Discussions about global innovation systems almost all include some reference to Israel and the strength of its directed approach to technology development, and for good reason. The speed at which Israel has built up a high performance innovation economy is one of the most widely admired feats in recent economic history.
In the span of three decades, the small Mediterranean country has bootstrapped one of the most competitive high-tech economies in the world. While this performance is often linked with the country’s tight military-technological ties, the antecedents are, in fact, far more varied than sometimes assumed. As a 2011 OECD Observer report notes, Israel has the highest gross expenditure on R&D, the largest number of non-North American companies listed on the NASDAQ and the highest level of venture capital as a share of GDP.[1] And Tel Aviv, a city of less than a half a million, hosts over 1,200 high tech companies.
A lynchpin in the country’s technological and economic progress was the establishment of the Israeli Technology Incubator Program in 1991 by the Office of the Chief Scientist (OCS). Between 1990 and 1993, 28 non-profit incubators were established throughout the country, usually in association with a university, municipality or large firm. Initially operated as public entities, over a dozen of these incubators have been transitioned into private management through the award of 8 year licensing agreements. Currently 24 incubators exist, housing approximately 180 companies at any one time.
According to the OCS, “the incubation term of a project in a technological incubator is approximately 2 years and the total budget for the two years term ranges between $ US 500,000 to $ US 800,000, depending on the field of activity of the project.” Incubators finance 15% of the total investment in supported companies. The balance is financed by a government grant that is only paid back upon success, in which case companies pay the government 3%-5% royalties on revenues generated, until the full amount of grant (plus interest) is paid back. In total, the government provides an estimated $46 million annually to participant companies.
Despite the presence of significant intellectual and technological capital, the incubators initially failed to attract private capital, so the OCS launched Yozma, a $100 million pool of funding distributed through 10 venture funds, and one direct investment vehicle. The fund was predicated on a 3:1 match whereby government funding flowed only if private, foreign and bank funding preceded it. The 10 funds were fully privatized in 1997 and by 2009 managed $3 billion in capital.
The scheme appears to have worked. Between 1991 and 2013, over 1,900 companies have been launched in the incubator system with an aggregate investment of 730 million USD. The sector diversity of incubated companies is approximately 40% medical device, 30% ICT, 15% cleantech, 10% biotech and pharma, and 5% in other fields such as machinery and materials. Of this pool of companies, 1,600 have survived the incubation period, and 60% of those graduated have raised private investment. The total cumulative private investment in graduated incubator companies has surpassed 4 billion USD. The OCS observes that this indicates a 5-6 times ratio between private and public investment.
As the model has evolved, the incubators have been progressively transitioned into private hands. Experienced private equity firms license the incubators and are tasked with providing ongoing investment and mentorship to the firms housed therein. Recent reports indicate that the incubation success rate, as measured by survival rates and the ability to attract follow on capital, have increased since the transition to private ownership (Wylie 2011).
Finally, a focus on attracting highly skilled immigrants appears to have made a significant impact on Israel’s startup ecosystem. In the 1990s, for example, Israel welcomed nearly 1 million ex-Soviet immigrants, including 82,000 engineers.[2] In fact, one out of every three Soviet immigrants was a scientist, engineer or technician. A 2002 review of 109 projects underway in the country’s system of incubators found that 33% of project founders were from the former USSR, second only to Israeli citizens (49%). Moreover, 84% of the initiators had either a Masters or PhD degree (63% have a PhD degree)[3]. A concerted focus on social integration through financially supported language classes also appears to have had an impact on settling highly skilled new immigrants into the country.
This post is a carveout from a broader study of global acceleration and incubation systems available here.
[1]Ilan Moss. 2011. Startup Nation: An Innovation Story. OECD Observer. Available at: http://www.oecdobserver.org/news/fullstory.php/aid/3546/Startup_nation:_An_innovation_story.html
[2] Ilan Moss. 2011. Startup Nation: An Innovation Story.
[3] Deniel Shefer and Amnon Frenkel. 2002. An Evaluation of the Israeli Technological Incubator Program and Its Projects. Available at: http://ifise.unipv.it/Download/final-draft3.pdf