IVA Continued - Generation IV

I believe that every region in the world has some evolved properties that drive the region to emerging behaviors. The properties are mostly a mix of demographics and government policy combining to create market conditions that in turn drive people’s behavior. Baby boomers create a booming market, aging baby boomers with accumulated wealth create a different market. Simple. When you open a market it usually becomes efficient; when you make a local market with more than a billion people efficient it will change the world. Simple.

So I took a look at the world’s markets and expertise by putting all the goods we make on some imaginary line, long tail by nature, but that’s not the point. I tried to figure out what each global region got better at over the years. The graph looks like this:

At the top left you see products that have mass appeal – global brands. The US is brand heaven, where companies learned how to export brand awareness for everything and make brands like Starbucks, Apple, MTV and NBA household names even in China. By creating global awareness the demand for those products (which is already high) becomes even higher – pushing value add up, and with it the US GDP.

On the tail side, America had to deal with geographically distribution of demand for esoteric products, as Chris Anderson calls it, long tail products. Stocking costs and distribution pains hurts profitability on these products – which America solved through the infinite store of the Internet and eCommerce – welcome to the land of eBay, iTunes and Amazon.

In between the two, we find the non-branded products lots of people buy. It is the part of the graph dominated by giant distributors like Walmart – serving as America’s storefront for anything produced in China. The Chinese perfected manufacturing and supply chains to drive these products manufacturing costs so low, the world can afford to buy more of them.

Europe remains in a very interesting situation, due to higher manufacturing costs there is a strong drive to push away mass-production of any non-branded non-specialized goods from Europe, at the very least  away from western Europe. So the continent relies heavily on tourism and other service industries (like financial services) which cannot be easily pushed away to Asia, and on “niche monopolies” driven mostly by years of heritage. You cannot make French wines or Swiss watches outside France or Switzerland. You also cannot take a Paris vacation anywhere other than Paris (Sorry, Vegas, we did notice that Paris, Vegas was fake). Some of the expertise, such as enterprise software remains a form of art with many experts in residence within 50 miles of a small town in Germany – which makes the expertise highly concentrated, at least for a generation. The problem with the European model is that you cannot afford to lose any of those “temporary monopolies” as you cannot regain them very easily once lost. See the case with Baan Software in the Netherlands, once they lost their grip – no new software giant emerged in the same region.

The demographics that drive the models are pretty obvious, but what are the traits and policies that can be changed and how do they affect the country. How did Israel become a high-tech startup generator, and what happened to the startups in Germany, a country that has a very significant mid-market sector but very little in startups (Hasso Plattner is trying to change that with his new and successful HPV fund)

The US model almost forces talent to recycle into small companies once large ones fail to ride the next next wave. It is a model that uses incentives through education, immigration, taxation, and aspiration all fueling the desire for a bigger risk with better rewards. The US idolizes the Edisons, the Fords, the Wrights, the Jobs and the Gates of each generation. They are as big stars if not bigger than the movie stars, and they get the rewards through patents, investments, stock options (all of which can also be abused, but that does not make them evil…). The risk-reward equation is so skewed towards taking risk, that imagination continuously sparks the entrepreneurial genes, and ideas (even bad ones) tend to reach market early and often - failure is not only an option, it is well accepted socially. The successful startups generate another generation of Venture capitalists, eager to invest their new wealth in the next wave, and even more eager to share their experience and knowledge with the next generation of smarter guys – and so goes the circle of life. Silicon Valley’s version of “The lion King”.

Europe on the other hand tends to view stock options as almost evil – a compensation tool forced on owners, not a driving tool that sparks risk taking. Talking about risk, European students, who graduate from universities without debt (counter to their US counterparts – who have more debt at 25 than they can count) still tend to be risk averse in their job choices. The reason is not a trait that cannot be changed, it is a function of local policy – in particular, labor law. Since people tend to stay in their jobs, and get heavy protection the harder it is to convince European masses to generate new jobs threw risk taking enterprise. In other words, the less jobs get opened and created the more people get risk averse (no new jobs = protect my seat at any price), the less jobs get created - negative feedback cycle . Since not many new jobs are created due to the Asian emergence of more affordable labor, it does not seem as though that music is about to start again any time soon. As such, when you enter the cycle as a young kids , afraid that if you do not find a secure job with an established company right out of University, you think that you may never find a job. So, we have a generation of young guys that tend to shy away from the kind of jobs, and from the kind of education that made Europe so successful in previous generations. Just as India and China start to produce infinite classes of engineers, Europe stops.

I contend that Israel, although very similar in traits to the US market, falls more into the European category of temporary monopolies. Israel was great in Security software, with a core of expertise growing from one company. Israel is a world leader in Telco software, because of Amdocs’ heritage, but while that expertise branch out of Amdocs to other telco software companies, it did not branch out to other vertical industries. The problem with that model - when a company fails even if for one second, as happened recently to Comverse, the results can be devastating with hundreds or even thousands of jobs eliminated or shipped over to other countries and the temporary expertise disappears – as happened to Scitex in the 90s. The job market absorbs such talents, but the equity lost in market leadership (and the taxes the state gains from the profits) are almost never recovered.

Some countries find their way to growth by applying more government uber-guidance. Take Singapore as a great example – free market economics drive great successes proven over the years, yet government intervention in the form of massive guided grant and investment programs drive global market competitiveness into the country and grows local knowledge and companies around the seeds the government put in place. In small enough countries, such seeds grow to drive comparatively significant economic growth through sheer temporary competitiveness. In larger countries the market directives need to be more heavy handed at first - Japan applied that model in post WWII through MITI, and China is doing it today to its extreme success with double digit annual growth for more than a decade in a row.

I truly believe that the VC industry is instrumental in absorbing these booms and busts and the talent is quickly reapplied into new startups. As such, the VC model is essential to keep the technology economy in Israel going on, no doubt. The question remains though whether the VC model alone is good enough to create significant growth and to generate long lasting strategic advantages for an economy with $120B in GDP? Remember that in order to get to double digit growth (which sounds like a fantasy until you consider China and India who are growing at that pace) you need to "create new GDP" in the order of $10B-$15B annualy.

In other words, will Generation IV drive this greatly succesful experiment called the state of Israel through the “Shaking the tree” model or is there a need for a single galvanizing vision that focuses some of the innovation on a new domain the country will be excelling in - driving $10B growth annually into the market on top of its existing dynamic?

**This post was written before the posting of the great comments on my previous post - I will respond to the first couple of comments posted by you guys later...

Comments

[Oded Roth]

Shai,

Correct me if I am wrong, but it seems most venture capitalists are impatient and search for safe investments with a short return period. Venture capital inflates quick bubbles that had inspired in the past the quick development of new factories in the industrial revolution age, the rush of railroads deployment in America’s “golden spike” era, or the start-ups of the Internet period.

Venture capital is flourished on a ground of some infrastructure change. Unfortunately the infrastructure change is more politically and long vision oriented, not appetizing the VC taste. The infrastructure change is a complicated combination between conservatism of government officials and vested interests, imagination of innovators and guts of rare venture capitalists.

[Rick Bullotta]

Shai:

The German government recently made a few quiet but substantial changes to taxation implications for venture investment, that in theory should make it more attractive for HPV and others to pump capital into that market. Perhaps other governments will need to follow suit in cases where prohibitive taxation structures push money elsewhere?

Rick

[Rick Bullotta]

Here's the link on the story regarding the proposed changes in the German VC tax breaks:

http://www.iht.com/articles/2007/06/28/business/equity.php

[scjb]

I applaud your view of regions and their evolved properties. But using the word "evolved" betrays a belief that regions only respond to outside pressures. But this misses the possibilities offered by strong political leadership.

As a European (with qualms about current political leadership here) and a former resident of Singapore (having experienced real political leadership there) i am happy to provide you my view of your question: "central vision" or "shaking the tree"?

Singapore is so successful because it's founder Lee Kuan Yew was a good leader. He believed in capitalism and thus ran the country more like a CEO and less like a politician. He was focused on goals and pursued them relentlessly. And he had the necessary leadership skills to drive his vision. This enabled Singapore to leapfrog from third world country to first in no time.

Therefore i argue that just as great companies need strong management, so do countries. The problem hence becomes: How to find a good leader. Because a good leader will know when to shake and when to intervene.

[Alex Segal]

Shai,
I live in Israel for most of my life (made "alia" in 87, age 7). When I was a teenager I was interested and involved in "making the world a better place". At some point I got dissillusioned and decided that trying to make a difference will take a personal price I am not willing to pay (I mean all the negative energy that comes with politics). Since than, I have matured, and realised that the world is not black and white :) and that i still care...
I heard an interview with you, where you were talking about making Israel a roll model for other countries, taking the positive approach and attitude and stop being everyone's problem and start being everyone's solution. I have to say that when I heard it, I felt that this is the kind of environment (and spirit) in which I would like to contribute. I am a management consultant and I try to preach to the same active and positive apprach to my clients on a daily basis (in their fields).
I was wondering how can i get in touch with your enterprise and get mre involved in this operation, because I feel I really want to help!
Best regards,
Alex