GOLB: Is this Israel?

Deal-making tip: We males get older, but do we ever grow up?

Maybe used car salesmen and other peddlers of tangible goods know it, but do many of us self-nominated sophisticates appreciate the value of physical props (toys) in selling ideas, deals and the like? I think not: when it comes to toys, not only will boys be boys, but often men will too. So use it!
 
A couple of examples, in this blog and the next one, may titillate you. Back in the late 1960s when the development of portable energy sources rose high on the list of US Government interests, priorities even, thermoelectric generators (T/Es for short) – namely devices that produce electricity from heat, with no moving parts – were being disinterred from their previous obscurity. The basis for their possible resurrection was two-fold: more efficient active materials – semiconductors, of course – and long-lived heat sources, like radioactive isotopes that emit only easily stopped alpha particles that heat what stops them, but don’t produce those nasty gamma-rays, the bodily absorption of which is cancer-causing, for a start.
 
On the basis of a crash course in thermoelectrics – not literally, I’m glad to report, since the expertise was acquired by reading the thankfully short classic text on the subject during a flight from Boston to Washington DC – I proudly presented to various funding agencies there a ‘novel idea’ (are there any other kind emanating from us techie hucksters?) for the development and construction of an efficient T/E generator. The reaction? Well, as a Royal might say to a plebe: “We are not amused.”
 
Back to the drawing board, from which emerged what we thought was a rather fetching design for a compact, efficient T/E generator that no serious evaluator could fail to recognize as such. Ha! Based on the frequency and consistency of rejections from those self-designated pundits in Washington, however, we might well have given up on thermoelectrics and sought a text on, say, fuel cells instead. But wait… I felt a rush of neurons that could signal an inspiration.  “Build a model”, spake the proverbial still small voice – which I interpreted literally, not being an economist or an academe.
 
Our in-house jack-of-all-trades built this beautiful model of the T/E generator, using various colors of transparent plastic, held together by brass screws, nuts and bolts. A red velvet-lined teak box housed the necessary tools to eviscerate and reviscerate it. (Apologies to Webster’s and the OED.) Gorgeous!
 
So off I went back to Washington DC to confront the severest critic of our previously paper-only proposal, but the man (boy?) with the license to dispense funds summarily for projects of his choice. He sneered at me, as his version of a welcome, but focused on the package that I peeled the way Gipsy Rose Lee used to peel herself.  Without a word, he reached over and captured the model and the teak box.
 
With something approaching animation – a quality not before exhibited by this guardian of US Government funds – he lovingly disassembled the model, reassembled it, and once again did both. In response to a signal he must of sent via an under-the-desk button – this was, after all, the US Atomic Energy Authority – a minion appeared, whom he instructed : “Write this man a contract”. To me: “You can go now”, his hands encircling the model and the tools in a manner that quite effectively discouraged me from requesting their return.
 
Not many weeks later, we received official approval for our proposal, in the full amount requested. (Of course, the project never achieved its goals, but the Final Report was masterly!)

 

 

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Body Language? OK, but Eye Language is the Bees Knees

Here’s a tidbit about an incredible deal, vintage early 1970s, with a phalanx of major companies, three of them Japanese. But first a bit of background: while at Tyco, I became a solar energy devotee, specifically in the direct production of electricity from sunlight by means of low-cost silicon solar cells. These deceptively simple-looking devices – no moving parts except electrons (OK you purists you, ‘holes as well), just bluish wafers, typically square and thin, typically with a parallel set of metallic lines on the surface – were actually the miraculous means by which it became possible to provide electricity for orbiting satellites. Why not then, said some of us (myopic?) visionaries, for terrestrial electric power production too? Easy answer: too expensive.

 

At Mobil Tyco Solar Energy Corporation, the JV blogged just before this one, we developed a very ingenious novel technique for growing, directly from the melt, crystals of any constant cross-section, including silicon ribbons. Since the largest part, by far, of the cost of a silicon solar cell was the single crystal itself, this ribbon-growing technique, of not-quite-but-almost-single crystals, offered the prospect for a large-scale manufacturing process capable of producing solar cells that would compete as energy sources with those nasty conventional pollutant-spewers like fossil fuel-based power stations. (If a nuclear power plant begins to spew, ‘yishcadal ve yishcadash’ is about the best one can do.)

 

It was this technology, at that time more putative than proven, that was the subject of the deal to form Japan Solar Energy Corporation, the joint venturees to be Kyocera, Sharp, Matsushita, Mobil and Tyco. The one who was negotiating on behalf of the Japanese group was the truly remarkable individual, Mr. K Inamori, founder and President of Kyocera. He and I, when his company was called Kyoto Ceramics, had earlier negotiated a license to the basic Tyco shaped crystal growth ("EFG") process, as applied to sapphire – which is nothing more than single crystal aluminum oxide: chuck in a trace of chromium and bingo, you have ruby.

 

From those previous negotiations and subsequent interactions, I had come to know Mr. Inamori as an exceptional entrepreneur, businessman, energy powerhouse, and model of integrity and probity. And yet, although I suspected that he understood all that was said, I could never calibrate the strength of his grasp of the English language because he was always accompanied by an interpreter.

 

To negotiate the Japan Solar Energy Corp. deal, it was agreed that Mr. Inamori plus retinue would come, for a week if necessary, to Tyco’s modest facility (early 1970s) in Waltham, Mass. In preparation for the visit, we scurried around looking for easily accessible eating establishments commensurate with these top-tier visitors. (Wouldn’t you just know that, for lunch, they asked for McDonalds hamburgers?)

 

Came the fateful Monday morning when Mr. Inamori, his interpreter, Arthur Jonishi, General Manager of Kyocera’s California operation (a friend of mine from the previous deal), and several older Kyocerans, arrived straight from the airport. Seated in our conference room, the older contingent all promptly fell asleep, woke for lunch, ate, went back to sleep, and were only again awakened when dinnertime rolled around. I hope that they, at least, knew who they were and why they were present: I certainly never found out.

 

Contrary to the myths of how Japanese business is conducted, it became fairly obvious to me that we might actually come to an agreement, and an MOU (memorandum of understanding) that very day. Just in case, I slipped out at a coffee break and called Josh Berman, Tyco Counsel, Chairman and nominal though off-site CEO: I was the on-site President and COO. “Josh”, says I, “you’d better come here this afternoon because I’m probably going to have to commit us to a deal today”. Says he, “When did they arrive, and how long did they plan to stay?” “Arrived this morning and available to stay the whole week”, was the snappy answer. “Ed, young lad” – this from one younger than me, but with a presence that suggested that he had been born at age thirty – “I’ll come on Thursday afternoon; nothing serious will happen before then.” “Josh”, said I, “Mr. Inamori is not your garden-variety Japanese. He and I have done business before, and we trust each other, even across the great cultural divide”. (Of course it’s very doubtful that I actually used such immaculate prose, but poetic license is deemed to be indiscriminately available.)

 

Josh’s wisdom notwithstanding, by late afternoon on that first day, we had agreement on all the basic issues but one, and that particular one had not yet been raised, namely (substantial) minimal annual royalties for the exclusive license – a condition that was an obligatory component of my negotiating mandate. Loath as I was to do so due to forebodings of culture clash, I tried to slip in, casually and apologetically:  “We will need to agree on the amount of the minimal annual royalties (by implication, that need to be paid upfront) that are a standard component of exclusive license grants.” Standard? Not according to the brief but unmistakable hint of a wince, signaled only by a flicker of the eyes of the inestimable Mr. Inamori. A very short burst of eye language, but one that seemed to me to imply chapters on the subject of mutual trust, commitment and business ethics – namely many of the elements quite often missing from the souls of dealmakers, and represented only by dry legal prose in their grudgingly arrived at agreements.

 

Luckily, my psychic antenna was finely tuned that day to cross-cultural radiation, so, with hardly a discernible pause, I added: “But, of course, these minimums (minima?) can be put in escrow in your local Bank, and drawn on only as and when royalties become due.” This fast bit of situation appraisal was rewarded by the, so to speak, opposite of a wince, namely a special kind of smile – all this transpiring with no involvement of the (why-was-he-there-anyway?) interpreter, good old Arthur, except that his smile was broader than that of his master.

 

That sealed the deal, barring the odd dangling participle. So off we went to dinner at one of Boston’s legendary eating-houses, namely Locke-Ober’s. There, written with a fountain pen on a gravy-stained napkin, a seven-point heads-of-agreement was composed covering the main terms, plus a few hints to the lawyers on how to render the whole into that opaque brand of syntax in which that profession seems to revel.

 

Before I signed it, I excused myself, apparently to pee but actually to call Josh, who lived nearby – on Beacon Hill, of course. (Note for the benefit of Bostonians.) “In about ten minutes from now, I’m going to sign this napkin – Memorandum of Understanding, that is – unless you want to zip over here and change anything.” Well, those of you who were ever fortunate enough to have known Josh will never think of him and of the word “ruffled” in the same sentence – unless it was Josh doing the ruffling. But ruffled he came suspiciously close to appearing when he showed up seven minutes later - in a hurry, immaculate garb, and Locke-Ober’s. While introductions were being made to Messrs. Inamori and Jonishi, their colleagues continuing to remain anonymous and simulating(?) sleep.

 

Josh surreptitiously scanned the now almost illegible napkin, the ink having seeped around a bit. Thoroughly back to suave personified, Josh gave me the nod and his fountain pen. Mr Inamori signed; I signed; hands were shaken; the deal was done. My “Please see, Josh, that nothing material is added in producing the final documents” produced a condescending Beacon Hill-brand optical zap. (Try to remember, Ed, to quit while you’re ahead.)

 

Body language? OK in its place, but oh the subtlety of the far more sophisticated yet trenchant eye language.

Large and speedily executed deals between small companies and industrial giants? Implausible, but not impossible.

The way in which Mobil Tyco Solar Energy Corporation, a Joint Venture between then quite small but now infamous Tyco, and the mighty Mobil Oil Corporation, came into being was, in retrospect, so implausible an occurrence as to contain many interesting lessons for aspiring deal-doers. Driven by the need for a solution to a pending crisis that, in context, rated mention on the Richter Scale, namely the almost assured demise of Tyco’s ~100 person laboratory - the company name back then, early 1970s, was Tyco Laboratories Inc. - and having as a tool only chutzpa-tinged instinct, I set about a rescue operation for the crisis which I, perforce, had created by hiring, as successor President and CEO to me, an archetypal US hard-core executive who would surely take very little time to decide that what he most certainly did not need in acquisition-of-profitable-companies-based Tyco was a bunch of scientific types whose best bottom line performance would be to cost the company less rather than more to maintain.

 

Although the lab had lots of projects supported by a variety of Agencies, the only activities with even conjectural commercial viability were in the area of the growth directly from the melt of any constant cross-section shaped crystal by the Tyco-invented EFG process, e.g. putatively, at least (at most?), silicon ribbons for low-cost terrestrial solar cells. At that time, however, the closest we had to a ‘silicon ribbon’ was a few-cm long hunk of silicon that was somewhat wider (~ 1 cm) than it was thick (~0.5 cm) – clearly (sic!) the precursor of continuous silicon single-crystal ribbons 100 cm wide and ~0.2 mm thick, hundreds of meters long, wound on drums in preparation for fully automated solar cell manufacture. (We leave shrinking to violets... )

 

‘Clearly’, says he: there’s chutzpa for you. No, no: there was back-up data, which just happened to fit on the back of an envelope, to the effect that, for the paltry sum of $50 million (early 1970s dollars, that is) spent competently over a ten-year period, I posited that a process could be developed for the production of ribbon-based silicon solar cells that would produce electricity at a cost per kilowatt-hour competitive with that produced by conventional power stations.

 

First write a business plan, right? Right! Except that mine comprised a 1½ page letter that would not strain the attention span of even a business mogul. (I still have the grace to blush when I remember the criteria for business plans that I later established as Executive Director of the Israel-US Binational Industrial R&D Foundation, BIRD: 1½ pages indeed!) It offered 80% ownership to the fortunate JV partner for an investment of $50 million. We, Tyco, would get 20% for the technology, the practioners thereof, and the intellectual property (IP).  All that was needed was a partner who could and would go for this once-in-a-lifetime opportunity.

 

Obviously the partner-elect had to be B-I-G, but monolithic to insure that the decision would be made at the top, with no filtering by – perish the thought – techies with genetic ‘not-invented-here (NIH)’ syndrome. OK, let’s take a look at Fortune’s (then) 100: ATT, the leader? Forget it! Wait a bit: how about oil companies? Esso(Exxon), sad to say, had already started diversifying, including some solar cell stuff. Mobil looked good – good enough, in fact, to have the privilege of becoming the prime target. So off I trotted to Mobil HQ on 42nd Street in NYC.

 

With the embellishments that accrue from re-telling, I have almost come to believe that I simply walked in off the street and told a startled doorman/guard that I wanted to see the ‘individual in charge’. Not knowing what else to do, he called the top hauncho and told him that a Dr. Mlavsky had come to see him on a matter of great importance. Not knowing what else to do, said hauncho invited me up to the hallowed Executive Floor. I gave him the letter and, with great portentousness, unwrapped and handed him that then one and only silicon harbinger of a Solar Age. Don’t ask me to reproduce the pitch, but within an hour or so, said he: “$50 million and 10 years? Sounds high to me: how about $30 million over 7 years?” Need it be said that, after the obligatory pause for appearing to give somber consideration to this counter-offer, I accepted. And yes, that was the deal later enshrined in legal gobbledygook, namely Mobil receiving 80% of the JV after it had invested $30 million.

 

OK, so I probably had arranged an appointment in advance. (Picky, picky!)  But the next meeting, very soon after, was with the Mobil President, the Chairman of the Board, and assorted VPs and chief assistants to their respective assistant chiefs. One was the VP PR, who, when instructed to tell the world that Mobil was about to go into the silicon solar cell business, went into red-faced spluttering mode: “Silicone?” said he. “Not silicone”, said the Pres., “that’s the stuff that went into Raquel Welch’s tits. SILICON, that’s a – what is it, Ed?:  right, a semiconductor.”

 

Breaking “n” more rules, where “n” is large indeed, within eight weeks, yes eight  weeks, of my first meeting with them, Mobil, as part of its role in the newly-created Mobil Tyco Solar Energy Corporation, starting picking up the tab for Tyco’s lab, almost all the staff of which were reassigned to the solar cell project.

 

How did it turn out? By chance, Mobil finished up spending about $50 million over about 10 years  (sounds familiar?), namely in the early '80s, before selling off the operation at a truly bargain price - a pity, since the solar panels then being produced by the venture were the most efficient in the industry, and have been surpassed only very recently. And remember, please, that the 'business plan' upon which the investment was made occupied little more writing real estate than the back of an envelope.

 

Moral: start at the top, and go no lower until the deal is made. And remember, Business Plans are for VC functionaries, plebes and Government funding agencies: for top bananas, keep it short and simple. (Put mathematically, it is posited that the ideal length of a presentation is inversely propotional to the stature of the addressee.)

 

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Some serious stuff about High Tech Israel - Part 2

Yesterday's Post included the quantitative validations of the claim that ‘Israel is a high-tech powerhouse' - today we cover the qualitative, and as promised, the Beatles.

 

So, what was the primary catalyst in Israel for converting opportunity into reality?

No choice ! With nothing much under the sand here except more sand, if one insists on attaining a GDP per capita that is comparable to what is to be found in, say, Spain – and we’ve already passed them – and later, what the Swiss enjoy, there is no more feasible strategy than to create high added value products.

 

One such was the achievement of the Beatles ! To exaggerate a bit, one might say that they bridged the gap from Imperial Britain to North Sea oil. (When I was a kid in England, practically the whole Globe was Imperial Red – and not the sort of red that Karl Marx would have liked to see.) How much higher added value can one get than by selling zillions of plastic disks or tapes which cost pennies to make, but command prices of many dollars a piece? (The UK repaid these Liverpudlians by handing out a few knighthoods, not a significant cost.) Unfortunately, Israel songsters sing in their own language, not widely appreciated on a global scale. Another field that enjoys a fantastically high ratio of selling price to material cost is the fashion industry. (I once weighed my daughter’s upscale bikini: we’d paid ~$1,000/lb for the cotton of which it was composed – just a bit more than the price of the as-harvested variety.)

 

Sadly however, it’s not a viable strategy for Israel to rely on fashion or the performing arts for its economic growth – and citrus exports will hardly cut the mustard. (I wonder where that strange expression originated…) But look at software, for example: the ‘manufacturing cost’ of, say, a $100,000 enterprise software product is comprised mainly of the box in which it is shipped – if, indeed, it is not downloaded from computer to computer. Now there’s added value for you.

 

Way back when, my rule of thumb for guessing the price of an electronic ‘black box’ was to estimate its weight: commodity products, were $X/lb. (Pity, but I’ve forgotten the value I ascribed to ‘X’, but it was quite small.) But boxes that perform miracles in the communications field, for example, sell for a huge multiple of the weight of the box, a large factor in the ability of such products to command premium prices being the highly sophisticated silicon chips and the embedded software. Some of these chips themselves, many of them designed and a quite significant number thereof also manufactured in Israel, can command prices per unit weight that would allow gold foil to be used as the wrapping material.

 

For medical products, the ratio of price to cost is also often seemingly outrageous, but if you need a stent, you need a stent, never mind that it costs many thousands of $/lb. By the way, stents were invented in Israel , as were many other devices now judged indispensable, e.g. the Intel Centrino chip that is now ubiquitous in laptop and other mobile computers – which only adds to the frustration one feels here at our national lack of ability to generate PR about ourselves that is fair, accurate, and therefore very positive! (Sorry: I promised to forswear political comment – but one could opine that, with friends like France, for example, a healthy dose of truth-based PR – not necessarily an oxymoron – would not come amiss.)

 

OK: so we have a driving need to succeed, and lots of relevantly qualified people – a good start, but not enough to account for how Israel has managed to attain what is no less than an extraordinary status in the world of high-tech. One of the underlying cultural factors that predate the foundation of the State is a deep-seated belief in the value of learning in all its aspects. Thousands of years of wandering about as a people, but not yet a nation, reinforced the need to carry one’s identity and profession around with one. No prize for naming the best repository for these assets: the head.

 

With nationhood came the ability to create world class institutions for every kind of learning, but the first need was to survive whilst surrounded – and grossly outnumbered – by not the friendliest or most tolerant of neighbors. A sine qua non for survival is a high-tech army in which virtually all able-bodied male and female citizens must serve  - except those whose extreme religious beliefs make them unwilling and, indeed, unsuitable for inclusion.

Almost all young people, then, typically at age about 18, are drafted, the men for 3 years or more, the women for 2 years. Wow! What a price to pay for a country of one’s own! But the dividends from this investment of resources are huge: 1) mutual acculturation of immigrants from widely different places of birth; 2) education to literacy for those who need it; and - the clincher - 3) accelerated high tech exposure to those talented enough and motivated to advance in the field. It’s no accident, therefore, that many – in fact nearly all – of Israel ’s most successful high-tech companies were founded by individuals from a small number of elite Israel Defense Forces (IDF) units.

 

One of the most important factors in enabling maximum leverage from the skill sets acquired by these personnel is that the IDF retains no rights whatsoever to technology developed under its aegis. Of course, specific matters relating to national security must be respected, but even the most advanced military and security-related technologies can typically form the basis for valuable commercial and industrial products.

 

This “omission” in the restrictions that apply to, for example, Intellectual Property (IP) generated in the US under Government support, has proven to be a very powerful incentive to potential entrepreneurs: no red tape – just do it ! (Relax Nike: I’ll only borrow your slogan just this once.)

Some serious stuff about High Tech Israel - Part 1

The Socratic approach here might be as follows: ‘Israel is a high-tech powerhouse: true or false – and if true, how did it come about? Ask your questions, discuss, and then leave your scrolls on the table on the way out’.

 

Conclusions like: ‘you’re darn right it is’, to some of us impatient ones, just beg to be jumped to, and so stand back as I leap. (Too late: I’ve already leapt.)

We’ll talk about several quantitative (in this post) as well as qualitative (in the next post) validations of this brash claim before addressing the more complex issue of philosophizing about root causes.

Because we are, by any measure, quite a tiny country – that some would like to see shrink even to zero (Oops! Stay out of politics), almost all parameters that pertain to technical capabilities, resources and achievements are most meaningfully defined on a per capita basis: here are a few that aren't:

1. Israel has more than 140 companies listed on NASDAQ: only Canada and, of course, the U.S. of A have more.
2. In 2005, California-based VCs  invested in 895 local high-tech start-ups; New England-based VCs invested in 385; and Israeli VCs invested in 378 home-grown ones – and don’t even bother to ask about the numbers for European countries: the total for all of Europe in 2005 was about the same as for Israel…
3.   “In the first three quarters of 2004, Israel high tech companies placed third in capital raising after California and Massachusetts, but ahead of Texas, New Jersey, New York and other states. Israeli companies placed second in capital raising among European countries, after the UK, and ahead of Germany, France, Sweden, Switzerland, Denmark and Ireland.” Efrat Zakai, Director of Research, Journal of Israel Venture Capital, December 2004.
4. “It is estimated that some 15% of all communications equipment sold around the world comes from Israel.” UK Trade & Investment publication.

And a few that are on a normalized basis:

1. Israel has ~140 scientists and engineers per 10,000 of population, nearly twice as many as the US, and more than twice as many as Japan.
2. Israeli is second only to the US in the per capita number of scientific papers published in refereed journals, and in patent applications filed.
3. The percentage of citizens who are university graduates is among the highest in the world.

The last few points indicate that the raw material is at hand for the creation of a thriving high tech-based economy, but as us pedants are wont to remark, this is a necessary but not even close to a sufficient condition. Compare Israel, for example, with Switzerland. (OK, they did progress from cuckoo clocks to Swatches.) So, what was the primary catalyst here for converting opportunity into reality? (It’s great to be able to pose only those questions to which one believes one has answers – one of the few benefits of being a blogger rather than a bloggee.) Answer:No choice!

With nothing much under the sand here except more sand, if one insists on attaining a GDP per capita that is comparable to what is to be found in, say, Spain – and we’ve already passed them – and later, what the Swiss enjoy, there is no more feasible strategy than to create high added value products.

Now for more on high tech Israel and the Beatles, yes, the Beatles: stay tuned for Part 2...

 

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