Financing High Tech

1

• Financing High Tech
• in Israel
• Prof. Shmuel Kandel
• Tel-Aviv University

2
Israel and High Tech

• Israel possesses the second highest number of
  start-up companies in the world following the
  united states.
• Israel has the mixture of high tech talent,
  coupled with entrepreneurial spirit - the basic
  ingredient of start up enterprises.
• Success main factors High Education, Military
  Service, Russian Immigration

3
Sources of Continuous Supply of Start-ups
IVC-Online
4
Industrial Exports, by Technology Intensity,
1998-2000 ( million)
Israel Export Institute Economics Department
Israels Economic Overview - 2000
5
Financing High-Tech

• Government
• Bank and personal (angels)
• Venture Capital Funds
• Initial public offerings (IPOs) and acquisitions
• NYSE, Nasdaq and TASE (Tel-Aviv Stock Exchange)

6
Factors Determining Financing Choice

• Uncertainty and risk
• Asymmetric information
• Nature of firm assets
• Conditions in the relevant financial and product
  markets

7
Government Financing

• The Israeli Government developed an Incentive
  Program for entrepreneurs by enacting the Law of
  Encouragement of Industrial Development.
• The Ministry of Industry and Trades Chief
  Scientist provides entrepreneurs with RD grants,
  consisting up to 60 of a planned products
  development costs.

8
Govt (Contd)

• In return, once the product reaches the market,
  the company pays royalties until the grant is
  paid back in full.
• The law also grants Approved Enterprise status
  for capital investments in high tech. Approved
  enterprise can receive partial or full exemption
  from corporate tax for a period of 7 years,
  beginning with the first year the company earns
  taxable income.

9
Government and VC

• The Chief Scientist also runs technology
  incubators supporting embryonic stage projects to
  assist individual entrepreneurs.
• In 1992 the Israeli Government established a 100
  million venture capital fund, Yozma Venture
  Capital (privatized in 1997). The fund invested
  directly and through its daughter funds in over
  60 different high tech companies

10
Defining Venture Capital

• In the US Independently managed, dedicated pools
  of capital that focus on equity or equity-linked
  investments in privately held, high growth
  companies.
• Outside the US, VC is used as a synonym for
  private equity that includes organizations
  devoted also to leveraged buyouts, consolidations
  and venture leasing

11
Staging Venture Capital

• Seed Start up
• Early 1st Stages
• Expansion 2nd 3rd
• Bridge
• Late Mezzanine

• Seed
• RD
• Initial Revenue
• Revenue Growth

12
Capital Raised by Israeli High-Tech Companies by
Stage in 1999 and 2000
Year 1999
Year 2000
Seed 6
Revenue Growth 25
Seed 10
Revenue Growth 22
RD 37
RD 42
Initial Revenue 27
Initial Revenue 31
Total 1.01 billion
Total 3.1 billion
IVC-Online Survey
13
Are VCs passive financiers of entrepreneurs? Do
they add value?

• Agency problems conflicts between managers
  and investors (? agency costs)
• VCs mitigate agency conflicts
• Generate information about prospects
• Scrutinize firms before providing capital
• Provide advice and active monitoring
• Stage capital infusion
• Design and control over entrepreneurs
  compensation

14
Back to the 4 Factors VCs concentrate in
industries

• with a great deal of uncertainty
• with information gaps between entrepreneurs and
  investors
• with substantial intangible assets
• with variable market conditions

15
Venture Capital in Israel

• Following Yozma, a first generation of venture
  capital comprising over 500m was raised by some
  30 funds in the early 1990s, approximately 80 of
  which was invested in technology companies. Most
  of the early funds tended to invest in
  later-stage companies and as a part of a
  consortium.

16

• The growth in high tech and venture capital in
  Israel also attracted foreign investment banks to
  Israel. In the mid 1990s MA activity began and
  large foreign corporations took significant
  stakes in local technology companies.
• Successful exits gave birth to a second
  generation of venture capital starting in the mid
  1990s. Most second generation funds are larger
  than the first generation funds, ranging from
  50m to 150m under management.

17
Selected Foreign Corporate Investment in
Israeli High Tech
IVC-Online
18
Venture Capital in Israel

• Today there are about 80 Venture Capital funds in
  Israel
• Total 6.5 billion under management
• The largest fund has about 500m under management
• About 3 billion are still available for
  investment

19
Total Amount Raised by Israeli High-Tech
Companies 1997-2000 (M)
3,098
1,012
600
430
IVC-Online
20
Venture Backed Investments

• During 2000, venture backed investment reached
  more than 3 billion, which is three times the
  total investments for 1999 (1 billion)
• More than 800 million was raised in the 4th
  quarter 2000, 18 lower then the all time record
  of more then 1 billion in the third quarter of
  2000.

21
Total Amount Raised by Companies by
Quarter (M)
1,069
813
648
576
343
279
222
169
IVC-Online Survey
22
Capital Raising by Industry during 2000
(3.1B)
Communications 39
IVC-Online Survey
23
Future Investment

• Following the crash in Internet related companies
  and especially dot.com, forecasts are that
  communication and biotech will have a larger
  portion in the total investment.

24
High-Tech, Venture Capital and Active Stock
Markets

• Theoretical research predicts and empirical
  papers document a positive correlation, across
  countries, between the level of high-tech
  activity and venture capital availability AND the
  existence of deep and liquid local stock markets
• One exception Israel

25
NASDAQ

• Since 1992 Israeli companies raised at NASDAQ
  over 11B.
• About 100 Israeli companies are traded at NASDAQ.
• After US and Canada, Israel has the largest
  number of companies traded in NASDAQ.

26
Dual Listing in TASE
Which companies can dual-list?
Companies that have been traded on the Nasdaq
National Market, the NYSE or the AMEX for at
least one year, or companies with market
capitalization exceeding US 350 million,
(regardless of how long they have been listed).
How does a company dual-list on the TASE?

• File a short, technical, registration form.
• Enclose the latest 20-F report filed in the U.S.
• Enclose copies of the announcements the company
  has made since the publication of the latest
  20-F.
• Trading opens two days after the registration
  form is published.
• No fees for listing on the TASE.

27
High Tech Companies in Tel-Aviv
No. of companies Market Cap.
2/2001 US Dual Listed 8
2.1 Others 42 2.1