Success Factors & Policy The Yozma Program - Success Factors & Policy Presented by: Yigal Erlich the Yozma Group Tel Aviv, Israel

THE ISRAELI OPPORTUNITY The Right Ingredients Wealth of Human Capital Mass Immigration • 1 Million people Israel 140 (mostly within 3 years) USA 82 # of Engineers/ Scientists per • Quantity: 20% of Israeli Population Japan 80 Germany 60 • Quality: 40% with Academic Degree 10,000 people Entrepreneurial Spirit • 2-3 New Startups every day • Highest Concentration of High-Tech Startups after Silicon Valley • 3rd in the world in IP (following US & Japan)

Why Foreign Investors Choose to Invest in Israel Entrepreneurial Spirit Human Resources Reputable Academic Institutes Government Commitment to R&D Strong Infrastructure for Entrepreneurs (CS, VCs, Incubators...) International Activity (R&D centers, VCs, Corporations, Investment Banks) Deal Flow Sources (Immigrants, Defense, Repatriate Israelis, Spin-offs, etc.) © Yozma Proprietary

Deal Flow Deal Flow Sources Repatriate Israelis Defense Sources Corporations Deal Flow Sources Spin-offs R&D centers Universities New Immigrants © Yozma Proprietary

Israeli Venture Capital Before 1993 Lack of investment capital for start-ups ($20 Million) Lack of professional venture capital management Successes in R&D vs. failures in marketing Number of start-ups tripled from 1988 to 1992 © Yozma Proprietary

Government Support for the High-Tech Industry- Pros and Cons Chief Scientist  Only R&D Tech. Incubators  Only Seed Gov’t Guarantees  No Risk Lowering Venture Capital  Equity-Based © Yozma Proprietary

Venture Capital – an Engine for Growth for High-Tech Companies Equity-based finance  VC Need to go international quickly  VC Short product life  Higher R&D spending  VC Larger investment per Company Deep pockets  VC Need for management and marketing assistance  VC © Yozma Proprietary

Government’s Entry Into Business – Preconditions Government as a Catalyst Lowered Risk Market Failure Conditions Predetermined Exit Conditions Timed Entry and Exit No Government Control Indirect Investments (Funds) © Yozma Proprietary

Yozma Venture Capital (1) Mission: To create the venture capital market in Israel Method: To entice the private sector and foreign investors to set up new VC funds To participate as a partner in the new VC funds To secure an obligation of the new VC funds to invest in start-up companies in Israel Accomplished through: Establishment of a $100M investment company Use of proceeds: Establishment of 10 drop down funds together with strategic partners. 15 Direct investments © Yozma Proprietary

Yozma Venture Capital (2) Basic principles: Investment of $8M in each drop-down fund (minority position) A 5 year option to Yozma’s partners to buy out the Government’s share at predetermined conditions Results: 8 out of the 15 companies Yozma Venture Capital has invested in directly, went public or have been acquired 9 out of the 10 drop-down funds have exercised their option and bought out the Government The Israel Venture Capital industry has been established © Yozma Proprietary

Yozma Drop-Down Funds (1) FUND PARTNERS Eurofund Daimler-Benz, DEG (Germany) Gemini Advent (USA) Inventech Van Leer Group (NL) JPV Oxton (US/Far East) Medica MVP (USA) Nitzanim-Concord AVX, Kyocera (Japan) Polaris CMS (USA) Star TVM (Germany) & Singapore Tech VERTEX Vertex International Funds (Singapore) Walden Walden (US) © Yozma Proprietary

Yozma Drop-Down Funds (2) FUND CAPITAL MANAGED ($MM) Original size Today Eurofund 20 90 Gemini 25 350 Inventech 20 40 JPV 20 580 Medica 20 70 Nitzanim-Concord 20 280 Polaris 20 645 Star 20 400 VERTEX 20 250 Walden 25 175 210 2,880 © Yozma Proprietary

The Government as a Catalyst Intervention Establishment of Yozma Market Failure $100M Investment 1993 Government Exits Yozma Privatized 1997 Problem Solved Return>$100M © Yozma Proprietary

Countries Following the Yozma Example Czechoslovakia Taiwan Denmark Australia New Zealand Korea South Africa © Yozma Proprietary

2nd Wave: Yozma Funds Raise Continuation Funds Venture Capital Raised 3rd Wave 2nd Wave: Yozma Funds Raise Continuation Funds 1st Wave: Establishment of Yozma Source: IVC Research Center

Total Amount Raised by Israeli High-Tech Companies ($M) 3,092 1,985 1,012 600 430 Source: IVC Research Center

Capital Raised by Technological Sector – 2001 and 2000 Source: IVC Research Center

Israel's high Tech Cluster of the 90s 00 90 80 Number of SUs: ~ 3000 ~ 300 ~ 150 Number of VC Companies: ~ 100 2 Accumulated No of IPOs (hi tech): ~ 130 9 1 Accumulated VC-backed IPOs: ~ 70 3 1 % Foreign Sources in SU funding 67% NA NA תכונות של האשכול % IT Exports in Manufacturing Exports 45 . 7% ~ 33% ~ 20%

Capital Raised in US Public Offerings of Israeli Companies (94’-01’) Source: IVC Research Center

M&As of Israeli Technology Companies and Foreign Strategic Partners: 1996 $0.6B 1997 $0.8B 1998 $1.8B 1999 $2.9B 2000 $10.5B 2001 $0.6B Source: IVC Research Center

Total Amount Invested ($m) : 812 No. of Deals : 656 Israeli VC Activity in 2001 Total Amount Invested ($m) : 812 No. of Deals : 656 No. of Companies : 438 Average Amount Invested ($m) : 1.2 Source: IVC Research Center

Israel VC Industry - Trends & Challenges Co-opetition Volatile Capital Markets Decrease in International Investments Maintaining Existing Portfolios Difficulties in Raising Capital Focus on Future Technologies Government Involvement

Thank You © Yozma Proprietary

Average Leading VC Size ($M) VC firms development over the years 1993-5 1996-8 1999-01 Average Leading VC Size ($M) 20 80 100-200 No. of Venture Firms 15 40 60

Share of Capital Invested by Israeli VCs (Financing rounds in which at Least One Israeli VC Participated) Other Entities Israeli VCs Source: IVC Research Center

First and Follow-on Investments by Quarter Source: IVC Research Center

Venture Capitalists – the Truth Revealed (part 1) SEED Hard & Fascinating First & Second Rounds Proof of Concept/Prototype/Beta (Good Chance) Third Round Product/Initial Sales (Attractive) Pre-IPO Profitability, Expansion (Love it) © Yozma Proprietary

Venture Capitalists – the Truth Revealed (part 2) Hate Risk Management more than Technology High return on investment (IRR>50%, X10 in 5 years) Innovation, not revolution Don’t want to control or micro-manage the company No time, but always open for new ideas As much details as possible Usually long and tired investment process © Yozma Proprietary

Korea Venture Fund Korean Government © Yozma Proprietary