Having been credited with playing a leading role in the emergence of Israel as an IT dynamo, American-based venture capitalist, David Blumberg, contiues to speak his mind on the advantages of being bold. He is of the firm conviction Australia now stands on the threshold of similar greatness, providing governments understand their delicate role, and innovative minds seize the day. In this interview with David Forman, Blumberg outlines how transformation from an economy based on agriculture and resources to one based on knowledge need not be such a long and difficult journey.

 Question: Australian start-ups vs Israel. We are putting in place policy elements to encourage the information industries. But are there cultural differences as well as policy between Australia and Israel?

Answer: If I'm onto anything correct, then I'm sure a lot of other smart people will have found those things out, but I do have some pretty strong opinions that I've formed about that. The problem with being introduced as an expert is that you're someone with strong opinions, and often wrong, but never in doubt. So I want to be careful. This is one man's opinion after one trip to Australia. Limited exposure, but this is what I learned.

I've had a lot of exposure to Israel, probably 30 trips to Israel dealing with literally hundreds of companies over the years, and seeing great successes and seeing great failures. And also seeing dramatic changes over the last 15 years. From protectionist, socialist, high inflation with no equity market, focused on non-tech industry and an almost hostile government, to just the opposite.

Israel has really done a lot to move the right way. There's certainly a lot more that they have to do, but there was almost a hostile environment a few years ago for the IT entrepreneur, and they've turned that around.

I don't think Australia is hostile, but it's not a warm environment for the entrepreneur yet. But the people at government and business levels are at least talking the right talk. I'd say the entrepreneurs are starting to walk the right walk. Government is lagging a little bit, in terms of changing tax policy, but they will, over time. The business community, knows where they have to go, and they're trying to push as well.

I think Australia in general has the right base for a good strong economy like Israel's has become in this IT sector start-up. They both want to model themselves on what has happened in Silicon Valley in the last 20 years.

So, let me start with the cross comparison. The US has a huge domestic market, so that a start-up that comes up here has it in its own backyard. That's very important because not only is the US the big market, it's one of the most open markets in the world, certainly for technology. Everything that's good, everything that's current, basically finds its way here.

The US is a very competitive market, as well as big. It makes the start-up companies think in competitive terms from the beginning because they're surrounded by it.

Now, if you're from Israel or if you're from Australia, both far away from major market countries, there can be a tendency to just focus on the local market and build yourself up to a certain level and then you try and cross the ocean and you find out your stuff just isn't competitive. You were protected and isolated and insulated, and so you were able to sell a certain amount of your product in your local market, but globally, you're not competitive.

Israel had less of an issue than Australia because Israel is a tiny country by comparison with Australia. It's about a third of the people, until very recently, they were a much poorer country. Recently, they've practically caught up with Australia in terms of GDP per capita., they've passed Britain, they're now about $US17,000 per capita income per year, but as recently as 10 years ago, they were half that. So they've been growing really fast. They've paralleled a little bit whith Taiwan & Singapore. Just a steady five, six, seven percent growth rates over a decade gives you a big increase.

So, Israel was a small market and a poor market. They didn't have domestic purchasing power, and so almost none of their companies in the IT sector, with a few exceptions, could count on any domestic growth. They were born global, they had no choice, and they immediately had to set their sights on global competition.

That was a trial by fire. They had to sink or swim across the Atlantic to get to North America . In the '50s and 60s, even in the 70s, Israel used to think of Europe as its main market. It was closer as well as more agriculturally oriented. There were European languages and family ties and so on. But that has switched. The US is now clearly Israel's big market. The agriculture sector of Israel's economy is declining dramatically. You can make a lot more money building chips per acre than you can growing oranges per acre.

And I'll make the same argument for Australia. It's the high value industries that are the industries of the future; software, biomedical, and services and so on. Not the natural resources extraction, nor agriculture.

Israel grew that way. Australia was luckier. You had a population of 18 million versus Israel's five or six, and so you were able to build companies of a certain size that kind of got comfortable. If you go to a country like France, that becomes even more extreme. There they have a big domestic market and a very protectionist supportive government of local companies and they like to buy from each other. There's a language issue as well. French companies particularly were problematic when they tried to break out of Europe and come across to the States. Many of them don't succeed. They get very comfortable ast a certain level of domestic success, come across the ocean and they find out they're not world class competitors.

So, I think Australia and Israel can compete well because they're such small economies that they have to think more in terms of sink of swim born global strategies. That's the context they're in.

As for cultural issues, I think people are basically brilliant and stupid in relatively similar proportions around the world. Education, on the other hand, is not well distributed around the world. Israel happens to have the most educated population in the world. More scientists and engineers per capita and so on and so forth.

Australia's definitely one of the elite education societies, and therefore has more of the natural 'stuff', the natural matter, that builds these information tech industries. But interestingly, Israel's had this lead in the world in terms of educated people since 1948. Since the state was created, they've been the most educated workforce in the world.

Why didn't Israel take off in the IT world until now? Well, they were fighting a lot of wars, they had other things they needed to build the country, they needed to build infrastructure, they started with practically nothing, whereas Australia has 150 years of history.



Q: Was there a correlation with the Russian immigration?

A: Yes, the Russian immigrants have augmented and added to that, but I would make a different point.

Not only are the Russians educated people, but immigrants. Immigrants are entrepreneurial people. They have been self-selecting to leave former lives and build a new one in a new place. I think in Australia you'll find the immigrant community are entrepreneurial people.

Why? Because generally a lot of immigrants are excluded from the big old boys network. They can't get into the big banks into big manufacturing...they don't speak with the right accents, they didn't go to the right schools, they don't have the right networks, they don't have that option.

Same is true in America. Very often you find the entrepreneurs are immigrants.

The Russians have turned out to be amazing. Despite their communist backgrounds and their lack of democracy, they're avid democrats. And they are entrepreneurial, even though they have no experience of capitalism.

The fact that they are educated is an added bonus and it's very important, especially in the IT area.

Israeli Government has done well by giving early stage grants to companies that are export oriented in the high tech area and by helping them build with the early stage seed money. They've done reasonably well in tax policy, getting rid of a lot of capital gains taxes, getting a level playing field so that foreign investors who are tax exempt can retain that tax exempt status when they invest in Israeli deals. There's still some problems, both in Israel and Australia.

But let's go back to the cultural issues and education. Australia has good education, it is an immigrant society as well, so you've got the right 'stuff'. My sense is that Israel went through a period, let's say in the 50s and 60s, where the best and brightest went into Government, or the military. Maybe in the early days, the best and brightest in Australia went into the Government and maybe into the big companies.

Now, in Silicon Valley, the young people all want to be entrepreneurs. In Israel, since the mid 90s, there have been all these role models of young people making it and being successes in their 20s and 30s. Now a lot of the best and brightest young people who come out of the elite universities or military want to be in the IT sector.

So this role modelling and culture of success has taken off.



Q: So the first generation of explosive growth in (Israeli) IT companies has been young people right from the start?
A: Yes. There were three or four old grandfathers of high tech in Israel. I worked for a trio of them. A fellow named Dan Telcofski, who had been head of the airforce and was head of Discount Investments, Uzial Galel, who was Elron Electronics, and Fred Adler, who was my direct boss, who was a venture capitalist in New York. Those three guys and maybe a few others were early to recognise the potential of Israel and they realised a lot of success investing and starting a bunch of big companies like Elron.

All three of them were always the cheerleading team that brought money and advice and backed the first generation of entrepreneurs. Those first generation of entrepreneurs are people like Affi Arazi, who built a company called Scitecs.

I don't want to say they were the only folks in town at the time, but they were three that I'm personally familiar with that were really pioneering.

And maybe here in the States the early venture capitalists would be Hewlett and Packard, and maybe Andy Grove and Gordon Moore of Intel, and People like Arthur Rock, one of the world class venture capitalists, now probably somewhat retired but one of the earliest guys in the game.

It was people like that who really got this industry going here, maybe 20 years earlier than Fred and Uzial and Dan started in Israel, and now you've got the same thing starting to happen in Australia.

So there is a step process.

In general, though, we see time collapsing, cycles are getting shorter, so Australia doesn't have to go through the same 40 year process it took to build Silicon Valley or the 20 year process it took to build Israel. You can leverage and go faster.

The strongest impression I got of Australia was that the young people are more like their young American counterparts and their young Israeli counterparts than they are like their elders. There is a horizontal similarity of entrepreneurial culture. They are not slackers. They are the opposite. They are hard working, driven, aggressive, bright, plugged in people and they search the web in real time for their information, they don't wait for it to come through a seminar or through a newspaper or in any delayed form. They get it fresh.

And because they get it fresh and they get it globally, they don't get it filtered through the domestic media. They get really what I call the world class skinny story.



Q: You spoke about the issue of Australia's isolation and in some sense our comfort, that we could build our own market. That is clearly not the case in the information industries any more.

A: But it certainly was in the furniture industry. In construction. In the traditional industries it was very easy.



Q: Which is the business culture people over 40 have inherited.

A: Exactly.



Q: Clearly the people who are under 30 understand all the global implications instinctively, but they don't seem to be the people to whom we are targeting our attempts to create these industries. We seem to have policies that are created by people who are 40 plus who are thinking of the way people who are 40 plus do business and so we seem to think we can create a company in Australia, that we can work for five years and that it can go overseas. Then it finds it's not competitive, and you think, that was a waste of time.

A: That's a very articulate way of saying it. It's terrible to generalise about a whole age of people or a race of people, or a religion of people, there are certainly very important exceptions.

But as a general rule, I did see this kind of age differentiation. The young people understood it and were going to do it come hell or high water. And if they couldn't do it in Australia, they were going to move.

And this is what happened in Israel. A lot of early generation successful guys moved over here or got their financing here or did it somehow outsides the rules of the Israeli Government.

I think Australia has made some very bad mistakes on tax policy by rewarding people up front instead of rewarding them at the end. What do I mean by that? Well, the tax oriented policies that I've heard about, and I'm not an expert that reward an investor for now. They get a write off which means they basically don't care what they're investing in. All they care about is the amount of the write off. Israel did a little bit of that as well.

These are disastrous policies that only a politician could love. They buy votes in the short term, but they don't build companies, they don't build long term patient investors, and that's what you need.

Now, what do you need to build long term patient investors? Basically, you need to get rid of capital gains tax. Then people can be patient and let it build and build and build and grow in value.

This tax orientation of quick write offs, credits for this, that and the other is the wrong way. Reduction of long term capital gains tax is, in my opinion, more the right way.

Now, let me go to a cultural issue. The acceptance of failure. In America there is a prevalence and a preference among venture capitalists to back what we call serial entrepreneurs. People who've done it before.

Just because they've done it before doesn't mean they've been successful before. Sometimes they've been successful, and probably sometimes they've not been successful. So that's okay, as long as you learn from your mistakes, it's okay. Native Americans have a saying, that you can fall down seven times as long as you get up eight.

It's a beautiful saying and it basically expresses feeling here in Silicon Valley. It's okay to try something, it might not work out. Just learn from it. Don't make the same mistakes again.

And in Israel, that was not acceptable until fairly recently. Now it's becoming very acceptable. They are becoming a risk-taking, accepting culture. I think Australia needs to become that new risk culture.

Let's take the opposite. The opposite is Japan, where loss of face, leaving a big company and all of that is almost unheard of. Why would you ever risk leaving a huge institution to set up something on your own?



Q: Who made the change in Israel? I mean these are ingrained cultural issues. We've been talking about these things literally for years. So how did Israel change, because we can't seem to.

A: I'm not a sociologist or philosophy expert. When you talk about these mass social changes, I think there is more than one key cause. One issue is getting the incentives right. If you get rid of capital gains tax, if you allow people to get serious options and equity, it has an amazing empowering effect. It makes them work 18 hour days, seven days a week to achieve their dream.

Entrepreneurs are a special type of people. If you take the top off of the box, they will jump very high and they will achieve some amazing things. But if you have a top on the box, you completely discourage their long term financial gain, but that's not the only thing. They're looking to build something important, not just get rich.

They're looking to do something with their life. To mean something, to have a meaning beyond just their own little personal life and existence which is short, nasty and brutish sometimes. So entrepreneurs want to prove something to themselves and to the world.

A government that's smart and wants to build a big economy will tap into that power. It's the entrepreneurial companies that cause almost all of the employment growth in today's economy. The Fortune 500 in America, and the top companies in Australia, Isreal and Japan are all downsizing. They have been downsizing forever.

Big companies typically get some kind of leadership position and then they start to replace people with capital or technology. That's not bad. They're doing what they should do. The new industries are founded by people who think differently, who start with an impossible dream, and then somehow achieve it. And that's called the entrepreneurial class.

Most of the growth of the economy in the States, in recent years is from the young companies who became big. Where was Cisco 20 years ago? Nowhere. Where was Microsoft? Nowhere.

That whole industry was nothing. Now it's a major impact in employment, in creating lots of millionaires and well-paying jobs including more capital to re-employ and invest in new things. The investors who invest in new things are getting great returns, and therefore have more money to invest again.

It's a positive cycle. Entrepreneurs should be encouraged in all cultures. The United States has a reasonably good tax structure and so on for this and has a strong venture capital industry backing it and a lot of role models who have made it.

Israel has moved itself along this way though there have been other barriers along the way. In Australia I think you can do the same thing. It's really set to do so but it's going to take some cultural change that seeps in slowly. It's going to take some role models and it's going to take some journalists trumpeting success stories and showing how a 20 year old can build a company and sell it for a few hundred million dollars a few years later. That's the kind of thing that gets people kind of motivated and that's happened in Israel now five or six times. And that's pretty damned impressive.



Q: This is a bit of a diversion from that, but just to go to the way companies move from their domestic focus, when they arrive here and find they are not competitive. What are the things that cause these companies to fail when they come here?

A: Okay, I'm going to answer that in two ways. First, I'm going to ask, why isn't Australia backing high tech early stage companies, and then what are the barriers when a young company gets some kind of backing that causes them to fail if they are crossing the ocean.

First, why isn't Australia investing in and hasn't traditionally invested in entrepreneurs and so on?

For one thing, there are tax disincentives. For another, there has been a culture of domestic sourcing, supply and so on. The old monied powers that be, the old boys club in Australia, don't understand high tech. They understand real estate development and mining and distribution of clothing and things like that. Maybe they understand exporting to east Asia. But they don't really understand building a fast growing internet company or something that's going to have to compete in the US and Japan and France simultaneously and be run by a bunch of people with ear rings and piercings and tattoos and pony tails running around the office and working crazy hours.

It's a new culture, this information technology culture. It's a new culture that takes flexibility and I think traditional investors have been risk averse. Iin the 80s, there was evidently a period when Australia tried a misguided, tax-oriented venture capital plan and people got singed. Institutional investors got singed so badly that it's taken them until now, a decade, to even consider anything again.

This plan that the Government is doing in its present metamorphosis is better. It's still not perfect, but it's better. You've still got to get rid of taxing the foreign investors. You've still got to get better capital gains tax treatment for your own entrepreneurs and so on, but the world is readier. The young people, again, aren't going to wait for the government to do it. They're either going to do it themselves by emigrating and doing it here, or they're going to find a way. They'll get positive change, I don't just know how.

And then you've had some bad news folks who claimed to be venture capitalists and gave that industry a bad name, the Bonds and so on. Who, I don't know what they were doing but it wasn't what we would consider venture capital in the high tech investor sense. They were financial manipulators in a sens. I don't mean to cast aspersions on any individual, but this is not a financial game. This is a company building game. That's what venture capital is about.

And if you own a piece of a growing company, you're going to get a great financial return, that's just inherent. Look at the returns of the stock market versus the bond market versus the real estate market over a long period. Equities perform better.

What is an equity? It's a piece of a growing company, or should be. So why hasn't Australia been investing in those things? Israeli investors didn't invest in those things for a long time either.

Israel has attracted the creme de la creme of the Intels and Motorolas and National Semi-Conductors, Digitals, for R&D centres. And that's because there was a great shortage of personnel in the 70s and 80s in the States. There were little teams of maybe highly motivated Israelis who wanted to go back to Israel and some of these big American companies said, okay, they would open an R&D plant in Israel. The government of Israel supported that, gave great tax incentives to sweeten the deal for investing companies and that was a very positive effect two ways.

One, it gave big companies experience in with dealing with Israelis and seeing they had brain-power to offer. Two, it gave Israelis great learning experience at the university of Intel and of Motorola, learning best management practices. Not as a sales office, because there was no Israelis market to sell this thing, but as an extension of the R&D department of Intel or Motorola, or the production department.

Getting a foreign investor to open a sales office in your country is no big deal. But getting them to open some kind of R&D facility is really when you've got the golden egg. And I think Israel did a very good job of that and that was another part of changing the risk acceptance curve, because Israelis were exposed to their American counterparts in the same company, and they would tell them stories of Silicon Valley.

They cross fertilise ideas, so Israel got exposed to this culture of Silicon Valley which is unique and it's quite positive to build an economy.



Q: Do Australians have the ingredients to do that?

A: I believe you do. I absolutely agree that Australia has all the ingredients and you don't have the war or the problems of boycott or anything Israel does.

Now, Israel has turned their negative into a positive. Out of the fact that they had to have a military, they couldn't trade with anybody to the south or east of them, land Europe was increasingly hostile, they moved more and more to trading with the US. And that again has been positive, because the US is the economy that leads the world in high tech stuff. If Israeli business people wanted to do anything important, they had to become more and more oriented towards high-tech, which was also the growing part of the US economy. The rest of the world shunned them which pushed Israel to the US and was a good thing for Israel.

Why do Australian companies have trouble crossing the Pacific where Israeli companies had to cross the Atlantic? Both face the same kind of problems. Generally, every business culture has a bit of old boy cronyism, and who you know is at least half the battle. You might have the world's greatest technology, but if the guy won't answer your phone call, because he doesn't know who you are, then your not going to get introduced.

Getting above the noise level, and there's a lot of noise in Silicon Valley, in competing for time and new product introductions, and dozens of journals and magazines to read, makes it very hard to get people to listen. They deal with their trusted friends, business partners and so on. Breaking in is hard.

All the more so, extra hard from across the ocean.

Increasingly, there's a new source of money and that's corporations, investing strategically, as V.Cs or through specialised V.C funds, and they are more and more understanding again that there's a big trend in outsourcing all kinds of tasks. R&D can be outsourced. It's called venture capital investing. Motorola has a fund. Intel has invested in three or four hundred companies.

It's hard for anybody from overseas to hook in. There are ways of managing it and partly it's by getting good intermediaries and advisers and so on. The other thing is you've got to understand that the rules are different. The American market is very diverse and competitive whereas the Australian market is far less competitive, it's more cosy, all know each other and there aren't too many regional distinctions or differences. The differences between the regions in the States are quite dramatic.

You can't expect the same rules in Australia to apply in the States. That's another mistake.



Q: Even in the information industries are there big regional differences?

A: There are probably less regional differences in the information industries than any other industry. But if you're selling a software product to companies, end user companies, around the States, there's probably going to be big differences from coast to coast and north and south. There are different structures.

In Australia and Israel if you are selling to the domestic market you have very little chance to focus on a vertical market. It's too small. You need to sell to everybody. You need to sell to Telstra, the government the military, the real estate developer, Myers department store chain and you don't get focus. In the States, a lot of driven companies get established very successfully just by selling to the ISP industry, just to the school system.

And you get these vertical niches where you get self-reinforcing sales going on because that industry talks to each other, and if you get success in one you get the buddy next door.

Australians and Israelis have to learn the importance of vertical niches.

Another problem is that sometimes Australians and Israelis think they can do this kind of business by remote control. They think they can just fly in and out. They think they can just fly here and do deals, a week at a time. Generally, more and more, they are realising that doesn't work. R&D can stay in Tel Aviv or Australia, but they have to establish the key marketing relationships here and be on the ground here.

The key business development function, which in a fast-growing high-tech company is probably the key function in the business probably has to be here. And when I say here, it can be Boston, but Silicon Valley's taking prominence over the East Coast, especially in the internet and software business. This is where the partners are, it's fast moving, and even being in the same time zone to make a call back and forth when phone tag is such a disastrous problem, makes it a lot easier.

I'm seeing more and more Israeli clients of ours bringing their top couple of executives over here, at least for a time period, hiring some more Americans over here, building up sales, marketing and some of the finance functions here. General operations and R&D stays behind in the home country.



Q: Is this at the start?

A: Increasingly they are doing it early on. Generally they're doing it when they have some venture capital, sometimes before and when they are trying to get venture capital. Often, they get some local seed funding, then they get kind of a combo round, from both. The later rounds are mostly American money leading eventually to a public market exit on NASDAQ, and Australians will probably do the same thing.

There's always been some money in Israel and there have been some investors, but they were big old guys, who did a lot of seed deals in the old days.

They weren't great at exporting those companies. It's taken a combination effort, where you have Israeli money and American money coming together to help the little companies to cross the bridge and be successful.

I'm going to suggest for most of our Australian clients the same thing, that there should probably be some Australian money and we'll combine and get them some American money as well. The Americans will feel comforted that there's an Australian investor watching things there, and the American investor will play the role of helping business development and find people and so on here.



Q: One of the issues I'm interested in is the willingness of people to embrace that business model of partnering and outsourcing skills. I get the impression that a lot of Australian companies are still very much owner-manager, suspicious of handing over that level of control.

A: Correct. I think that's true and again I saw an age difference. The younger they are, the more willing to embrace partnering. They read on the net, they see Yahoo. How many partners does Yahoo have? Netscape? All these guys are partner mania. The Israelis were similar. They were suspicious and wanted to do everything themselves and in the old days they generally were engineering driven. Marketing didn't matter. "Build a better mouse trap and they will beat a path to your door." Wrong.



Q: Same mentality in Australia?

A: To some degree. But I think at least the young people have learned some of these lessons, they see reality.



Q: Are there guys who talk the talk but then find it's a bit harder to walk the walk? They find it harder to take the step of letting go control when it comes to the crunch?

A: Well sure. For example, I said something that probably sounds easy, but is in fact very hard; moving your family to another country. And I'm not advocating mass exodus from Australia to Silicon Valley. But the reality seems to say that business development, marketing, contact with the local market, contact with the customer, has to be here.

I'm sure there are some examples where it doesn't, but most of the ones I'm seeing, especially internet and enterprise software, it's very helpful. And more and more companies seem to be doing it.

But that's a tough thing for a young company president to think about doing. America and Silicon Valley is a pretty nice place to live, so it's not a disaster. I think Australians are used to a very social, outdoor lifestyle. You can have some of that here. But it's not going to be the same. People here work extremely hard. I think in Australia you take a little bit more time for the weekends and for pleasure, and I think that's great. I'd like us to be a little bit more balanced. But right now, Silicon Valley is a place where people really bust their chops! They work around the clock.

I think that basically the people who will be successful will be the people who adopt the new model. The new model involves partnering. The new model involves flexibility in moving places where you need to move. Building more virtual companies rather than traditional bricks and mortar factory, doing everything from base headquarters and exporting to the world, it's a more fluid, distributed model of management right now.