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Daniel Isenberg: “if it’s predictable, it’s not entrepreneurship.”

Daniel Isenberg talking at Tel Aviv UniversityDaniel Isenberg is an expert on how the public and private come together to create environments that foster entrepreneurship. IsraelDev invited Daniel to come to Tel Aviv University to talk about the opposite of that, how entrepreneurship can spur economic development, not just about how it’s happened in Israel but also how it could happen in emerging markets.

Daniel Isenberg talking at Tel Aviv University

Daniel is an important guy – he’s taught at Harvard, written books (“Worthless, Impossible and Stupid: How Contrarian Entrepreneurs Create and Capture Extraordinary Value”), worked on policy at forums and summits, and founded an institute, the Babson Entrepreneurship Ecosystem Project, which reflects his expertise and professional mission. He’s also been an entrepreneur, venture capitalist, and angel investor since he moved to Israel in the late 80s.

Unlike the popular narratives on display in “Startup Nation” and others, Daniel said the development of entrepreneurship in Israel “has been far from a straight line. It’s evolved differently.” And by extension, it will evolve differently everywhere else.

He quoted early 20th century thought: “the principle of indeterminateness means that economic development is intrinsically unpredictable.” And vice versa, “if it’s predictable, it’s not entrepreneurship.” Entrepreneurship may be a driver of economic development, he said, but it occurs in “jerks, cracks, and leaps.” And “despite the fact that I sound confident,” he continued,”this is murky business” and that “should make us humble.”

Daniel spent a lot of time trying to define exactly what is entrepreneurship. He compared two possible entrepreneurs: one, Dean Kamen, whose segway was supposed to “revolutionize personal transportation” with the help of loads of internal and external financing and ended up being called by Time Magazine one of the 10 biggest technological failures; and two, Robert Wessman, a twenty-something Icelander who refinanced his home over and over to turn a shrinking pharmaceutical business called Actavis into a global powerhouse. One is an example of organic growth; the other is an example of growth through acquisition.

So which venture is more entrepreneurial?

Let’s compare them to a third company, Tough Mudder, a quirky running competition for gladiator types that originally failed a startup competition at Harvard. In their first year, Tough Mudder earned $20M in revenue, in their second year, $72M, in their third, $120M. All from a total investment of $20k in plastic. Now, thanks to what’s probably a 50% gross margin range, the people at Tough Mudder have started their own internal venture capital fund.

“Today, entrepreneurship is a buzzword,” Daniel said, “but what is it? A lot of young people think it’s mobile applications.” “What it is is the creation and capture of extraordinary value.” “By definition, all these examples after the fact are obvious. Before the fact, investors, partners, consumers, everybody thinks they’re worthless, irresponsible, stupid. In order to create extraordinary value from the marketplace, you have to be ready to create risk, and also buy low and sell high.”

Israel’s own path to becoming the startup nation was turbulent. In the mid-70s there was a boom and a lot of optimism with Elson, Israel’s first public company, and Sidetech. The 80s also witnessed a slew of companies spinning off from the security industry. And now there’s another boom with unprecedented levels of diversity thanks to government policy. A handful of years ago, the Israel’s Chief Scientist decided to be asectoral in the allocation of public funds as long as the startup was feasible technologically and economically. As a result, the organ of the most disruptive technology in Israel–and everywhere else–has been government policy.

According to Daniel, a startup community develops when you have all of the following resources: culture, human capital, access to markets, financing, support organization, and corporate presence. The last one may seem odd, but the presence of big companies in startup communities is crucial: they offer opportunities and revenue and cultivate talent. As an example, both Microsoft and Google have campuses in Tel Aviv and resources for independent innovators.

And the presence of corporations affects entrepreneurship in another way. “Excess human capital is a driver of capitalism,” Daniel said. “The biggest problem is always talent.” That means that when there’s low levels of employment, there tends to be entrepreneurialism. The opposite is also true: large companies drive down entrepreneurship. What’s interesting to observe is the effect on startup concentration with big companies fail. After Nokia collapsed, for example, there was a run of new startups in Finland; and when the telecom industry collapsed in Denmark, wind energy become a locus of entrepreneurship.

Tel Aviv happens to be special in this area because despite the growing presence of corporations, most entrepreneurs would prefer to work on their own  projects than join larger firms. So Israel is more resistant to these economic trends that other startup hubs. Partly this has to do with the lower compensation typical here but it’s also undeniably a result of a unique culture. Daniel joked that when a South Korean diplomat asked him how to replicate Israel’s success, he told him to have “all the surrounding countries declare war on you simultaneously & then you’ll have an entrepreneurial culture.”

All of the factors that drive entrepreneurship don’t happen linearly and the mix matters. One mistake development organizations make, Daniel said, is overlying on entrepreneurs and underemphasizing assets. Entrepreneurs can only do so much themselves to create economic development. In emerging markets where each factor is harder to come by, entrepreneurs, investors, and public figures have responded by creating coalitions to jointly impact and grow every key ingredient needed to create a culture of entrepreneurism.

When it comes to entrepreneurship in Israel, he thinks there are still obstacles. Namely, “that closing a company is difficult. When closing a company is difficult, entrepreneurs are hesitant to start one.” Also, “more risk capital would be nice.”

Daniel’s book can be purchased here: http://www.amazon.com/Daniel-Isenberg/e/B00DNX1BOK.

Find out more about his Babson Entrepreneurship Ecosystem Project at http://entrepreneurial-revolution.com/. 

IsraelDev is a  entrepreneurial community working to develop a nationwide ecosystem that harnesses Israeli innovation for solving challenges in the developing world. Check them out at http://www.israeldev.org/.