The Israeli VC Industry: Emergence, Operation and Impact
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The Israeli VC Industry: Emergence, Operation and Impact The Israeli VC Industry: Emergence, Operation and Impact Presentation Transcript

  • The Israeli VC Industry: Emergence, Operation and Impact Morris Teubal and Gil Avnimelech
  • Objectives
    • To Analyze the emergence of the Israeli VC industry in the 90’s: background, triggers, operation and growth.
    • To Analyze the emergence of the Israeli Hi-Tech industry.
    • To Analyze the role of R&D support policy with connection to the emergence of the Israeli Hi-Tech industry
  • Background – The Israeli Hi-tech Industry Till the 70’s
    • 50’s-60’s: emergence of innovative agriculture industry.
    • Early 60’s: Strong science academic departments in Israel.
    • After 67’: a major objective of the government was to generate relative independence from external supply of military equipment.
    • 60’s-70’s Academic links with Europe and US are being strength.
    • Military R&D cooperation with US, Germany and France – transfer of technology from those countries to the Israeli military industry.
  • Background – The Israeli Hi-tech Industry Till the Mid 80’s
    • 70’-80’s: many Israeli scientists emigrated to the Silicon Valley.
    •   70’s-80’s: dominance of strong military industry.
    •   70’s-80’s: first foreign multinational companies establish R&D centers in Israel including Motorola (1964), IBM (1972), Intel (1974) and National Semiconductors (1978).
    •   In 1972, Elscint (Hi-Tech company) became the first Israeli company to be traded on an US stock exchange.
  • Background – The Israeli Hi-tech Industry From the Mid 80’s
    • The reconstructive of the military industries (sharp reduce in military expenditures) – led to enhanced flow of engineers to civilian Hi-Tech industries.
    • A new trend of creating new Hi-Tech companies (startup companies) in the late 80’s, with high rate of failure.
  • Background – Government Policy Supporting R&D Till the 70’s
    • 50’s-60’s: add-hock solutions supporting academic and industrial R&D.
    • After 67’: strength of the military industries.
    • Military R&D cooperation with US, Germany and France – transfer of technology from those countries to the Israeli military industry.
    • The establishment of the Office of the Chief Scientist (OCS) and the creation of the “R&D Industrial Fund” program. This program, which is a direct neutral support for R&D in individual companies, is the backbone of Israel RD/Innovation/Technology Strategy. The OCS budget grew from $2.5M in 1969 to almost $400M in 1999.
  • Background – Government Policy Supporting R&D Till the 80’s
    • Incentives to capital investment in Israel (1964) convince the first foreign multinational companies establish R&D centers in Israel and later on manufactories including Motorola (1964), IBM (1972), Intel (1974) and National Semiconductors (1978).
  • Background – Government Policy Supporting R&D From Mid 80’s
    • The reconstructing of the military industries.
    • Successful macroeconomic stabilization program.
    • Liberalization process which generate a better environment for doing business in Israel.
    • the new R&D low of 1984; and increase in R&D incentives in the mid 80’s.
  • Triggers to the Emergence of the Israeli Silicon Wadi – Global Environment Triggers.
    • The global growth of the IT industry in the 80’s and 90’s.
    • The de-Regulations in the telecommunication market in the 90’s.
    • Globalization of Capital and Assets markets – enhanced opportunities for startup companies to get financed.
    • The rapid grow of global capital markets (Nasdaq effect).
  • Triggers to the Emergence of the Israeli Silicon Wadi - Environment Triggers Related Only to Israel(1).
    • Readiness of the industry after the rapid changes in the 80’s and deeper understanding of the Israeli market failures.
    • The breakdown of the Soviet Union, which brought a very large number of immigrant Scientists and Engineers to Israel.
    • Greater legitimacy acquired by Israel after the Gulf War.
    • Entrance of global investment banks into Israel during the late 80’s and 90’s.
  • Triggers to the Emergence of the Israeli Silicon Wadi - Environment Triggers Related Only to Israel(2).
    • The emergence of several Israeli communication technology companies including Tadiran, ECI, Fibronics, DSPG, NiceCom, Efrat and others during the 80’s.
    • Few successful Exits of Israeli startup companies in the early 90’s, in which the entrepreneurs and investors made very high profit (including Scitex, Megic, NiceCom and few others).
    • A new trend of Israelis that return to Israel after few years in the Silicon Valley.
  • Triggers to the Emergence of the Israeli Silicon Wadi – Policy Triggers(1)
    • The reconstructing of the military industries; Successful macroeconomic stabilization program; Liberalization process; the new R&D low of 1984; and increase in R&D incentives in the mid 80’s.
    • US guarantees of $10B, after the Gulf war.
    • Structural change which help transferring the environment to become more adjusted to Hi-Tech.
  • Triggers to the Emergence of the Israeli Silicon Wadi – Policy Triggers(2)
    • Technology Incubator program – supporting startup companies in very early stages..
    • INBAL program – gives guarantee to public VC companies on the down side.
    • MANET program – Support generic R&D.
    • Yozma program – the creation of the Israeli VC industry, though establishing 11 VC funds.
  • Yozma Program – Background
    • Readiness of the Israeli Hi-Tech industry.
    • Long history of incentives to R&D.
    • Shortage of finance for startups (high demand for VC money).
    • Weak management and marketing capabilities in the Hi-Tech sector.
    • Verity of supporting programs.
    • Strong supply of experience manpower and good ideas.
  • Yozma Program – Objectives
    • Creation of stabile VC industry.
    • Ensuring that their won’t be a monopoly in the VC industry.
    • Ensuring minimum government intervention in the management.
    • Ensuring the industry will continue to survive after the government incentive stops.
    • Fast learning of local VCs and creating added value to SUs.
  • Yozma Program – Creation(1)
    • Long preparations and Continues consulting with the Treasury and other government offices.
    • Long consulting and negotiation with global VCs and with local financial institutions.
    • Changing Israeli corporate low.
    • Creating 10 Yozma funds – 5 in 1993, 2 in 1994, 2 in 1995 and 1 in 1996.
    • Total government investment of $100M; Investment of $8M in each fund; Total capital managed by Yozma funds was $310M.
  • Yozma Program – Pre-condition to Become a Yozma Fund
    • Investment in technology startup companies.
    • raising private capital of $12M minimum.
    • strong local office based on a local financial institution or corporate.
    • strong foreign partners/investors represented in the management company.
  • Yozma Program – Growth
    • Most Yozma funds management companies has at least 2 additional funds.
    • All but 2 of Yozma funds bought back the government share.
    • The total sum managed by Yozma funds management companies is approximately $5B.
    • At least 8 out of 11 Yozma funds management companies are among the top 20 management companies in Israel (out of approximately 100 VCs).
    • Yozma program was a critical element in the amazing growth of the Israeli VC industry.
  • Stages of Evolution of the Israeli VC Industry. Phase1 (1993-1995/6) – Creation and Learning . Phase2 (1996-1998) – Rapid growth and fast maturation process . Phase3 (1999-2000) – mature and bobble . Phase4 (2001-) – Back to reality and first big obstacle (overcoming the global slowdown) .
  • Phase1 (1993-1996) – Creation and Learning (1)
    • Very dominant by Yozma funds.
    • Very low valuation in private investment .
    • Small funds (~$20M).
    • Small amount invested in each startup and small numbers of investments.
    • Many co-investment with other Israeli VCs in order to increase total amount invested, to reduce risk and Little co-investment with US VCs.
    • Little seed investments and No specialization in areas.
  • Phase1 (1993-1996) – Creation and Learning(2)
    • Foreign partners had important role and operational role.
    • Learning mostly from lowers and attorneys on VC operation.
    • Cumulative learning in the industry.
    • Very little understanding of the market and the VC business - Very small added value.
    • Goal of VCs to make fast exit through M&A (in low valuations - $10M-$70M).
    • Israeli VCs were very important for startup both due to shortage in access to capital and due to need in added value both operational and during Exit.
  • Phase2 (1996-1998) – Rapid Growth and Fast Maturation Process(1)
    • First round of private VC funds (not related to Yozma) but the market is still dominate by Yozma funds.
    • still low valuation in private investment, comparing US startups.
    • medium funds (~$100M).
    • Increase in the amount invested in each startup and Decrease the portfolio companies.
    • Increase in seed investments and Beginning of specialization in areas.
    • Foreign partners had less important role and non-operational role.
  • Phase2 (1996-1998) – Rapid Growth and Fast Maturation Process(2)
    • Learning, mostly from investment-banks, the core business of VCs.
    • Less co-investment with Israeli VCs- less collective learning and increase in co-investment with US VCs.
    • VCs have better understanding of the market and Increase in VCs added value.
    • Goal of VCs to make successful IPOs.
    • Israeli VCs were very important for startup both due to shortage in access to capital and due to need in added value.
  • Phase3 (1999-2000) – Mature and Bobble (1)
    • Many VC companies, verity of VCs.
    • Normal valuation in private placements, comparing to US startups.
    • No change in number of portfolio companies amount of investment grows rapidly.
    • Most VCs have specialization in areas and Increase in seed investments.
    • Learning mostly from strategic partners which helps in understanding of future demand and the dynamics of the market - Increase in VCs added value capabilities.
  • Phase3 (1999-2000) – Mature and Bobble (2)
    • Minimum co-investment with Israeli VCs– increase in competition; and increase in co-investment with US VCs.
    • Goal of VCs to create successful independent companies or very high valuation Exits.
    • Israeli startup companies has small need in Israeli VC’s added value both due to easy access to capital market and many exit opportunities and due to experience management. Moreover, successful Israeli startups has direct access to US VCs.
  • Phase4 (2001-) – Back to Reality and Global Slowdown(1)
    • The first time many startups and fund will be closed down.
    • Verity of funds’ sizes ($50M-500M).
    • Decrease in the amount invested in every startup (and in number of investments) and many down-rounds.
    • Strong specialization in areas, abundant of areas and decrease in seed investments.
  • Phase4 (2001-) – Back to Reality and Global Slowdown(2)
    • Co-investment with Israeli VCs and with US VCs.
    • VCs have little added value.
    • Main business of VCs is to decide which startups to close and which to keep supporting and the Goal is to have any kind of Exits or to find the next investor.
    • Israeli VCs are very important for startup both due to shortage in access to capital and due to need in added value.
  • In Depth Analysis Of A Sample Of Israeli VC Companies
  • The Sample
    • We interviewed 20 VC companies including 9 of Yozma Funds and 11 other VC companies.
    • They represent more than 60% of total capital under management in Israel's VC industry - $6B.
    • These fund were usually established according to the phases in the Israeli VC industry.
    • We identified rapid growth in the fund’s size.
    • The average size of the last fund in the VC management companies we have interviewed is above $200M compared to average size of the first funds of $32M.
  • Table1: Descriptive Statistics
  • Table2: Direct Indicators of Vc-performance
  • Direct Indicators of VC-performance
    • Average number of portfolio companies: 50-60
    • Average number of Exits is 9, which represent between 15%-20% of success.
    • The percentage of success is higher in the first phase – 30.
    • T he percentage of IPOs is 1%-2% higher then the percentage of M&As.
    • The percentage of IPOs in the first phase is more then 20% while the percentage of M&As is less then 10% in this phase.
    • These figures demonstrate the strength and the maturity of Israeli hi-tech and VC industries (IPO is considered to be more complicated and requires not only good technology but also additional capabilities).
  • Table3: Indirect Indicators of Vc-performance
  • Indirect Indicators of VC-performance
    • 7 VCs had at least 1 very successful Exit (valuation of at least $500 million), and another 3 VCs had at least 1 successful Exit (valuation of at least $200 million).
    • 7 VCs has leading strategic investors and 11 VCs has financial institutions as investors (investment banks, private equity funs...) .
    • 6 VCs had at least one office out of Israel.
  • Founder and Initial Team Background
    • We identified very strong background of the VC’s founders and initial team. Israeli venture capitalist are characterized by very strong technology background including science degree, actual work in R&D.
    • Education - In 11 VCs, some founders/initial team members had a Technological Educational Background. 10 Had a Business/Economics education. 6 VCs had Technological and Business/Economics degrees.
    • Work Experience - the founders/Initial team of 5 VCs had Work Experience in MNEs; 5 had experience with SUs; and 2 in Israeli Global Companies.
    • Investment experience - 11 had investment banking or VC background.
    • Management Position background- All VCs in our sample had management Position background; In 9 cases they previously had founder background.
    • R&D position background - In 8 VCs, at least one founder/member of initial team worked in R&D positions.
    • In 5 cases at least one VC founders/Initial Team held M&S positions; in 4 cases- Accounting/Finance positions
  • Type of VC
    • During foundation, (4) of the (15) VCs where not Limited Partnerships; but of these (3) adopted such an organizational form in the course of time.
    • (8) of the VCs were part of Yozma.
    • (5) VCs are part of a Global Network of VC companies (All of these are also Yozma funds).
    • (4) VCs are part of an Investment Bank, and (1) is part of a Holding/Investment Company.
    • At foundation, (2) VCs had publicly traded funds, but in the course of time one became a Limited Partnership.
    • Phase of Creation - (10) VC companies were created in Phase I; (2) during Phase II; and (3) in Phase III.
  • Trigger to VC Foundation
    • ( 8) VCs where Yozma Funds that is they received Yozma incentives.
    • (2) additional ones did not receive such incentives but still their creation directly resulted from Yozma.
    • (5) were created in the wake of prior Israeli VC industry successes.
    • (7) were directly the result of prior personal success in investing in high tech SU- entering the VC industry was a natural phase in their evolution
  • Linking Characteristics With the Model of a Successful VC Company success is a function of four basic operations: Deal flow - good SU who apply to the VC; Scanning Abilities - Identifying a subset for Due Diligence; efficient due diligence process; and successful selection of SU; Value added "operational' activities - ability to help companies during startup and early growth phase; Value added during Exit - networks with Investment Bankers or with Strategic Partners; timing of exits, preparing the company for the exit, etc.
  • Linking VC Characteristics to Performance-some Hypothesis
    • Hypothesis I: prior Management Experience is a necessary condition for VC entry and VC success. It however cannot explain success & failure.
    • Hypothesis 2: Important Role of Founder Technology/Science Education combined with R&D Work Position --absence of founder Technology/Science Education background and R&D Work Position/Function is strongly associated with failure.
    • Hypothesis 3: Belonging to a Global Network is Strongly Associated with VC success.
  • Prior Management Experience Is a Necessary Condition for VC Entry and VC Success. It However Cannot Explain Success & Failure All VC partner has prior management experience. Moreover, considering the VC business it seems trivial that all VC partners must have prior management experience in order to be successful VCs.
  • The Absence of Founder Technology Education Background and R&D Work Position Is Strongly Associated With Failure Founders/ Initial General Partners of (7) out of the (15) VC companies did not have a combination of Technology/Science Education and an R&D Position. -(4) Our of the (7) were significantly below average performance (among the (5) lowest) An analysis of the other (3) shows the following: -(1) VC was founded in 1992, had Investment Banking experience and had an US investment bank as partner in the first fund. -(1) VC had a partner with US VC experience and all founders had an Investment Work Position. -(1) VC is Yozma, qhich its General Partner is Yigal Erlich.
  • Belonging to a Global Network Is Strongly Associated With VC Success In (4) out of (5) cases of belonging to a Global Network were successful VCs. The fifth case did have neither a founder Technological Educational background nor a prior R&D Work Position. Belonging to a Global Network, however, is not necessarily the cause of success; rather it may be in indicator of success and of factors leading to success e.g. of good founder initial capabilities.