The document summarizes Israel's experience with two policy instruments - the Yozma program and technological incubators program - that supported the development of its high-tech sector from 1969 to 2008. The Yozma program in 1991 leveraged government funds to create private venture capital funds, helping establish Israel's VC industry. Technological incubators established in 1991-1993 received public funds but also attracted $1.8 billion in private investments for incubated firms. Both programs enhanced Israel's tech cluster growth but had limitations. Venture capital focused on certain regions and technologies while incubators had low exit rates. However, incubators diversified investments more than venture capital. Overall the programs show synergies between different financing agents

1. High Tech Development Policy:
Israel’s Experience with two Policy
Instruments
Gil Avnimelech, Dafna Schwartz & Rafi Bar-El
School of Management
Ben Gurion University of the Negev
RSA Conference 2008 - April 15, 2008
Beer-Sheva, Israel
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2. Background
The development Israeli high-tech sectors
began during the mid 1960s
Till 2008 it followed three main phases of
development: building pre-conditions (during
the 70s and 80s), rapid growth (during the
90s), and post-emergence (since 2001)
The VC emergence was the main trigger of the
Israeli high-tech cluster takeover during the
1990s
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3. Phase 1a: 1969-1980
National strategic decision to develop defense R&D
capabilities and significant R&D activity in the BS
1. Extensive expansion of defense R&D industries
2. Creation of the OCS (1969) financing of R&D in
the business sector
First Israeli Electronic companies (Telrad, 1952; ECI
1961; Teldor, 1966; Elbit 1966)
First Greenfield investment of semiconductors MNE
(Motorula 1964; K&S 1969; IBM 1972; Intel 1974).
2 IPOs in NASDAQ (Scitex and Elbit)
No formal or informal VC activity; Very Few startups
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4. Phase 1b: 1981-1990
•
Continues increase in the supply of high-tech
employees; strengthening R&D capabilities; and
development of few large Israeli high-tech companies
First wave of Israeli ICT startups (less than 250)
Slow entry of ICT MNE (Freescale 1982; Lucent,
1986; BMC 1988, Microsoft 1989)
16 IPOs in NASDAQ and BIRD-F activity -
Establishing the links with the U.S. HT industry
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5. Triggers for Transition
• The global ICT revolution and economic growth
continued stream of technological opportunities
• Creation of the Israeli Software industry
• Restructuring of the defense R&D industries
• Stabilization and Liberalization processes in the
Israeli economy
• Significant increase in the OCS grants
Two targeted ITPs: the Yozma program and the
technological incubators program
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6. Takeover/Emergence Phase
A Cumulative growth of VC and startup
activities caused by the: initial triggers &
conditions, supportive environment, positive
feedbacks, and scale economics
Emergence of the VC industry
Transition of the cluster toward a startup-
intensive high-tech (ICT) cluster
A leading worldwide high tech cluster
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7. THE YOZMA PROGRAM
Objective: Creation of a VC ‘Industry’
• Government Investment 100M$ that leveraged
150M$ from private investors
• Created 1+10 private VC Funds
• Limited Partnership form of VC organization
• Upside incentives and planed privatization
Outcome: VC Industry emergence and
significant growth in the high tech cluster
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8. Israel’s VC Fundraising (M$): 1990-2000
2,800
2,100
1,400
700
0
1990 1992 1994 1996 1998 2000
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Source: IVC 2008

9. Startups foundation: 1991-2000
600
All New Startups
New VC Backed SU
450
300
372
208
150
152
117 119
85 87
73
0
1991 1993 1995 1997 1999
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Source: IVC 2008

10. Israeli high tech companies that were
targets in significant M&A deals 1991-2000
32
High Tech M&A deals
VC backed M&A deals
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16
8
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Source: IVC 2008

11. Initial Findings - I
The VC industry emergence had a significant
impact on the development of the Israeli high
tech cluster
However, there are significant drawbacks
associated with a high tech cluster linked to a
dominant VC industry
Concentration mainly in metropolis areas
Concentration on narrow technological fields
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12. Technological Incubator Program
28 Incubators were established during 1991-1993
4 of them were closedown
Its privatization began at 2001- almost finished
Its official objective were:
Supporting entrepreneurs at the earliest stages of
technological development
Encourage new export oriented industries
Create new employment opportunities for
technologically skilled persons (immigrants)
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13. Public vs. Private Investments in
Incubators’ Projects
Government incubators budget:
~$450M in 17 years (1991-2007)
Private Investments in Incubated
Firms: ~$1800M in 17 years
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Source: OCS Annual Report 2007

14. Summary of Projects 1991-2007
Total Projects
Currently Previous Tenants
1154 Incubated
973 (100%)
181
Non-Graduated Graduated Projects
Incubators 156 (16%) 817 (84%)
Total Exits
Valuation
~1.2B Stopped (Failed) Continuing
445 (46%) 372 (38%)
Exit (IPOs/M&As) Attracted Private No new Investment
44 (4.5%) Investment
264 (27%) 108 (11%)
FireSale M&As IPOs
14 (1.4%) 19 (2%) 11 (1.1%)
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15. Israeli Startups (1996-2005)
by Regions
Entire VC &
VC Backed Incubator
Population Incubator
North 16.8% 13.8% 35.5% 30.9%
Center 70.7% 79.9% 40.3% 56.5%
Jerusalem 7.3% 5.0% 7.5% 9.5%
South 5.2% 1.3% 16.7% 3.1%
Total 100% 100% 100% 100%
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16. Israeli Startups (1996-2005)
by technological Fields
Entire VC Backed Incubator VC & Inc
Population 836 864 136
ICT 56.5% 71.1% 18.8% 36.8%
Life Science 23.0% 19.7% 42.0% 44.6%
CleanTech 7.7% 1.9% 20.9% 6.6%
Other 12.8% 7.3% 18.3% 11.0%
Total 100% 100% 100% 100%
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17. Initial Findings - II
The technological incubators program enhanced
the development of the Israeli high tech cluster
However, the direct results of the incubators are
quite disappointing – very low exit rate
On the other hand, the incubators do not suffer
from the drawbacks of the VCs – they have more
diversified investment pattern (geographical and
technological)
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18. Startups Successful Exit
by Groups (1996-2005)
Entire VC &
VC Backed Incubator
Population Incubator
Total 9.5% 26.7% 4.9% 9.6%
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19. Conclusions
There are potential synergies between VC funds and
technological incubators
We suggest that in the post-emergence phase the
incubators’ objectives should be: 1) dealing with the
drawbacks related to VC investments; and 2)
improving the incubators’ operation & performances
The privatization process is a step in the right direction
More generally speaking, there are significant
synergies between different types of financing agent in
the VC market – we should seek to create more
diversified VC markets
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20. VC-Backed Startups: 1991-2007
800 400
All New Startups
New VC Backed SU
600 300
400 200
20% VC-Backed
50% VC-Backed
200 100
0 0
1991 1993 1995 1997 1999 2001 2003 2005 2007
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Sources: IVC 2008

21. Comparison of Success Rates of
Various VC Agents (1991-2000)
Exit Survival Closed
All Startups 13.5% 42.7% 43.8%
Incubators 3.8% 34.0% 61.5%
Self-Finance & OCS Grants 8.2% 49.1% 42.7%
Investment Companies 17.6% 48.8% 33.6%
Private Investors 22.4% 53.5% 24.1%
Domestic VC 22.6% 44.9% 32.5%
Foreign VC 26.8% 49.2% 24.0%
Corporate VC 33.9% 49.1% 17.0%
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22. Investment Stages of Different Types
of VC agent in Israel (1991-2000)
Seed Early Mid Late
All Investments 19% 35% 40% 6.0%
Incubators 100% 0% 0% 0%
Private Investors 41% 33% 23% 3%
Investment Companies 22% 36% 36% 6%
Domestic LP VC 20% 43% 33% 4%
Foreign LP VC 14% 36% 44% 6%
CVC 7% 28% 58% 7%
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23. Israeli Startups (1991-2000)
Technology Location Quotients
Comm Soft Internet MD BIO Other All
Incubators 0.13 0.34 0.20 1.69 1.44 2.14 1.00
R&D Grants 0.63 0.57 0.19 1.70 1.87 1.57 1.00
Academic Spinout 0.55 0.14 0.45 1.46 7.73 1.01 1.00
Investment Co. 1.33 1.06 0.89 0.93 1.22 0.76 1.00
Private Investors 1.17 1.10 1.09 1.00 1.18 0.74 1.00
Domestic LP VC 1.53 1.14 1.00 1.10 0.96 0.50 1.00
Foreign LP VC 1.87 1.31 0.89 0.78 0.84 0.31 1.00
CVC 1.66 1.36 0.55 0.64 0.40 0.68 1.00
All Startups 1.00 1.00 1.00 1.00 1.00 1.00 1.00
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24. Israeli Startups (1991-2000)
Geographical Location Quotients
Tel Aviv Haifa & North &
All
Metropolis Jerusalem South
Incubators 0.54 1.23 2.60 1.00
OCS R&D Grants 0.77 1.41 1.48 1.00
Academic Spinout 0.72 2.50 1.06 1.00
Investment Companies 1.06 1.02 0.53 1.00
Private Investors 1.13 0.94 0.53 1.00
Domestic LP VC 1.14 0.75 0.60 1.00
Foreign LP VC 1.21 0.68 0.36 1.00
CVC 1.18 0.67 0.31 1.00
All Startups 1.00 1.00 1.00 1.00
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