary formalities and bureaucracy – so it simply did away with them. As a result, IDF soldiers aren’t trained to simply accept things as they are given – it’s paramount that ideas are tested, and alternatives considered.

As it turns out, this mental framework is quite useful when considering innovation in business. Inability to see past the status quo and formalized rules of society are some of the most common barriers to ideation in business. Israel didn’t set out to create super-innovators in business – rather, it has been a naturally occurring byproduct of the IDF.

Beyond flat hierarchies and a knack for innovation, the IDF also builds the mental toughness necessary to succeed as an entrepreneur. We got a taste of just how much mental toughness is required in the IDF – as we underwent an afternoon of training (edit: light training) with former officers. Running with stretchers on a hot Israeli beach is no easy task – and we weren’t even in uniform. We can only imagine what boot camp would actually feel like.

Running stretchers full of sandbags down the beach in Herzliya

SpacePharma and Zirra

Challenging the status quo can be simple or can really stretch your mind of what is possible. For the latter, two company visits stand out in particular.

Yossi Yamin at SpacePharma has a vision of democratizing access to space. More specifically, he aims to expand access to research and development opportunities in orbit for scientists in a variety of industry. As it turns out, the microgravity conditions of space can have curious and unexpected results in the fields of pharmaceuticals and biochemistry. SpacePharma provides a vehicle through which a multitude of compounds can be launched into space as one package – allowing the various compounds (and their respective researchers) to share the cost burden of accessing orbit.

Examining a model of the SpacePharma boxes sent into orbit

Moshit Yaffe of Zirra, on the other hand, has her eyes set on Wall Street. A lawyer and former investment banker, Moshit has led Zirra as it pioneers AI-driven data analysis of company data shared across the internet. Rather than relying on technical financial data, Zirra will scrape the web for press releases, job postings, and other text-based data sources that can be fed into an algorithm that ultimately renders a buy or sell judgement. Initial results indicate that Zirra is onto something, with a sample portfolio outperforming the S&P 500 over the past 2 years.

Next Time

In our next post, we’ll examine civilian life in Israel and the socio-cultural forces that help drive a successful community of ventures. Check back soon!

Casey Buckley is a 2020 MBA Candidate at Columbia Business School

A Closer Look at Start-up Nation: Prologue

The author’s copy of the text (feat. half a pad of mini post-its)

Fifty MBA students from Columbia and Interdisciplinary Center (IDC) Herzliya met up tonight in Tel Aviv to kick off a week-long intensive course, “A Closer Look at Start-up Nation”. Inspired by Dan Senor and Saul Singer’s 2009 book, “Start-up Nation: The Story of Israel’s Economic Miracle”, the 5-day course will introduce students to individuals from all areas of Israel’s innovation ecosystem – from start-ups and research and development (R&D) divisions of multinational firms to venture capitalists (VCs) and business-focused non-profits. We hope to take away valuable learnings about the genesis of Israel’s start-up culture, how to work with Israel’s high-tech industry, and – more broadly – how a cluster of factors can lead to innovation-rich geographies such as “Silicon Wadi” (the Israeli “Silicon Valley”).

Israel leads the world in per capita R&D spending – benefitting from both the R&D divisions of large multinationals such as Intel, Google, and Microsoft as well as a high concentration of start-ups. Outside Silicon Valley, Israel claims the top spot in per capita start-ups and is also the world leader in per capita VC investments. Not confined to early-stage ventures alone, Israel has more companies listed on Nasdaq than Korea, India, and Japan combined.

The book, for those who have not had the chance to read it, does a wonderful job of weaving together the aspects of Israel’s history and sociopolitical structures that contribute to this innovation-rich environment. As an example, the book explores the non-hierarchical nature of Israeli society and how a willingness to challenge the status quo leads to more innovative thought and design. Mandatory conscription in the Israeli Defense Forces (IDF) serves to enshrine egalitarianism as a societal value and instills a mission-driven culture amongst citizens. Lastly, on a cultural note, failure is not viewed as shameful but rather as an aspect of growth and development in life. While each of these conditions may be found in a number of societies, the book argues that it is the union of these factors that has allowed Israel to become the high-tech powerhouse it is today.

This blog will view the course through the lens of Senor and Singer’s text – providing updates on the latest decade of Israeli start-up development as well as supplementary learnings related to the themes found in the book. It is our hope that, through careful evaluation of this confluence of factors, we can identify the most crucial aspects necessary to build a culture of innovation – and what competitive advantage, if any, can persist for Israel’s high-tech sector in the long-run.

Casey Buckley is a 2020 MBA Candidate at Columbia Business School

Asi Es Cuba

In case you missed them, take a look at our prior posts.

School pride on the walking tour of Havana

It’s been a little over a week since the last of us returned from Cuba and it’s safe to say that – at least for us first-time Habaneros – no amount of classroom time could have prepared us for what we found. Textbook accounts of political and social challenges can never replace conversations with local business owners as they recount their struggles to purchase basic supplies. Similarly, pictures of the Malecón highway could not diminish the surreality of seeing roadways filled with classic American cars.

Through speakers and company visits, we were exposed to a side of Cuba that few are able to see. Moreover, it’s a side of Cuba that may very well cease to exist should the economic transition continue. However, for all its flaws and all its beauty – we fall back to Asi es Cuba. Nothing quite compares.

As for the questions we prepared prior to leaving…

How do the Cuban people view their neighbors? The U.S.? Venezuela?

Old Cuba may have spent most of its energy antagonizing the U.S. and forging alliances with fellow communist states, but New Cuba maintains a relatively positive focus on domestic development in spite of the Bloqueo. In fact, I would say one of our strongest takeaways from the week relates to just how much damage the embargo does to the Cuban people.

Title III of the Helms Burton Act allows U.S. companies to sue firms (Cuban or other) for “trafficking” in expropriated Cuban property. While Title III has historically been suspended by every U.S. President (until our current one, possibly), it is sufficient to make foreign investors wary of involving themselves too heavily in business on the island.

Further, the embargo does a massive disservice to cuentapropistas. Since Obama, Cuban entrepreneurs have been able to sell their goods in the U.S. Their products, however, are still subject to extremely high tariff rates – in some cases, up to 90%. The only other country with “Column 2” status under the U.S. International Trade Commission’s Harmonized Tariff Schedule is North Korea. As expressed by some cuentapropistas, the U.S. claims to support Cuban entrepreneurs while its policies seem to only make the life of a cuentapropista more difficult.

That being said, all seem to recognize that there is still plenty more the Cuban government must do to safeguard the growth of industry on the island. U.S. policy does not help matters, but it would be unfair to assert that the U.S. should shoulder all of the blame.

Pre-revolution ride

How has life changed since the introduction of 3G cellular service on the island? What has stayed the same?

3G cellular service has had an undeniable impact on the availability of information in Cuba. For a population that once relied on a network of hard drives (dubbed, El Paquete) in order to disseminate information, WiFi was a game-changer. It stands to reason, therefore, that 3G service would have a similar impact on the mobility and accessibility of data – especially given the struggle to access WiFi networks on the island.

Of course, it wouldn’t be Cuba if there weren’t a handful of associated challenges. For one, not everyone can afford a phone or SIM card – and service isn’t available everywhere. Beyond that, a large portion of apps and internet services are blocked from use due to the embargo. The Apple app store is unavailable, as is our beloved Canvas (which made uploading an assignment very difficult for our author).

Sorry, Professor. My cash flow model got embargoed.

How do private citizens view themselves in the context of broader economic reforms? Is it a “reform or out” mentality? Or is there a “third way” between capitalism and Cuba’s communist past?

Cubans want private property, and they’re very glad that their new constitution recognizes this as a right. Now they want to make sure the government will defend this right to property as well as create a system by which individuals can grow their wealth. This trip certainly helped cement the innate human desire to create and the drive to achieve some level of ownership in life – the natural expression of which is entrepreneurship.

While Cubans are setting up their own businesses and appreciate the material benefits of capitalism, they are – by and large – proud of certain achievements in their history. The quality of their public health system, all things considered, is something that merits close examination. Moreover, Fidel’s vision for Cuba truly did create a racially diverse and relatively non-divisive society. Cubans don’t want to lose these tangible and intangible qualities that make their nation unique. Even worse would be a return to the rampant economic inequality of the pre-revolution days. While New Cuba seems to be defined by a desire to build and reform industry on the island, we certainly did not get the impression that Cubans as a whole are striving for full-blown, American-style capitalism.

And I’m sure they’d like to keep their cars, too.

With our questions answered and our “Bucket List” items checked off, we say goodbye to Cuba and hope to return very soon!

Until the next time…

Casey Buckley is a 2020 MBA Candidate at Columbia Business School

Resolver

In case you missed them, take a look at our prior posts.

As I write, I’m overlooking the waves crashing on the Malecón – a 5-mile sea-wall esplanade separating Havana from the waters of the Florida Straits. For so many Cubans who fled the island in decades past, the Malecón was a final point of contact with familiar land before risking so much at sea. Those who chose to stay continued to face a harsh reality under the Castro regime and, although individual freedoms have increased in recent years, daily life in Cuba still requires the ability to resolver.

Waves crashing on the Malecón

We’ve had the privilege of meeting with a wide variety of cuentapropistas (private business owners) across Cuba – from owners of paladares (private restaurants) to casas particulares (small hotels operated out of individuals’ homes). Building a profitable enterprise is a challenge in and of itself, but the complexities and erratic nature of Cuban law make it all the more difficult for cuentapropistas.

Coming from the United States, it’s easy to take for granted a robust wholesale market and access to supplies. Raw materials for nearly any business can be found domestically or imported fairly easily. Supply chains in Cuba, however, require a bit more resolver.

El bloqueo (the blockade, as the embargo is referred to on the island), effectively restricts cuentapropistas from purchasing anything directly from the US. Business owners with US visas, however, are able to travel to the United States, purchase goods, and carry them back as luggage. As such, the international arrivals terminal at Havana airport is littered with bundles of foreign goods destined for private homes or businesses in Cuba. This workaround is effective, but a single traveler can only carry so much and is forced to purchase goods at full retail prices in the US.

Those without US visas can purchase goods from popular intermediary markets in the region such as Panama or Mexico. Regardless of country of purchase, there are tax limitations to this import policy. Each Cuban citizen is limited to 120kg of tax-free imports per year. Imports on a larger scale introduce further bureaucratic complexity and financial burdens. For those unable to leave the country, a black market exists – but the prices become even more punitive.

Rather than craft a workaround for imports, many choose to resolver by using supplies found on the island. Clandestina, a local fashion producer and retailer, sources all its fabrics in Cuba. Their latest line – for example – includes clothing crafted from window curtains. They purchase the curtains in Cuban state-owned stores and repurpose the material into button down shirts, bandanas, and more.

https://clandestina.co/

Mediterráneo, a restaurant in Havana, is proud to be Cuba’s premier farm-to-table paladar. Given the massive food shortages on the island (the Cuban government imports ~65% of the food provided to citizens) and limited agricultural resources (lack of agricultural diversity and technology), it’s quite impressive that our meal at Mediterráneo was one of the best on the island.

Without significant reform on both sides of the Florida Straits, it is unlikely that life as a cuentapropista will become any easier. A lifting of the US embargo and reform of Cuban import regulations would massively improve the chances of success for private businesses in Cuba, but – until then – the Cuban people will have to fall back on their ability to resolver.

Casey Buckley is a 2020 MBA Candidate at Columbia Business School

Es Complicado

Spend enough time in Cuba and you’ll notice a few phrases that often pop up in conversation: Es complicado (it’s complicated), Resolver (to resolve; to get by), and Asi es Cuba (that’s Cuba; just accept the idiosyncrasy for what it is). As much as their frequency may border on overuse, these phrases’ ubiquity serves as a constant reminder of the many daily frictions in Cuban life.

Take communications, for example. Nothing quite sums up es complicado as trying to access the internet. Much like any other good or service in this country, the government controls access. Students receive free internet at universities, but the average Cuban citizen needs to follow a few steps before being able to log on. First is the half-hour queue at the local telecommunications office where one can purchase a maximum of 3 internet access cards – good for one hour each. Whether using the state-provided WiFi in public parks or a personal router at home, everyone needs a card. No card, no internet. Fortunately for tourists, select hotels provide their guests with enough internet hours to last the duration of their stay. Sadly, this connection is fairly unreliable and has proven quite the challenge to posting as a traveling blogger.

With such restrictive measures placed around traditional internet access, it might come as a surprise that 3G cellular data is available in Cuba. Introduced in late 2018, 3G has served as an inflection point in Cubans’ access to the outside world and their overall level of connectivity. Many Cubans, however, cannot pay for a SIM card and can still be found at all hours of the day and night using the internet in public parks.

1 hour of internet = 1 CUC (I interpret the image as a critique of modern overconnectedness)

Another facet of life in Cuba is its currency system. Cuban citizens purchasing goods and services within domestic sectors use the Cuban Peso (currency code: CUP). Tourists, foreign investors, and those operating in the international sector use the Cuban Convertible Peso (CUC). That’s pronounced “kook” – a source of constant amusement when divvying up our dinner/bar bills. While officially 1 USD = 1 CUC = ~25 CUP, things are – of course – a bit more complicado.

The FX conversion process for foreigners isn’t exactly straightforward. A 10% “embargo tax” is added to all USD transactions so, also taking into account the bid-ask spread, 100 USD will get you roughly 86 CUC. Our group applied a little resolver to this situation and tried to bring as much non-USD currency as possible. All those spare Euro, Swiss Francs, and Canadian dollars we had lying around helped save 10% on conversion. Cuba’s a cash economy and, if you’re American, ATMs are of no use here due to OFAC restrictions. So plan ahead and convert with care if you expect to spend time on the island.

Pesos vs. Convertible Pesos
Note the reverse faces of the bills: locals see armed uprisings while foreigners see energy innovation

As mentioned, 1 CUC = ~25 CUP. Other than an enterprising taxi driver who chooses to give you change in CUP rather than CUC (as happened to someone in our party; in his defense, the bills look quite similar in the dark), the two currency systems did not interact very often. Until very recently, private companies operating under the CUC did not interact with state-run enterprises no the CUP. While this disconnect might not seem meaningful at first, it ultimately serves as an impediment to comprehensive analysis of the Cuban economy. Results are further obscured by official books and records that consolidate the Cuban economy at a 1:1 ratio for CUC:CUP. Cuba’s two currencies have a very clear disconnect between official records and reality, but the situation gets even murkier when one considers exchange from CUC to foreign currency.

Foreign investors in Cuban enterprises are not always free to convert their CUC profits back to the currency of their choosing – the Cuban government may limit the amount or timing of the conversions. While this is technically a restriction on access to and repatriation of profits, it can also be understood as an implied devaluation of the CUC. By running a dual currency system split along domestic / international economic lines and by limiting the convertibility of a “convertible” currency, it becomes very challenging to evaluate Cuba’s economy relative to the rest of the world. Due to this lack of meaningful data, Cuba ultimately has trouble planning for the future.

Whether it’s getting on Instagram or paying cash for a cortado, Cuban life can get complicado. Moreover, what may seem to be a minor issue from a tourist’s perspective often signals a broader issue with potentially major implications. We’re seeing good progress on the internet front with the introduction of 3G and – hopefully – 4G in the coming years. The currency system is a known issue that we can only hope will be rectified in the near future. As for now, we will continue to enjoy our brief respite from the demands of cell phone notifications (those of us who didn’t buy a SIM card, at least) and we will happily spend our CUCs on coffee and mojitos. Things might be complicado now, but we’re hopeful for what tomorrow holds.

Casey Buckley is a 2020 MBA Candidate at Columbia Business School

A Cuba!

Every week since late January, our group of 30 has gathered on the fourth floor of Warren Hall to discuss Cuba – its culture, its history, and its future. Led by the inimitable Professor Bruce Kogut (and his fearless sidekick, Lodovico), we have been fortunate to have been exposed to a wide range of literature and numerous distinguished guest speakers – including Provost John Coatsworth and Dr. Margaret Crahan of SIPA.

The core focus of our course – and the lens through which we have viewed Cuba – is that of an economy in transition. Our holistic approach to the subject has allowed us to explore a wide range of topics: the legacy of Spanish colonialism, the decline of the Castro regime, and a Russian case study in privatization of state-owned real estate – to name a few. We hope that a thorough understanding of Cuba’s past and the transitions of its formerly communist peers will allow us to better contextualize and assess the promise of economic reforms today.

And with that, we’re off to Havana!

Some of the questions we hope to answer over the course of the next week are:

  • How do the Cuban people view their neighbors? The U.S.? Venezuela?
  • How has life changed since the introduction of 3G cellular service on the island? What has stayed the same?
  • How do private citizens view themselves in the context of broader economic reforms? Is it a “reform or out” mentality? Or is there a “third way” between capitalism and Cuba’s communist past?

On a slightly more whimsical note, we’re also looking forward to jazz clubs, salsa dancing, and riding in classic cars. And of course, we wouldn’t be MBA candidates if we weren’t interested in any potential business opportunities down the line…

Stay tuned for answers to the above questions and more!

Casey Buckley is a 2020 MBA Candidate at Columbia Business School