Where Einstein Meets Edison

Globalized Clustering

Globalized Clustering

Apr 28, 2010

Conventional wisdom tells us that entrepreneurship flourishes in “clusters”, i.e. geographic hot-spots of innovation, typically surrounding at least one world-renowned university that specializes in science or engineering. Such are the entrepreneurial clusters of the Silicon Valley, Boston, Tel-Aviv, New York, and Austin, to name a few. In fact, the numbers supporting the significance of these hot-spots are staggering: Nearly 90% of the venture capital invested in 2008 in the United States was invested within only ten states1.

I have grown to appreciate this phenomenon firsthand, as an entrepreneur in two such areas (Boston and Tel-Aviv). Simply put, there is no way I could have succeeded as an entrepreneur without the support network that exists within these clusters. First, the vibrant activity that characterizes a hot-spot creates a sort of peer pressure that pushes a potential entrepreneur to overcome reasonable concerns and blindly pursue his/her dream. More importantly, an entrepreneur’s ability to execute hinges upon local, direct access to talented technologists, university research, patent and corporate lawyers, angel investors, venture capitalists, and companies that constitute “coopetition”. Let’s face it – Entrepreneurship is a localized activity.

But this is only one piece of the puzzle.

The last couple of decades were characterized by the trend of globalization, as mid-sized and even small companies grew to the point where they needed to target global markets. It was then that they realized that their product offerings were tailored to the local market with which they were familiar, but not to foreign markets with different modi operandorum. The attractiveness of international outsourcing opportunities meant that CEOs, COOs, and CFOs, even of small companies, needed to understand how to manage cross-cultural teams and the implications of international tax laws. Today, those entrepreneurs, whose entire world exists within one entrepreneurial hot-spot, and whose investors, partners, lawyers, suppliers, and market are confined to one city or even to one country, are at a severe disadvantage. They will inevitably design their offering based on the unique, localized perspective of a resident of their specific hot-spot.

We’ve all read about how multi-nationals cope with the challenges of new market penetration, and how they repeatedly fail with their market strategies. Yet they try, try again, until they eventually either manage to crack the global nut or ultimately give up on their imperialist quest. Either way, much corporate blood is lost to the perils of cultural differences, corruption, local taste preferences, efforts to save local employment opportunities, etc. – blood that entrepreneurs and SMBs simply do not have enough of. Clearly, an entrepreneur cannot dominate the world from day one.

However, an entrepreneur can grow as a creature of a global environment. An entrepreneur need not be deprived of the local advantages of founding his/her venture within an entrepreneurial hot-spot in order to build a globally-aware venture. Since entrepreneurial clusters all exist within cosmopolitan city centers, they are all inherently connected to other hot-spots, and, in fact, to global markets. It is up to the savvy entrepreneur to seek these connections and to utilize them to his/her advantage.

Nowhere is the global-born entrepreneur more evident than in Tel-Aviv. Israel has thrived as a global hot-spot of innovation and entrepreneurship despite its lack of access to a local market worth mentioning. In fact, Israel’s population of seven million is mostly regarded by technology entrepreneurs as a wonderful pilot market, but little more. Moreover, Israel’s political and economic isolation within the middle-east means that goods cannot be exported by land, for the most part. As a result, Israeli entrepreneurs are forced to focus on global markets from day one.

One would think that this isolation would contradict the existence of an entrepreneurial cluster. After all, how many start-ups could such an economic island, with a population of a mere seven million, sustain? How many venture capitalists would set up shop in such an isolated location? How could Israeli ventures be expected to “cross the chasm”2, when there’s a chasm between Israel and its market which includes a physical ocean, a language barrier, at least a few time zones, different weekends and holidays, and, of course, political conflicts – all above and beyond the typical market chasm?

Yet Tel-Aviv’s entrepreneurship thrives, with a track record that includes ventures that have grown to become large globally-active companies, such as Teva Pharmaceuticals, Checkpoint Software, Iscar, Amdocs, Comverse, and, more recently, Better Place. In fact, Israel boasts more companies listed on NASDAQ than can any country outside the US – more than all of Europe, India, and China combined3. And in 2009, 63 Israeli technology ventures were acquired for a total of $2.54B, mostly by multi-nationals4. Acquisitions by foreign companies have become so substantial, that Dr. Ed Mlavsky, Chairman and Founding Partner of Gemini Israel Funds, and one of the “founding fathers” of Israeli venture capital, considers this phenomenon even detrimental to Israel. He points out that “foreign corporations, many of whom have a presence here, are ‘eating our lunch’ by cajoling our young start-ups into early sale of their companies”. In light of the fact that 92% of job growth within these companies occurs after their IPO5, his concern is quite reasonable.

There are several factors that contributed to Israel’s entrepreneurial success: its strong technology-oriented military, its emphasis on education and research and development, a few visionary government policies that went a long way, and a tradition of flat organizational structures and informality in the workplace. But perhaps the key factor that contributed to this success lay in its existence as a melting pot of international cultures within an isolated society. When Stef Wertheimer, founder of Iscar, was asked in an interview6 “What forces drove the growth of Iscar?”, his immediate response was “It was mostly the disadvantage of being in Israel, where the market is extremely small and not secure”, followed by a discussion of how the young entrepreneur was forced to go to the European and American markets from the very beginning. That same company was ultimately valued at $5B when acquired by Berkshire Hathaway in 2006. Israeli entrepreneurs must export as soon as they sell. They buy from foreign suppliers, because, frankly, there usually aren’t any relevant local suppliers. And even when there are, these local suppliers won’t necessarily favor the local market over any other.

Similarly, Israeli entrepreneurs have no choice but to rely on their vast connections to other entrepreneurial hot-spots around the world. It is said that investors should not invest in a venture that they cannot visit in a one-day trip. Yet American and European investors, be they private or institutional, continue to pour their funding into remote Israeli ventures, even when in their early-stage. In fact, only 37% of investments in Israeli high-tech ventures in 2009 came from Israeli venture capital funds7.

It is this author’s contention that the Israeli entrepreneur’s global awareness and nature represents the future of global entrepreneurship. Must we cluster? Absolutely. Entrepreneurship requires a support network that exists solely within the cluster. But an entrepreneur who lives entirely within the confines of his/her cluster, indeed his/her comfort zone, is destined to ultimately meet the challenge posed by globalization. Today’s entrepreneur lives in a global economy, and must acknowledge and embrace that fact sooner rather than later. Entrepreneurs worldwide are beginning to reach this conclusion and to seek global partnerships during the first phases of their lifecycles. As a result, the entrepreneurial hot-spots in which they operate will begin to interconnect, forming what I call globalized clustering. It is this global network of clusters that will produce tomorrow’s winning entrepreneurs: supported by the comfort of their local network, and empowered by the scalability of global reach.

 

Dan Grotsky (MIT LGO ‘01/’02) is an American-Israeli serial entrepreneur, and serves as Vice President of the MIT Club of Israel. Dan is a Founding Partner at Gas2Business (www.gas2business.com), a company that structures and implements international biofuel projects. Dan is also a Guest Writer for the MIT Entrepreneurship Review.


References

  1. 2009 Venture Capital Yearbook, National Venture Capital Association, March 2009
  2. Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, Geoffrey A. Moore, 1991
  3. Start-Up Nation: The Story of Israel’s Economic Miracle, Dan Senor and Saul Singer, 2009 (http://www.startupnationbook.com)
  4. Israel Venture Capital Research Center, March 2010 (http://www.ivc-online.com/upload/archive/Exits/2009_Exits_PR_English_Final.pdf)
  5. NVCA Recommendations to Restore Liquidity in the US Venture Capital Industry, April 29th 2009 (http://nvca.org/index.php?option=com_docman&task=doc_download&gid=427&Itemid=93)
  6. Cutting Tool Enigneering Plus (http://www.ctemag.com/interactive.reports.php?irid=126)
  7. Israel Venture Capital Research Center, January 2010 (http://www.ivc-online.com/upload/archive/survey/IVC_Q4-09_Survey_PR-English.pdf)

About

Dan Grotsky is CEO of Cressca, a venture focused on developing sustainable Moldovan agribusiness for export. Cressca implements agro-technology and advanced methods, and offers a vast agricultural support network, including logistics, training, marketing, and financing. Dan is a serial entrepreneur and business development professional, with experience at companies ranging from garage operations to world leaders. Most recently, he headed business development at Atlantium, a vendor of water disinfection products. Previously, Dan held managerial technical and business development positions at Alvarion, Pegasystems and Taldor Computer Systems. He also cofounded Israel Angels, an angel investor group, and Sophium, a start-up in the personalized television space. Dan graduated as a fellow in the Leaders for Global Operations (LGO) program at MIT. He completed a B.Sc. in Industrial Engineering from Tel-Aviv University, an MS, EECS, from MIT and an MBA from MIT Sloan School of Management. He is a Sergeant Major (ret.), alumnus of the Israeli military intelligence "Talpiot" program (unit 8200).