1. The Israeli VC Industry: Emergence, Operation and Impact

2. Emergence …. Clearly, Yozma played a significant role in the development of the Israeli VC Industry. Yozma acted as main catalyst in creating the VC industry in Israel – the supply side However … The success of Yozma was much depended on the existence of other enabling factors - mainly the demand size.

3. Main Objectives Identifying the background conditions for Yozma success Learning some lessons on policy design processes. Implications for Italy

4. Contents Of Presentation Part A: Background- Phases in the Israeli high tech industry and Innovation Technology Policy Part B: Phases in the Emergence and growth of the Israeli VC industry Part C: Policy Implications for Italy Part D – The Israeli case of Biotechnology

5. 1.R&D penetration period: 60-89 2.Silicon Valley period: 90-00 Part A: Phases in the Israeli High Tech Industry and Innovation Technology Policy:

6. 50’s-60’s: emergence of an innovative agriculture sector. After 67’: create a domestic capability for supplying advanced military equipment (this required also high level Military R&D). Military R&D cooperation with US, Germany and France - transfer of technology from those countries to Israel’s military industry. R&D Penetration Period 1960-1970

7. 70’s-80’s: dominance of strong military industry 70’s-80’s: first foreign multinational companies establish R&D centers in Israel: Motorola (1964), IBM (1972), Intel (1974) and National Semiconductors (1978). In 1972, Elscint (Hi-Tech company) became the first Israeli company to be traded on an US stock exchange. R&D Penetration Period 1970-1980

8. Mid 80s: re-structuring of the military industries Share of high-tech industries in total manufacturing output (and exports) increased between 1968 and 1983 from 6 % (5%) to 24% (28%). R&D Penetration Period 1980-1990

9. R&D Penetration Period 1980-1990 – Cont. High Growth Rate of industrial Civilian R&D - from 26 M$ real to 347 M$ between 1970 and Numbers of Skilled employees in Manufacturing grew from 3400 in 1968 to over 20000 in 1987; Skill intensity increased from 1.3 % to 5.8%

10. Silicon Valley Period 1990-2000 The breakdown of the Soviet Union, which brought a very large number of immigrant Scientists and Engineers to Israel. Liberalization process which generate a better environment for doing business in Israel. Beginnings of Globalization of US capital markets with respect to SU

11. Intermediate Conclusions (1): The creation of the high-tech industry (the “ demand side ” ) was a result of: – Changes in national priorities – Institutional changes – Global Economical changes – Availability of skilled labor

12. Part B: Innovation & Technology Policy

13. Innovation & Technology Policy 1950-1970 50’s-60’s: Promotion of capital investments in Industry. This stimulated the establishment of R&D performing MNE in Israel during the 70s & 80s No policy supporting Industrial R&D till 1969.

14. Innovation & Technology Policy 1970-1980 1969-70: Establishment of the Office of the Chief Scientist (OCS) R&D incentives since 1970 induced a high rate of growth of business sector R&D and a strong process of learning about innovation

15. Innovation & Technology Policy 1980-1990 1977 Implementation of BIRDF Till the 90s, more than 90 % of R&D subsidies to companies still came through the regular “R&D Industrial fund”(‘backbone’ program)

16. New ITP Programs Other OCS support programs– Marketing, Innovation in SMEs, Export research, etc. Technology Incubator program – supporting startup companies in very early stages.. INBAL program – gives guarantee to public VC companies on the down side. MAGNET program – Support generic R&D. …… Yozma program (1993-97)

17. Influences of the R&D Policies Significant growth in R&D expenditures Rapid growth in employment of Engineers & Scientists in the Industry Strong ‘Learning to Innovate’ process Creation of a identifiable civilian oriented High Tech industry High growth rate in high tech output and exports Rapid increase in the share of High Tech in Manufacturing output and exports

18. Table 1: OCS R&D Grants (Nominal M$) Year Total Grants Regular R&D support MAGNET Technology Incubators MiscellaneousRoyalties 1990136NA00 1991179NA01.8 1992199NA510NA 1993231NA1018NA 1994316NA1023NA 199534628615311364 19963482763630591 1997397303533011121

19. Table 2: IT High Tech Manufacturing Industry Year Total Sales (000$) Exports (000$)Employees Sale per Employee (000$) 1991 3,6182,28333,000109 1992 3,9962,66034,000117 1993 4,6103,20036,500126 1994 5,2003,75038,000137 1995 5,8904,30040,000147 1996 6,5004,88042,000155 1997 7,2005,70043,000166 1998 8,0306,55044,700180 1999 8,5807,13045,800187 2000 12,50011,00053,800232

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22. Intermediate Conclusion (2): The different support schemes of the OCS and the Incubator programs have created the conditions for civilian R&D oriented industries and for entrepreneurship. These conditions enabled the emergence of the VC industry

23. Phases in the Emergence and Growth of the Israeli VC Industry

24. Phase1 (1993-1996) Creation-Emergence and Learning (1) Dominated by Yozma funds. Very low SU company valuations. Small funds (~$20M). Small amount invested in each startup and small numbers of investments. Large share of co-investment with other Israeli VCs Little seed investments and no specialization in areas.

25. Phase1 (1993-1996) Creation-Emergence and Learning (2) Foreign partners had important role and operational role. Cumulative learning Very little understanding of the market and the VC business - Very small added value. Goal of VCs to make fast exit through M&A (in low valuations - $10M-$70M).

26. Phase2 (1996-1998)- Growth (1) First round of private VC funds not related to Yozma still low valuation in private investment, compared to US startups. medium sized funds (~$100M). Increase in the amount invested in each startup and fewer portfolio companies. Increase in seed investments and beginning of specialization in areas. Foreign partners had less important, non-operational roles.

27. Phase3 (1999-2000) - Maturity (1) Many VC companies and large variety of VC company types. Normal valuation in private placements, compared to US startups. Most VCs specialized in certain areas increase in seed investments. Increase in VCs added value capabilities.

28. Phase3 (1999-2000) – Maturity (2) Increase in co-investment with US VCs. Goal of VCs to create successful independent companies or very high valuation Exits. Israeli startup companies becoming less dependent on Israeli VC’s added value

29. The Israeli VC “ Case-Study ” suggests That: Success of targeted policies is much depend on: – Clearly analyzing the failures – Identifying the required enabling elements –Create the condition for these elements to exist Timing is Crucial Carrying on-going learning process is important

30. This may require: Coordination with existing policies The implementation of new policies/schemes Institutional changes Political/Economical changes Cultural changes Etc.

31. The Emergence of VC industry was the Result of: High demand backed with strong R&D capabilities High entrepreneurial activity backed with public support schemes Many good investments opportunities Proper economical and political conditions … Targeted incentives for VCs (YOZMA)

32. Part C: The Israeli Biotechnology Study

33. The Israeli Biotechnology Market 160 companies (30% in therapeutics) 10 Public companies 4000 employees Market valuation: $3.5 billion Market capitalization: $2.7 billion Av. Growth in no. of companies: 14% Sales: $800 million (incl. the Copaxon) 75% of the companies employs less then 20

34. First IPOs in early 80 th The experience gained in IT is partly be relevant in Biotech Therefore, only 8 Israeli VCs are focused on Biotechnology Other financial tools have been developed during the 90th.

35. Other Financing Tools include: Public Incubators Private Incubators Corporation Biotech Funds TTOs ’ funds Angels New Incubator scheme

36. Israel Biotechnology Sector

37. Beer-Sheva 3% Jerusalem 22% Haifa 21% Rehovot 27% Tel-Aviv 19% Other 8% Israeli Biotechnology Companies by Location

38. Israeli Biotechnology Companies By Field of Technology

39. Typical Limitations of Bio- Pharmaceutical companies Complex regulation Research is complex, lengthy and costly Costly infrastructure is required carry out the research Marketing of new drugs is an extremely difficult task

40. Typical Business Model Strong Team of entrepreneurs Significant Innovative Idea Pre-Clinical Tests Phase I+ II Strategic PartnerLicensing/Selling of IPR Phase III NDA+Marketing Phase III After2-3 successful drugs Royalties IPO

41. Conclusion from the Israeli Biotech Study (1): Bio-Pharmaceutical function as R&D companies for long period of time without reaching an economical independency IPO is commonly not an “ Exit ” but rather part of R&D financing Complex networks are necessary for the firm development (IPR, Regulation issues, Financing, Infrastructure, CROs, Strategic Partners, etc.)

42. Conclusion from the Israeli Biotech Study (2): Proximity to academic institutes is important in order to ease the flow of knowledge VCs find difficulties in entering biotechnology. Thus relatively small no. of VCs are active. Policies directed towards Biotech can hardly be mixed with other regional development policies

43. Part C: Policy Implication For Italy

44. Implication for Italy The policy for promoting SU should focus on: Creating higher demand (increasing entrepreneurial activity) Extending and simplifying the support for R&D oriented firms Closing the information gap between potential entrepreneurs and VCs Strengthening of relations between universities and SU Institutional changes (especially in regards to technology transfer)

45. end

46. Yozma Program – Background Large number of ideas emerging from scientist and engineer from the defense industry and from immigrants from the former Soviet Union Acute Shortage of finance for startups (high demand for VC money). Awareness of importance of strengthening the management and marketing capabilities in the Hi-Tech sector. Realization the critical Market Failure in venture capital

47. Yozma Program – Objectives Creation of stable VC industry Ensuring minimum government intervention in the management. Creating fast learning process of local VCs

48. Yozma Program-Final Design Total government investment of $100M In each of Yozma funds the government invested 40% of the capital raised by the fund up to 8 M$. Each fund had a 5 years option to buy the government share at initial value plus interest. All management companies were Israeli entities which included partners from both Israeli and foreign financial institutions.

49. Conditions to become a Yozma Fund Investment only in technology startup companies. Raising a minimum of 12 M$ of private capital. The Management Company owned by a local group. Partners include strong local financial institution and a reputable foreign VCs/investors.

50. Yozma Program – Growth Most Yozma funds management companies has at least 2 additional funds. All but 2 of Yozma funds bought back the government share. The total sum managed recently by Yozma funds management companies is approximately $6B.

51. Yozma Program – Growth At least 8 out of 11 Yozma funds management companies are among the top 20 management companies in Israel (out of more than 100 VCs). Yozma program was a critical element in the amazing growth of the Israeli VC industry.

52. Yozma Funds and Their Leading Foreign Investors EurofundDaimler-Benz, DEG (Germany) GeminiAdvent (USA) InventechVan Leer Group (NL) JVP Oxton (US/Far East) MedicaMVP (USA) Nitzanim-ConcordAVX, Kyocera (Japan) PolarisCMS (USA) Star TVM (Germany) & Siemmens Vertex Vertex international WaldenWalden International (US)

53. Table 3: Israel's high Tech Cluster of the 90s 99/009080 Number of SU~3000~300~150 Number of VC Companies~10020 Funds Raised byVCs:M$3400~490 Capital Invested byVCs:M$1270~450 Accumulated No ofIPOs (hi tech):~13091 Accumulated VC-backedIPOs:~7031 % Foreign Sources in SU funding67%NA % IT Exports in Manufacturing Exports45.7%~33%~20% Mergers and Acquisitions: B$~10NA

54. Table 4: Capital Raised by the Israeli VC industry

55. Table 5: Capital invested in Israeli startups by Israeli and foreign VCs