April 2018 - Monthly Insights - Israeli Venture Capital
THE STATE OF ISRAEL CONTINUES TO SUPPORT EARLY STAGE INVESTMENTS
One of the key contributors to the creation and successes of the Israeli venture capital ecosystem has been the long-term support of the Israeli government. This has come mainly through the work of the Israel Innovation Authority and its related entities. Official support by the Israeli government for technological innovation started in the late 1960’s through the creation of the Office of the Chief Scientist at the Ministry of Economy which was charged with the task of fostering the development of industrial R&D within the State of Israel. Since then, the Israeli government has invested billions of dollars to support these goals across various platforms and industries. Included among the types of support are direct financing to startups companies (the Tnufa program), supplemental financing to startups together with private capital (the Young Companies Track and the Incubator Program) and direct support to the venture capital industry (the Yozma Program). Below are a few specific examples of how the State of Israel uses these programs to enhance innovation and support the venture capital ecosystem in Israel. The Global Enterprise Collaboration Program While most Israeli startups exhibit strong R&D capabilities, the commercialization of newly developed products remains a significant challenge for any startup. This is especially true for Israeli startups given their geographic isolation from their go-to-markets. In contrast, multinational corporations have strong expertise in the commercialization, manufacturing and marketing of new technologies. The goal of the Global Enterprise Collaboration Program is to enhance collaboration between Israeli startups and multinational corporations, by means of joint ventures (“JV”) between parties with common interests. The Israel Innovation Authority provides financing to the JV equal to 20%-50% of the R&D budget. In addition, the multinationals provide in-kind resources and support to the Israeli company in the form of consultation and services. As part of the JV, the companies enter into an agreement regarding the ownership and licensing of intellectual property developed during the JV. Such intellectual property may be solely owned by the Israeli company or jointly owned by the Israeli company and the multinational. The Israeli company may also provide the multinational with a non-exclusive license to the intellectual property. The program features many leading multinationals including Infosys, DuPont, Microsoft, P&G, Cisco, General Electric, IBM and Intel. The Technological Incubator Program In an effort to support the early-stage development of startups and increase the involvement of multinationals, the Israel Innovation Authority operates the Technological Incubator Program. As part of the program, Israeli companies enter an incubator for a period of between 18- 24 months, during which they receive funding of between $520,000 and $770,000. The Israel Innovation Authority provides up to 85% of the approved R&D budget of the company, while the incubator itself must invest the balance. This entails, a financing ratio of 6:1 ; for every $1 invested by the incubator, the State of Israel invests $6 dollars – the most lucrative governmental support program in the world. In exchange for its investment, the program mandates that each incubator receive between 20%-50% of the equity of each incubator company. In order to ensure that the local economy benefits from any success governmental-backed companies achieve, the State of Israel has attached several “strings” to its funding. For instance, each project is obliged to repay the government-provided funds to the State of Israel in the form of royalties from income. Additionally, there are limitations on the transfer of technology outside of Israel. Given the importance of foreign investment, these restrictions are typically lifted in exchange for increased repayments to the Israel Innovation Authority. In recent times, the interest of multinationals in obtaining a license to establish such incubators has been overwhelming, including participation by companies such as IBM, Medtronic, Boston Scientific, Nielsen and Johnson & Johnson. The program has also produced several successful exits, such at CyActive, acquired by PayPal for about $60 million after a year of incubation and Traffix, acquired by F5 Networks for $130 million. The Yozma Program Started in 1993, the Yozma program was the first governmental program aimed at providing support to Israeli venture capital funds. Through the program, the State of Israel invested around $100 million in 10 different ventures capital funds, after which the fund would admit the State of Israel as a limited partner or pay back the investment plus interest. The State of Israel also allowed private investors to acquire its stake in the funds after five years under accommodating terms. As of 2004 (about 12 years following the launch of the project), the underlying “Yozma” funds invested in 153 Israeli startup companies, 30 of which were acquired, 26 became public and 49 remained private. Overall, 103 of the 153 companies remained active – a very high hit ratio. The program was later replicated in several other countries including, Ireland, Korea and Hungary, albeit with limited success. Overall, the Israeli government remains a key pillar of the success story of Israeli venture capital and we believe that its continued support will be pivotal in the years to come as the country solidifies its role as a leading global high tech hub.
NOTABLE INVESTMENT ROUNDS
Pagaya, a Viola Ventures portfolio company, secured a debt fundraising of $75 million from Citi Bank designated for the launch of the Pagaya Opportunities lending platform. Pagaya is a peer-to-peer lending platform leveraging big data analytics.
Luminate Security, secured its seed and series A funding for $14 million from Aleph VC and U.S. Venture Partners. Luminate provides a SaaS based platform for secured access to application and cloud services within the working environment.
Solebit, a Glilot Capital Partners portfolio company, secured its series A funding for $11 million from Clear Sky and Glilot Capital Partners. Solebit provides a fast and cost-effective approach for the identification and prevention of zero-day malware and unknown threats.
KLA-Tencor Corporation (NASDAQ: KLAC), a U.S. based company in the field of process control for semiconductors, acquired Orbotech (NASDAQ: ORBK), a provider of process innovation technologies, solutions and equipment for
Cyberark (NASDAQ: CYBR), an Israeli cyber security company, acquired Vaultive, a developer of cyber security solutions for cloud infrastructure.
RECOMMENDED VENTURE CAPITAL READS
Spotify CEO: 'Going public has never been about the pomp and circumstance' [Pitchbook]
The 20 most valuable VC-backed companies in the US [Pitchbook]
The Young and Brash of Tech Grow a Bit Older, and Wiser [New York Times]
Private Equity's Money Problem [Bloomberg]