1. 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

2. 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
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

3. General Evolution
Phase I ( ) – Academia and scientific tradition
Phase II ( ) - Accumulation of intangibles by public policy (military oriented)
Phase III– ( ) - Private high-tech exponential growth (through start-ups)
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

4. 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 1920’s
The Weizmann institute is founded in 1949
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

5. Phase 2 –( ) (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 R&D
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

6. Phase 2 –( ) (2/2)
The Aeronautics and Electronics industries take the lead as they are the most relevant for the military sector
Since 1984 R&D activity is enlarged and becomes more oriented to civilian R&D
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

7. Phase 3 – (1990-2000) Main Characteristics
ICT market growing very strongly worldwide
Progresses in the peace process
Agressive public/private partnership programmes
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

8. VC raised (M$-estimated) Share of IT in Man.Export
Phase 1,2,3-Comparison
Year
1980
1990
2000
Firms No.(estimated)
150
300
3000
Number of VC companies 2
100+
VC raised (M$-estimated) 50
3400
VC investment (M$) 45
1270
Accumulated No. of IPOs 1 9
Share of IT in Man.Export
(estimated)
20%
33%
45.7%
Source: Teubal and Avnimelech
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

9. Phase 3 – Public Programmes
1990-The Technological Incubators programme
Yozma and Inbal (Venture Capital)
Magnet (Universities-Firms links)
Regular funding of R&D (R&D in Firms)
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

10. Part II – The Yozma and Technological Incubators Programmes
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

11. Phase 3 – The Yozma Programme (or How to create a Venture Capital Industry from Scratch)
1990
Market Failure
Gov’t Intervention
1993
$100M Investment
Establishement
of Yozma
1997
Creation of 10 funds
Gov’t exit
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

12. Phase 3 – The Yozma Programme (1/3)
Yozma= a public Fund of Funds’
40%
60%
Private investors
Start-up fund
(private)
Company
Company
Company
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

13. 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 int’l funds
Walden Walden
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

14. The Yozma Baby Funds Growing…(3/3)
Fund Original Size (M$) Present Size (M$)
Eurofund
Gemini
Inventech
JPV
Medica
Nitzanim-Con
Polaris
Star
Vertex
Walden
TOTAL
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

15. 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
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

16. An Early Stage Business-plan
Source:Pridor
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

17. 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%
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

18. Evolution of the Public/Private Investment in Incubated Projects
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

19. Contribution to Sectorial Variety
Source:IFISE final report
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

20. Part III – Exportable Lessons (mainly from the IFISE Project)
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

21. 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
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

22. 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
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

23. Sectorial Neutrality
Neutral seed funds (or incubators) appear to succeed as much as sectoral, so:
If you don’t have a very good reason to impose sectorality or neutrality, don’t !
Biotech is different as it requires different infrastructures, size of funds, development time.
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

24. Passive Role of Government
No intervention in the management companies: Government shall only monitor (a delicate matter), not make business decisions
Gov’t role and exit should be planned from the start.
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

25. Expert Foreign Partner Involvement
For expertise, networking and reputation.
Encouraging/requiring such partnerships is a way to help the industry work.
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

26. 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 flow=>more flexible schemes not limited to small regions or specific sectors
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

27. Example: Italian high-tech potential vs. Structural funds
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

28. Part IV – The ESTER Project
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

29. 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
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

30. 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
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

31. 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
V. Modena - World Bank Conference - Riga, June 8-9th, 2004

32. Contacts/references
IFISE Project
ESTER Project
Company
V. Modena - World Bank Conference - Riga, June 8-9th, 2004