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Start-up Nation

stephenrozenStephen Rozen tells us how Israel has invested in supporting start-ups and the positive returns this has delivered

 

Much has been said of Israeli innovation and entrepreneurship. The Israeli Ministry of Economy defines it as a key catalyst to Israel's growth - especially in international markets.

In order to support this important sector, the Israeli Ministry of Economy's Office of the Chief Scientist (OCS) administers several programmes that provide funding to technology ventures in the private market. One of these programmes is the Technology Incubator Program.

The purpose of the Technology Incubator Program is to promote innovative, early-stage technology entrepreneurship, which due to the high-risk involved, experience difficulties securing private financing. The programme also furthers ancillary purposes, such as promoting investments in peripheral areas of Israel and driving research and development in a few specific fields deemed to be of a higher R&D priority.

The programme was founded in the early 1990's in order to help absorb the influx of hundreds of thousands of immigrants from the former Soviet Union (many of them educated and skilled) that arrived after the fall of the Iron Curtain. The Israeli Government, by way of the OCS, has entered into a franchise with numerous venture capitalists to operate over 20 incubators. These incubators specialise in diverse fields, from medical devices and pharma to new media, from ICT and cyber-security to cleantech and life sciences. The incubators are located in all regions of Israel, from the pastoral Galilee in the North to the Arava desert in the South. At any given time, there are roughly 200 projects in the incubator programme, with an average of 80 new projects being incubated every year.

The incubators are, essentially, the pipeline to significant amounts of governmental financing for Israeli start-ups in dire need of funding. Over 1,800 projects have been supported during the course of the programme's two decades. Over the years, these projects have received, in the aggregate, more than $690m.

A project is accepted into the technology incubator programme after receiving specific OCS approval. Such approval entails an in-depth examination of the proposed project and each project must submit an R&D plan. Such a plan must focus on generating knowledge, a method or a process which results in the development of a new product or improves an existing product, process or method, in each case - with commercialisation potential.

The incubation period of each project typically lasts between 18 and 24 months, during which it receives funding in an amount that ranges between NIS 2m and NIS 3.5m (approximately $555k to $970k, at current exchange rates). The level of the funding depends on the field of the project and the physical location of the incubator under which it participates in the programme. A select few projects will be granted OCS approval to extend their incubation period by an additional year, which is typically coupled with an additional NIS 1m.

The programme has singled out certain fields as those in which R&D investments are preferred. Therefore, projects in the fields of cyber-security, medical devices, integrated medical projects and biotechnology receive higher levels of funding.

Projects incubated in peripheral incubators (outside the main business hubs of Tel Aviv, Jerusalem and Haifa) also receive increased levels of funding, as part of the government's effort to encourage the growth of the local economy of these outlying areas. There is even an incubator, located in Nazareth, that focuses on investing in projects founded by Israeli-Arabs.

As part of the approval process, each project submits to the OCS an operational budget for the course of the incubation period. If approved, the OCS provides funding for 85 percent of the budget. Funding is provided in instalments to each project over the course of its incubation period. The incubator itself must invest the balance 15 percent of such operational budget and must also provide each project with business development and marketing services, office space and infrastructure and various other services.

In exchange for its investment and support, the programme mandates that each incubator receives between 30 - 50 percent of the equity of the company formed for the incubator project. This leaves the founders with between 50 - 70 percent of their project's equity.

In order to ensure that the local economy will benefit from the long-term successes of the incubated companies, the State of Israel has attached several ‘strings’ to its funding. First, each incubator project is obligated to repay the government-provided funds back to the State of Israel, by way of royalties. Generally, royalty payments are made at the rate of between three and six percent of the income generated from the products or services developed by the incubator project. Additionally, there are limitations on the transfer, outside of Israel, of know-how resulting from the research and development conducted by the OCS-funded projects. Any products resulting from such must generally be manufactured inside Israel. However, recognising the importance of foreign investments and the challenges of globalisation, these restrictions will typically be lifted in exchange for increased repayments to the OCS. The technology incubator programme has provided crucial funding for many projects that otherwise would have had slim chances at getting off the ground. At the same time it is an amazing deal for the incubators - who receive equity in the projects, mainly on account of government funds.

The success has been phenomenal. Of the incubator projects, 65 percent have managed to raise follow-on investments, of over $3bn in total! This amounts to more than $5 for each $1 that the government has invested in the programme.

Furthermore, many of the projects have managed to provide an amazing ROI to the local economy. Protalix Biotherapeutics, for example, had three employees when it was founded and entered the incubator program in 1994. Now it has more than 240 employees. Another example is Traffix Systems, which had only one employee when it was founded in 2006. Following its acquisition by F5 Networks in 2012 for over (according to the OCS) $100m, it now has over 100 employees.

There is no doubt that the incubator programme is one of the key engines that has turned Israel into the ‘Start-Up Nation’.

 

The Time is now

In conversation with Uri Weinheber, CEO of The Time Innovations on the value and success of their incubation Programme

 

Can you give me a quick overview of The Time?

The Time was founded in mid-2009, when its current shareholders bought the organisational platform - including its government franchise - from its previous owners. Our name is an acronym for our fields of focus - Telecom, Internet, Media and Entertainment. We have been making investments at a rate of ten OCS-backed investments per year. As a result, we were named ‘Incubator of the Year’ by the Minister of Economy in 2010, 2011 and 2012.

 

How does The Time stand out from other incubators?

The Time actually makes equity investments in the projects that it incubates. This is, of course, in addition to providing the slew of services that other incubators typically provide. Participation in the inherent risk that a start-up venture entails which makes us true partners with the founders and ensures our dedication to the projects. You simply cannot reach this level of commitment if you are not an investor.

Essentially, we put our money where our mouth is. Unlike the accelerators set-up in Israel by the big multinationals, which focus on identifying technology for the sponsoring company, we are interested in the projects themselves, succeeding as independent companies. I think that one of the defining aspects of how we do business is that we are not looking for quick exits. The projects that interest us the most are the ones that have strong business models with potential for long-term success. We will not invest in a company just because it is the latest hype or buzz. We are looking for companies that have the potential to create long-term value.

 

What added-value does The Time provide?

We bring with us vast expertise in our focus areas: telecom, internet, media and entertainment. This allows us to effectively operate as day-to-day partners, not distant consultants or passive members of the board. We help build the strategy and the 'go-to-market' plan, and position the companies for future fund-raising. While it is the CEO of each project who leads the company, we are here to help avoid mistakes and find the short-cuts. Our ten yearly investments has led us to about 35 projects that are currently active. This also provides for an ecosystem. The founders meet each other, consult with each other and some even join forces. It makes things much more efficient than they could ever be if they were not in our incubator. We see this happening on a day-to-day basis.

 

What do you view as being the strong points of the technology incubator programme?

Leveraging state funds is one of the strongest points of the programme. It allows for the creation of a lot of projects which otherwise would not be possible. The state funding also reduces our level of risk in any particular company, so a lot more money can go to companies that are still in their seed stage. The result is that many new companies appear on the Israeli hi-tech scene each and every year. This has an amazing positive effect on the Israeli hi-tech ecosystem as a whole. It creates a flow of companies that reach more advanced stages of development, at which point they are sufficiently attractive for private investors that will be willing to make an investment.

 

What are the biggest challenges that a project company faces once it has finished its incubation period?

Like many incubated business, most of the companies reach the end of their incubation period with a product or service. The main challenge is in showing the market interest. The company is not necessarily expected to generate actual sales, but it does have to be able to demonstrate that the market responds well to the product or service. If this can be achieved, then it will be less difficult for the project to continue beyond its incubation period; it will be easier to raise additional funds, to validate the business plan and to find additional business partners.

 

Quick Talk

In conversation with Yossi Smoler, Manager, Technology Incubators Program, Israeli Ministry of Economy, Office of the Chief Scientist

 

What do you view as the strong points of the Technology Incubators Program?

Our programme is unique in that there is effective and massive government involvement. A significant portion of the budget of each new project is granted by the government. This results in the government taking most of the risk. Our technological incubators are privatelyheld companies that operate for profit and each one of them has a high quality and experienced management team. The shareholders of these incubators are actively involved with the ongoing activities of their incubator and provide significant added value to the project companies.

 

What makes an incubator successful?

The three most important factors are the quality and scope of its deal flow, the level of its mentoring and how successful it is in helping its incubated projects achieve commercialisation and follow-on investments.

 

What are the biggest challenges of the Technology Incubators Program?

Naturally, securing the state budget for the programme is the most challenging matter. Beyond that, we are constantly balancing the interests of the incubators and the founders with the responsibility that comes with the utilisation of public funding - which includes trying to find the right balance between the governmental control processes and allowing, without too much bureaucracy, the projects sufficient freedom to operate. We are constantly looking for ways to make the programmes more attractive to both the founders of projects and the incubators themselves.

 

In what fashion do you think the Technology Incubators Program has contributed most to the Israeli economy?

We believe that the programme has created start-ups that never would have existed otherwise. In fact, 70 percent of the Israeli life sciences field is comprised of companies that were born in the incubator programme. More than 1,800 new start-up companies were established in the incubators since its establishment. No doubt, one of the most significant contributions of the programme has been the investment of over $3.5bn in companies that have participated in the programme, compared to the $690m that the government invested in those companies. Additionally, the programme encourages innovation and entrepreneurship and enables the development and training of professional manpower that later serve as the backbone of the Israeli hi-tech industry.
Published on 21-10-2013 10:51 by David Tee. 801 page views

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