Financing High-Tech: Lessons Financing High-Tech: Lessons from the Israeli Innovation from the Israeli Innovation

SystemSystemVittorio Modena

The University of Pavia

and E.M. Venturepolicy

Prepared for the World Bank seminar held in Riga on June 8-9, 2004

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Presentation OutlinePresentation 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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

General EvolutionGeneral 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)

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 1 - Academia and Phase 1 - Academia and Scientific TraditionsScientific 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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 2 –(1969-1990) Phase 2 –(1969-1990) (1/2)(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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 2 –(1969-1990) Phase 2 –(1969-1990) (2/2)(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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 3 – (1990-2000) Main Phase 3 – (1990-2000) Main Characteristics Characteristics

ICT market growing very strongly worldwide

Progresses in the peace processAgressive public/private partnership

programmes

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 1,2,3-ComparisonPhase 1,2,3-ComparisonYear 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 AvnimelechSource: Teubal and Avnimelech

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 3 – Public ProgrammesPhase 3 – Public Programmes

1990-The Technological Incubators programme

1992-3- Yozma and Inbal (Venture Capital)Magnet (Universities-Firms links)Regular funding of R&D (R&D in Firms)

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Part II – The Yozma and Part II – The Yozma and Technological Incubators Technological Incubators

ProgrammesProgrammes

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 3 – The Yozma Phase 3 – The Yozma Programme Programme (or How to create a Venture Capital (or How to create a Venture Capital

Industry from Scratch)Industry from Scratch)

Market FailureMarket Failure Gov’t InterventionGov’t Intervention

EstablishementEstablishementof Yozmaof Yozma

Creation of 10 fundsCreation of 10 fundsGov’t exitGov’t exit

19931993

19971997

$100M Investment$100M Investment

19901990

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Phase 3 – The Yozma Phase 3 – The Yozma Programme Programme (1/3)(1/3)

Yozma= a public Fund of Funds’

Start-up fund(private)

40%

Company Company Company

Private Private investorsinvestors

60%

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

The Yozma Programme- 10 The Yozma Programme- 10 Drop-Down Funds Attracting Drop-Down Funds Attracting

Foreign Investors Foreign Investors (2/3)(2/3)

Fund Fund Foreign PartnersForeign PartnersEurofundEurofund Daimler Benz, DEG (DE)Daimler Benz, DEG (DE)GeminiGemini AdventAdventInventechInventech Van Leer Group (NL)Van Leer Group (NL)JPVJPV OxtonOxtonMedicaMedica MVP (USA)MVP (USA)Nitzanim-ConcordNitzanim-Concord AVX, Kyocera (Korea)AVX, Kyocera (Korea)PolarisPolaris CMS (USA)CMS (USA)StarStar TVM (DE) & Singapore techTVM (DE) & Singapore techVertexVertex Vertex int’l fundsVertex int’l fundsWaldenWalden WaldenWalden

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

The Yozma Baby Funds The Yozma Baby Funds GrowingGrowing…(3/3)…(3/3)

Fund Fund Original Size (M$) Present Size (M$)Original Size (M$) Present Size (M$)EurofundEurofund 2020 9090GeminiGemini 2525 350350InventechInventech 2020 4040JPVJPV 2020 580580MedicaMedica 2020 7070Nitzanim-ConNitzanim-Con 2020 280280PolarisPolaris 2020 645645StarStar 2020 400400VertexVertex 2020 250250WaldenWalden 2525 175175TOTALTOTAL 210210 28802880

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

The Technological Incubators ProgrammeThe Technological Incubators Programme

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

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

An An EEarly arly SStage tage BBusiness-planusiness-plan

Source:PridorSource:Pridor

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

The Technological Incubators ProgrammeThe Technological Incubators Programme

•Started 1991Started 1991•23 incubators23 incubators•8 start-ups each8 start-ups each•30 M$ budget every year30 M$ budget every year•Geographically distributedGeographically distributed•Non-profit entities now being privatisedNon-profit entities now being privatised•Number of graduates: 735 (end 2001)Number of graduates: 735 (end 2001)•Success rate: around 52%Success rate: around 52%

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Evolution of the Public/Private Investment in Incubated Evolution of the Public/Private Investment in Incubated ProjectsProjects

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Contribution to Sectorial Contribution to Sectorial VarietyVariety

21,6%

7,8%

21,2%

10,7%

24,0%

6,1%

14,5%

67,8%

8,7%7,1%

10,1%

0,0%0%

10%

20%

30%

40%

50%

60%

70%

Pe

rce

nta

ge

of

firm

s

Sector

Incubators

General

Source:IFISE final reportSource:IFISE final report

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Part III – Exportable LessonsPart III – Exportable Lessons(mainly from the IFISE (mainly from the IFISE

Project)Project)

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Seed (and Pre-seed) Seed (and Pre-seed) vs. Start-up Capitalvs. 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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Research-Intensive vs. Research-Intensive vs. “Generally Innovative” Firms“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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Sectorial NeutralitySectorial 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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Passive Role of GovernmentPassive 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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Expert Foreign Partner Expert Foreign Partner InvolvementInvolvement

For expertise, networking and reputation. Encouraging/requiring such partnerships is

a way to help the industry work.

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Deal Flow: a “Critical Mass” Deal Flow: a “Critical Mass” ProblemProblem

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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Example: Italian high-tech Example: Italian high-tech potential vs. Structural fundspotential vs. Structural funds

Figure 4.1: Inventors in all high-tech sectors per Local Labour System Source: Univeristy of Pavia elaboration on EPO data.

1 - 6 7 - 21 22 - 44 45 - 84 85 - 229 230 - 826

Number of Inventors

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Part IV – The ESTER ProjectPart IV – The ESTER Project

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

The ESTER Project The ESTER Project (1/2)(1/2)

Objectives1. Planning for effective sources of seed and

venture capital in Estonia, Latvia and the Slovak Republic

2. Submission of formal proposals for the launch of new programmes to the relevant authorities in the three countries and the EC

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

The ESTER Project The ESTER Project (2/2)(2/2)

Basic Methodology1. Inspiration from the Yozma and Technological

Incubators programmes in Israel2. Thorough study of the Innovation system in

Estonia, Latvia and Slovakia3. Thorough study of EC regulations4. Planning with world experts5. Submission of proposals to the relevant

authorities

V. Modena (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Latvia Venture Capital StrategyLatvia 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 (vmodena@libero.it) - World Bank Conference - Riga, June 8-9th, 2004

Contacts/referencesContacts/references

Email: vmodena@libero.it

IFISE Project http://ifise.unipv.it

ESTER Project http://www.unipv.it/ester/index.html

Company http://www.venturepolicy.com