Financing High-Tech: Lessons from the Israeli Innovation System

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Financing High-Tech Lessons from the Israeli
Innovation System

• Vittorio Modena
• The University of Pavia
• and E.M. Venturepolicy
• Prepared for the World Bank seminar held in Riga
  on June 8-9, 2004

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Presentation Outline

• Part I Evolution of the Israeli Innovation
  System
• Part II The Yozma and Technological Incubators
  programmes
• Part III Exportable lessons
• Part IV The ESTER project

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General Evolution

• Phase I (1920-1967) Academia and scientific
  tradition
• Phase II (1968-1990) - Accumulation of
  intangibles by public policy (military oriented)
• Phase III (1990-2000) - Private high-tech
  exponential growth (through start-ups)

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Phase 1 - Academia and Scientific Traditions

• Strong scientific (academic) culture since the
  end of the 19 century
• The Technion and Hebrew University of Jerusalem
  are created in the 1920s
• The Weizmann institute is founded in 1949

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Phase 2 (1969-1990) (1/2)

• Following the 6 days war and embargo on weapons
  import, independent technological capability
  becomes a need
• The Office of the Chief Scientist at the Ministry
  of industry and trade is created
• Large budget allocation to RD

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Phase 2 (1969-1990) (2/2)

• The Aeronautics and Electronics industries take
  the lead as they are the most relevant for the
  military sector
• Since 1984 RD activity is enlarged and becomes
  more oriented to civilian RD

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Phase 3 (1990-2000) Main Characteristics

• ICT market growing very strongly worldwide
• Progresses in the peace process
• Agressive public/private partnership programmes

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Phase 1,2,3-Comparison
Year 1980 1990 2000
Firms No.(estimated) 150 300 3000
Number of VC companies 0 2 100
VC raised (M-estimated) 0 50 3400
VC investment (M) 0 45 1270
Accumulated No. of IPOs 1 9 150
Share of IT in Man.Export (estimated) 20 33 45.7
Source Teubal and Avnimelech
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Phase 3 Public Programmes

• 1990-The Technological Incubators programme
• 1992-3- Yozma and Inbal (Venture Capital)
• Magnet (Universities-Firms links)
• Regular funding of RD (RD in Firms)

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Part II The Yozma and Technological Incubators
Programmes
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Phase 3 The Yozma Programme (or How to create a
Venture Capital Industry from Scratch)
1990
Market Failure
Govt Intervention
1993
100M Investment
Establishement of Yozma
1997
Creation of 10 funds
Govt exit
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Phase 3 The Yozma Programme (1/3)
Yozma a public Fund of Funds
40
60
Private investors
Start-up fund (private)
Company
Company
Company
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The Yozma Programme- 10 Drop-Down Funds
Attracting Foreign Investors (2/3)
Fund Foreign Partners Eurofund Daimler Benz,
DEG (DE) Gemini Advent Inventech Van Leer
Group (NL) JPV Oxton Medica MVP
(USA) Nitzanim-Concord AVX, Kyocera
(Korea) Polaris CMS (USA) Star TVM (DE)
Singapore tech Vertex Vertex intl
funds Walden Walden
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The Yozma Baby Funds Growing(3/3)
Fund Original Size (M) Present Size
(M) Eurofund 20 90 Gemini 25 350 Inventech
20 40 JPV 20 580 Medica 20 70 Nitzanim-Con
20 280 Polaris 20 645 Star 20 400 Vertex
20 250 Walden 25 175 TOTAL 210 2880
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The Technological Incubators Programme

• Finances 85 of the budget up to 350,000
• A protective environment for the inexperienced
  entrepreneur including premises and consulting
• Accept projects at the very early stage of their
  conception

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An Early Stage Business-plan
SourcePridor
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The Technological Incubators Programme

• Started 1991
• 23 incubators
• 8 start-ups each
• 30 M budget every year
• Geographically distributed
• Non-profit entities now being privatised
• Number of graduates 735 (end 2001)
• Success rate around 52

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Evolution of the Public/Private Investment in
Incubated Projects
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Contribution to Sectorial Variety
SourceIFISE final report
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Part III Exportable Lessons(mainly from the
IFISE Project)
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Seed (and Pre-seed) vs. Start-up Capital

• Both need strong initial public support
• Start-up sources just need triggering, seed
  sources need continuous support
• However, support for seed funds may be reduced
  gradually after successful launch

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Research-Intensive vs. Generally Innovative
Firms

• Different schemes are needed for different kinds
  of firms Research-intensive firms are more risky
  and need more help and infrastructure
• Venture Capital and private equity also deal with
  traditional sectors

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Sectorial Neutrality

• Neutral seed funds (or incubators) appear to
  succeed as much as sectoral, so
• If you dont have a very good reason to impose
  sectorality or neutrality, dont !
• Biotech is different as it requires different
  infrastructures, size of funds, development time.

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Passive Role of Government

• No intervention in the management companies
  Government shall only monitor (a delicate
  matter), not make business decisions
• Govt role and exit should be planned from the
  start.

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Expert Foreign Partner Involvement

• For expertise, networking and reputation.
• Encouraging/requiring such partnerships is a way
  to help the industry work.

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Deal Flow a Critical Mass Problem

• Making a programme attractive is not only about
  incentives
• Deal flow may be a problem for new technology
  based deals and/or for small regions (or
  countries)
• Low deal flowgtmore flexible schemes not limited
  to small regions or specific sectors

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Example Italian high-tech potential vs.
Structural funds
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Part IV The ESTER Project
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The ESTER Project (1/2)

• Objectives
• Planning for effective sources of seed and
  venture capital in Estonia, Latvia and the Slovak
  Republic
• Submission of formal proposals for the launch of
  new programmes to the relevant authorities in the
  three countries and the EC

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The ESTER Project (2/2)

• Basic Methodology
• Inspiration from the Yozma and Technological
  Incubators programmes in Israel
• Thorough study of the Innovation system in
  Estonia, Latvia and Slovakia
• Thorough study of EC regulations
• Planning with world experts
• Submission of proposals to the relevant
  authorities

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Latvia Venture Capital Strategy
Detected Situation Decision
Uncertain high-tech deal flow Flexible scheme
Limited amount of available public monies Two funds (ensuring right size)
Scarce presence of skilled management in high-tech Strong incentive to management company
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Contacts/references

• Email vmodena_at_libero.it
• IFISE Project http//ifise.unipv.it
• ESTER Project http//www.unipv.it/ester/index.html
  
• Company http//www.venturepolicy.com