VC, New Technology, and Business Development Dafna Schwartz Ben-Gurion University, Israel [email_address] Regional Economies in a Globalising World Enhancing Intellectual Capacity and Innovation Friday 21 November 2008, Cardiff University
Government intervention can be effective in overcoming market failure by supporting the formation of a VC industry
However, this policy may have an unintentional negative side effect in terms of increasing regional inequality
The reason – the special role of the venture investors in the development of the start-ups
Therefore, a specific public policy for the spatial distribution of such activities should be considered.
The Objective: To analyze the Israeli experience
Israel has adopted a policy of supporting the formation of the VC industry
The emergence of the VC industry in Israel is considered to be the most successful example of diffusion of the Silicon Valley model of VC outside of North America (Avnimelech & Teubal, 2004a, b; Bresnahan et al., 2001; Carmell & de Fontaenet, 2004).
Improve the quality of the firm in which they invest
Improve accessibility to resources (own and external) – financial and other resources (Gompers & Lerner, 1999, 2001, 2005; Sapienza, 1992; Elango et al . , 1995; Sapienza et al . , 1995; Jain, 1999; Van Osnabrugge & Robinson, 2000; Brierly 2001; Allen, 2002; Brancomb & Auerswald, 2001; Lindstrom & Olofsson, 2001; Helman & Puri, 2002a, b; Wang et al . 2002; Allen, 2003; Riquelme & Watson, 2002 ).
Main factors in the location of start-ups financed by venture investors
They are part of high-tech - therefore have a tendency to cluster, primarily around metropolitan locations and in the satellite urban ring around the main metropolitan area (Bar-El &. Parr, 2003; Capello, 2002; Cooke & Schwartz, 2003; Cooke 2004, Cooke 2005, Cooke & Schwartz, 2008, Frenkel, 2001; Frenkel & Shefer, 2001; Schwartz, 2006; Schwartz& Bar-El, 2007, Mason & Harrison, 2002).
In addition, their location depends on the venture investors: capital provider, entrepreneurs and managers
Two main considerations in the location of venture investments
Capital is highly mobile
Entrepreneurship & management – much lower mobility
A partner of a leading Israeli financial institution with leading foreign venture investors
The government's share is maximum 40%
Option to buy out the government's share at a pre-determined price over a period of 5 years
In addition - invest directly in start-ups.
The Yozma program proved to be extremely successful
10 VC funds were formed
Major international venture investors were attracted: USA, Germany, Japan, Netherlands, Singapore.
9 funds bought out the government's share
15 direct investments - 9 enjoyed successful exits – IPOs or M&A
Catalyst for the development of the VC industry: (VC funds and others) Capital Raised by Israeli VC Funds by Year
Catalyst for the development of young technology firms – start-ups (SU)
Exits: IPO and M&A Capital Raised in IPOs of Israeli High-Tech Companies M&As of Israeli High-Tech Companies
The location pattern of SU backed by venture investors (Schwartz & Bar-El 2007)
We analyzed the location pattern of SUs in comparison to that of high-tech activities
Our hypothesis: This policy has an unintentional negative side effect in terms of regional inequality
Start-ups backed by VC – heavier concentration in comaprison with high tech activities. Tend to concentrate in the metropolitan urban center of the country in specific focal locations, leaving the peripheral districts far behind .
When making a location decision, every firm considers the macro-regional factors and its micro-business specific needs
Start-ups are high-tech activities, and are influenced by the same macro-regional factors that lead to concentration
The location considerations of start ups are influenced also by their investors – since their role is not merely a financial capital provider: they also play an important role in entrepreneurship and management of the start-ups