IsraeliFinancingInnovationSchemes forEuropeFinal ReportPublished by the University of PaviaThe University-Enterprise Liais...
Ifise Final ReportPLANNING FOR THE CREATION OF SEED ANDSTART-UP CAPITAL SOURCES FOR HIGH-TECH FIRMS IN ITALY FOLLOWING THE...
INDEXExecutive Summary 1Introduction 4Chapter 1 The Yozma Programme, or How to Create a Venture 6Capital Industry from Scr...
3.6.2 Law 297/99 and the incentives to research 54operated by new firms3.6.3 Regional programmes 543.6.4 European programm...
4.4.5 Monitoring 754.4.6 Possible launching institutions 754.5 Project 4. A Coordinating Institution for High-tech 76Indus...
Table 3.5 - Number of Investments and of Early Stage Investments in the 49Biotech and Pharmaceuticals Sector - year 2001Ta...
EXECUTIVE SUMMARYThis document represents the final results of the project IFISE (Israeli FinancingInnovation Schemes for ...
3. The state should play a passive role in venture capital schemes. Any decisionsabout investments should be made by profe...
that initiatives in this field have strong needs in terms of time and finance,public support shall be particularly generou...
INTRODUCTIONIn an attempt to follow the American example and create their own pool of NewTechnology-based firms, several E...
5.6.The planning of adequate programmes for Italy by applying the lessonsgathered from Israel, and the consultation of sen...
CHAPTER 1THE YOZMA PROGRAMME, OR HOW TO CREATE AVENTURE CAPITAL INDUSTRY FROM SCRATCHThis chapter is aimed at presenting t...
of their mission: to put in place a mechanism that would stimulate the creation ofventure capital funds in Israel. This pl...
-------Yozma would be organized as an independent entity under contract to theOffice of the Chief Scientist;the government...
believed to have been the long term indirect result of the programme. It should bementioned that while the first set of in...
2 - Number of management companies created. Ten management companies werecreated. In the beginning, each management compan...
8 - Opinion of venture capital funds managers about the importance of the impactof the Yozma programme. All of the VC mana...
programme, 80% used their option to buy government shares in the funds after fiveyears (before the fund was closed), at a ...
8 - Sales of Yozma-affiliated companies as opposed to the average high-techcompanies. Table 3 shows how the group of enter...
divestment sizes were relatively small ($1-2 million of investment per deal, $10-70million of sales for the successful exi...
creation of a venture capital industry in another region. These have been discussedat various occasions at IFISE meetings....
programmes or to modify their rules, as well as to select projects for funding.Decision making at the OCS takes no longer ...
6. The state as a passive investorIn spite of its significant share in the first Yozma funds, the state has neverinterfere...
10. A variety of instruments for the market must be considered. It is important topilot and to be ready for failures or am...
should invest in those sectors that have a strong and unexploited potential in theirregion.While both approaches are inter...
CHAPTER 2THE TECHNOLOGICAL INCUBATORS PROGRAMMEAND THE PROVISION OF SEED CAPITAL TO RESEARCH-INTENSIVE NEW FIRMS2.1 - Prog...
It should be mentioned that the T.I.P. only accepts projects that are both rooted inresearch and development and have a hi...
In general, we might say that the T.I.P. is built in such a way that any entrepreneur,regardless of his/her place of resid...
5. Percentage of enterprises which succeeded in securing financial support at theend of the incubation periodAccording to ...
7. Financial support securement by industrial sectorTable 2.1 shows financial securement by industrial sector. As can be s...
Table 2.2 – Sectorial Distribution of Incubated Projects as Opposed to aRepresentative Sample of High-tech Firms in Israel...
programme cannot be validated with respect to these functions. The importance ofpublic financial support is also easily in...
10. Incubator managers’ level of satisfactionIncubator managers’ level of satisfaction of the program varies according to ...
of these indicators may well be influenced by factors other than the programmeitself.1. Percentage of incubated firms as a...
Table 2.6 - The Working Environment for the Genesis of the New IdeaCompanies (% of total)EnvironmentHigh-techindustryTradi...
1. The initial effort of the public sector has proven to be successful in attractingprivate investors. Figure 2.2 shows th...
proposal, incubators will be for-profit entities which will not receive anybudget for management. They will be entitled to...
also worth noting that in spite of very generous state contributions (up to 85% ofthe budget; up to $350,000), both projec...
3 - Locational factors and the need for background conditionsThe question of location is of extreme importance when we con...
If background conditions exist, it appears that there is quite a good probability ofgraduate projects remaining in the vic...
sectors (e.g., what is the potential of the area in that sector? How is themanagement team track record consistent with th...
which a company is completely free to do as it wishes concerning the matter,provided it refunds back to the state a sum wh...
11 A - Conflict of interest. It may happen that due to research aspirations of theuniversity, researchers are tempted to u...
CHAPTER 3THE ITALIAN INNOVATION SYSTEM AND ITSPOTENTIAL FOR HIGH-TECH START-UPSThis chapter summarizes figures and charact...
An innovative firm often changes its products, services, or its production processes.It often (but not always) uses new te...
3.2 - High-tech Activity per Sector and Geographical RegionSince the Italian territory is large and non-uniform, it was fo...
6. Although the Milan area is by far the most active of the high-tech sectors, itspotential is divided into different sect...
Table 3.1 – Major R&D Indicators per Geographical RegionRegionR&Dpersonnel inpublic andprivateenterprise:% ofnationaltotal...
Table 3.2 below was created so as to locate any concentrations of high-tech activityin a local system in a given sector. A...
Table 3.2 - R&D Indicators per Main High-tech Sector and Local SystemSector RegionLabour localsystem (LLS) 1Inventors perL...
In order to get further insights on high-tech activity by sector, it was decided tolook into more details of the biotech, ...
The computer sector has been heavily affected by the closing of the Olivetticomputer production company, which was one of ...
We reasoned that the existing conditions in Catania are not sufficient to justify thecreation of venture capital funds ded...
However, Italy boasts strong academic research in this sector. It was found that asmany as 10,000 researchers (or about ha...
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
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Israel Experience for Europe
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Israel Experience for Europe
Israel Experience for Europe
Israel Experience for Europe
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Israel Experience for Europe

  1. 1. IsraeliFinancingInnovationSchemes forEuropeFinal ReportPublished by the University of PaviaThe University-Enterprise Liaison Office
  2. 2. Ifise Final ReportPLANNING FOR THE CREATION OF SEED ANDSTART-UP CAPITAL SOURCES FOR HIGH-TECH FIRMS IN ITALY FOLLOWING THEISRAELI SUCCESS STORIES OF THE YOZMAAND THE TECHNOLOGICALINCUBATORS PROGRAMMESPARTICIPANTS IN THE PROJECTVittorio Modena (P.I.)Gil AvnimelechMargherita BalconiRoberto Del GiudiceYigal ErlichMatteo FacoettiTobia FiorilliAmnon FrenkelPatrizia GattoniAnna GervasoniDan KaufmannAric LeibovitchChen LevinMichal MillerGordon MurrayPeter NijkampFabio PalmieriFrancesco PellizzariArie SadovskiDaniel SheferMorris TeubalPaola Vita-FinziThis document was developed and edited by Vittorio Modena (vmodena@libero.it)
  3. 3. INDEXExecutive Summary 1Introduction 4Chapter 1 The Yozma Programme, or How to Create a Venture 6Capital Industry from Scratch1.1 The Yozma Programme - Definition Process and its 6Final Structure1.2 Validation of the Yozma Programme 81.2.1 Economic Impact - Output Indicators 91.2.2 Economic Impact - Outcome Indicators 111.3 The Israeli VC Evolution - Main Features 131.4 Success Factors, Lessons and Issues from the Yozma 14Programme and the Evolution of the Israeli VC Industry1.5 Conclusions 19Chapter 2 The Technological Incubators Programme and the Provision 20of Seed Capital to Research-Intensive New Firms2.1 Programme Background and Operation 202.2 Validation of the Technological Incubators Programme 222.2.1 Economic impact - Output indicators 222.2.2 Economic impact - Outcome indicators 272.3 Evolution of the Technological Incubators Programme 29Over Time2.4 Success Factors, Lessons and Planning Issues from the 31Technological Incubators Programme and its EvolutionChapter 3 The Italian Innovation System and its Potential for High-tech 38Start-ups3.1 General Characteristics of the Italian Innovation System 383.2 High-tech Activity per Sector and Geographical Region 403.3 The Electronics and Telecommunication Sector 453.4 The Biotech Sector 473.5 The Supply of Private Seed and Venture Capital Sources 493.6 Public Incentives to Innovative Firms in Italy 533.6.1 The EU regulations 53I
  4. 4. 3.6.2 Law 297/99 and the incentives to research 54operated by new firms3.6.3 Regional programmes 543.6.4 European programmes 543.6.5 The Startech programme 553.6.6 Laws 95/95 for the incentive of juvenile 56entrepreneurshipChapter 4 A Proposal for Seed and Venture Capital Schemes in Italy: 58Four Projects4.1 General Planning Orientations 584.2 Project 1. Rotational Seed Capital Funds for New 62High-tech Companies in Regions with High Potential4.2.1 Motivations behind the project 624.2.2 Project outline 634.2.3 Requirements for seed funds’ management companies 654.2.4 Additional criteria for the selection of the 65management company4.2.5 Fund of funds’ role and monitoring 664.2.6 Qualified supporting institutions 674.3 Project 2. Biotech-Pharmaceuticals Incubators 684.3.1 Motivations behind the project 684.3.2 Basic facts and guidelines used for planning 684.3.3 Programme definition and incentives 694.3.4 Investment rules 704.3.5 Qualified management companies 704.3.6 Selection criteria for management companies 714.3.7 Role of the central agency and monitoring 714.3.8 Possible launching institutions 724.4 Project 3. VC Funds for Depressed Regions 734.4.1 Motivations behind the project 734.4.2 Description of the proposed project 734.4.3 Qualified management companies 754.4.4 Rules of investment 75II
  5. 5. 4.4.5 Monitoring 754.4.6 Possible launching institutions 754.5 Project 4. A Coordinating Institution for High-tech 76Industries’ Incentive Policies4.6 Recommendations for Future Research and for the 77Definition of Innovation PoliciesAcknowledgements 78Bibliography 79LIST OF TABLESTable 1.1 - Original Yozma Funds and their Evolution 9Table 1.2 - Growth Rate of Yozma-Affiliated Companies vs. a Sample 12of Non-Yozma-Affiliated CompaniesTable 1.3 - Sales of Yozma-Affiliated Companies vs. a Sample of Non-Yozma- 13Affiliated CompaniesTable 2.1 - Graduating Projects that Succeeded in Securing Financial 23Support, by LocationTable 2.2 - Sectorial Distribution of Incubated Projects as Opposed to a 25Representative Sample of High-tech Firms in IsraelTable 2.3 - Project Initiators’ Level of Satisfaction from Services Provided 26vs. Level of Importance Attached to these ServicesTable 2.4 - Incubator Managers’ Level of Satisfaction 27Table 2.5 - Previous Occupation of the Founders - “Incubator” Companies 28vs. Generic Sample CompaniesTable 2.6 - The Working Environment for the Genesis of the New Idea 29Table 2.7 - Sales Revenues (2000) of Incubator-Graduate Companies 29Vs. Non-Incubator Sample CompaniesTable 2.8 - Average Source of Funding of Incubators, by Location 32Table 2.9 - Project Selection Process in the 21 Israeli Incubators, by Location 33Table 3.1 - Major R&D Indicators per Geographical Region 42Table 3.2 - R&D Indicators per Main High-tech Sector and Local System 44Table 3.3 - Electronic Components, Computer Hardware and 45Telecommunication Equipment - National Basic IndicatorsTable 3.4 - R&D Investments and Personnel in the Biotech-Pharmaceutical 47Sector in Italy and in the Major Industrialized CountriesIII
  6. 6. Table 3.5 - Number of Investments and of Early Stage Investments in the 49Biotech and Pharmaceuticals Sector - year 2001Table 3.6 - Seed and Start-up Investments of VC Funds in Italy - year 2000 52LIST OF FIGURESFigure 2.1 - Project Selection Process - General Flow Chart and Percentage 21ApprovedFigure 2.2 - Government Investment vs. Private Investments in Incubator 31Graduate ProjectsFigure 3.1 - Main Innovation Indicators, Italy vs. Europe 38Figure 3.2 - Enterprises in the Biotech Sector in Main European Countries 48per CountryFigure 3.3 - Internal VC Investments as a Percentage of GDP 50Figure 3.4 - Early Stage Investment by Italian VC Funds by Region 51(2000 - 2001)Figure 3.5A - Major Objective 1 (depressed) Areas 57Figure 3.5B - Concentrations of Inventors 57Figure 4.1 - Scheme for Public Incentives to Seed Funds 64Figure 4.2 - Public Incentive Scheme for Investment Funds in Economically 74Depressed AreasLIST OF ACRONYMSEC -European CommissionEU - European UnionGDP - Gross Domestic ProductIPO - Initial Public OfferingICT - Information and Communications TechnologyIRR - Internal Rate of ReturnIT - Information TechnologyIVA - Israel Venture Capital AssociationM&A - Mergers & AcquisitionsOCS - Office of the Chief Scientist at the Ministry of Industry and Trade in IsraelR&D - Research and DevelopmentVC - Venture Capital, Venture Capital Management CompanyIV
  7. 7. EXECUTIVE SUMMARYThis document represents the final results of the project IFISE (Israeli FinancingInnovation Schemes for Europe), which was supported by the EuropeanCommission under the Innovation and SMEs programme of the Fifth FrameworkProgramme. Aims of this project were: (1) The validation of two Israeliprogrammes: Yozma and the Technological Incubators Programme; (2) Theextrapolation of principles useful for the efficient creation of seed and venturecapital schemes in Europe; and (3) The proposal of public schemes for the efficientcreation of seed and venture capital sources in Italy.All papers presented by partners in this project are available on the websitehttp://ifise.unipv.it.Results of the project indicate that the Yozma programme, launched in Israel in theearly 1990s, was an outstanding success. All indicators are consistent with thisaffirmation and indeed suggest that this simple and relatively small programme hascreated the current venture capital industry in Israel. It has thereby become a verystrong contributor towards the incredible blossoming of the Israeli high-techindustry in the second half of the nineties.The Technological Incubators Programme (T.I.P.) can also be described assuccessful, having given opportunities to inexperienced entrepreneurs or toinitiatives in sectors that are uncommon in Israel. However, not all successindicators are consistent and some improvements should be made to theprogramme.Some of the most important lessons derived from these two programmes are thefollowing:1. Public intervention for the establishment of seed and venture capital funds isusually necessary and desirable. While for seed funds (€0.1-1 million) this hasto be continuous, in the case of start-up capital (€1-5 million) it should be time-limited.2. Venture capital for the high-tech industry is an instrument suitable only formature situations, i.e. for regions that already feature a strong potential forhigh-tech spin-offs and some demand for private equity.1
  8. 8. 3. The state should play a passive role in venture capital schemes. Any decisionsabout investments should be made by professional and private entities.4. If there are no special reasons to employ incentives aimed at specific sectors,neutral instruments, i.e. instruments that are not reserved to firms in any onesector, should be used.5. Any targeted programme must be inserted into a context of innovation policywhich is integrated and interdisciplinary. For this purpose it is advisable to setup an ad hoc agency able to manage policy for the high-tech industry.The Italian Innovation System was analysed by means of various surveys and dataelaboration. The main results used as a basis for planning are the following:1. Distinction between generally innovative firms and research-intensive firms iscrucial in Italy, where there is an abundance of the former, but very few of thelatter.2. Italy lacks seed capital for the high-tech industry, especially in the regions thathave the strongest potential for high-tech start-ups.3. Hardly any new biotech-pharmaceutical firms are found in Italy, despite largemarkets and significant academic research.4. Economically depressed areas in Italy lack venture capital activity in allindustrial sectors.5. Existing public programmes for the support of new high-tech firms seeminadequate.Planning for investment schemes in Italy has led to the suggestion of fourproposals to the Italian authorities:1. The creation of rotational seed capital funds for new research intensive firms inthe regions with the highest potential. The public incentive will be by way ofparticipation in the funds, with private investors given the option to buy thepublic shares under privileged conditions. The programmes shall be repeatedevery four years.2. The establishment of biotech incubators in the areas with the highest potentialfor this sector. These shall be linked to the best local university researchcentres and will give financial, consulting and infrastructure support. Given2
  9. 9. that initiatives in this field have strong needs in terms of time and finance,public support shall be particularly generous.3. The creation of venture capital funds for depressed areas dedicated to allindustrial sectors. In this case, venture capital funds will be entitled to invest inany industrial sector. Private investors will have the option to buy public sharesunder favourable conditions. This program is meant to be a trigger for theventure capital and private equity industry which is considered self-sustainable;therefore, after a certain number of funds are established in each region thisprogramme will terminate.4. The establishment of a National Institution for the coordination of allincentives for the high-tech industry. This shall have a large budget, broadcapabilities and the power to launch, modify or stop any programmes for thehigh-tech industry in Italy.3
  10. 10. INTRODUCTIONIn an attempt to follow the American example and create their own pool of NewTechnology-based firms, several European countries and the EuropeanCommission have directed much effort towards the creation of innovation policy,so as to encourage employment, innovation and economic growth.Among the many aspects of innovation, the availability of venture capital andprivate equity is crucial. Various forms of venture capital schemes for the creationor strengthening of an industry have been adopted since the second half of thenineties. However, since most of these instruments are less than five years old, ithas been quite difficult to validate their performance and analyse their operationover time [Dimov and Murray, 2001]. This makes the Israeli schemes particularlyinteresting: not only have they contributed to the spectacular growth of the high-tech industry in that country, but they can also point to a relatively long trackrecord.The aims of the IFISE (Israeli Financing Innovation Schemes for Europe) includedthe validation of the Yozma and Technological Incubators Programme, theextrapolation of lessons to be used by policy makers for planning financial tools,and the actual proposal of practical plans to be implemented in Italy. In order toreach its conclusions, the project underwent the following phases:1.2.3.4.The thorough analysis of the Yozma and Technological Incubators Programmein Israel by means of literature and field surveys, including interviews withventure capital and incubator managers, entrepreneurs, and policy makers, anda review of similar projects in Europe.The extrapolation of success factors and various planning issues from the twoprogrammes, and from the review of similar European programmes, whichcould prove useful for policy makers.An analysis of the characteristics and potential of the Italian reality throughavailable data and targeted field surveys.An analysis of public schemes for venture capital which currently exist in Italy,plus an assessment of the availability of private venture capital by region andindustrial sector.4
  11. 11. 5.6.The planning of adequate programmes for Italy by applying the lessonsgathered from Israel, and the consultation of senior experts in the Italian realityas analysed in all its relevant aspects.The involvement of Italian policy makers in the planning process and theirsuggestions taken into account for the various proposed programmes.It is important to mention that although academic papers will result from thisproject, it is primarily meant to help policy makers define their instruments atvarious levels. Therefore, a variety of planning issues are proposed, be these theresults of the surveys conducted in Italy and Israel, the interviews conducted withvarious market actors, or the brainstorming that was done by IFISE partners atvarious stages of the project. This document was written by Vittorio Modena whohas originated and coordinated the IFISE project. Whenever a result was obtainedby a different partner, the source is cited.Results of this project have been made public by means of two workshops, inPavia, Italy, and Amsterdam, Holland, which were held in May, 2002. Many Italianand other European policy-makers participated. Project results are also available onthe site: http://ifise.unipv.it/downloads.html.Chapter 1 deals with the validation of the Yozma programme and the resultingplanning issues. Chapter 2 examines the validation of the Technological IncubatorsProgramme and its issues. Chapter 3 looks at the Italian Innovation System, withsome insights into the provision of private venture capital and the existing publicschemes for the support of VCs and new innovative firms, and Chapter 4 outlinesthe proposals that were made to Italian policy makers.The participants in this project wish to especially thank the European Commission,which made the project financially possible under its Fifth Framework Programme.5
  12. 12. CHAPTER 1THE YOZMA PROGRAMME, OR HOW TO CREATE AVENTURE CAPITAL INDUSTRY FROM SCRATCHThis chapter is aimed at presenting the results of the IFISE project associated withthe validation and analysis of the Yozma programme. The evolution of the IsraeliVC industry was also taken into account, as we have proceeded with extractinglessons, rules of thumb, and stimulating thoughts with the goal of creating VCindustries in other regions. This part of the project has been carried out mostly byProf. Morris Teubal and Mr. Gil Avnimelech of the Jerusalem Institute for IsraelStudies [Teubal and Avnimelech, 2002]; when other research is employed, thesource is cited.1.1 - The Yozma Programme - Definition Process and its Final StructureThe situation in Israel at the end of the 1980’s showed clearly that backgroundconditions existed for the creation of venture capital funds, but the venture andseed capital funds themselves were lacking. Indeed, only one VC fund, Athena,existed, with $12 million in available funds.At that time, the policy of government subsidies to industrial R&D had begun to bequestioned by the Chief Scientist1in charge, Mr.Yigal Erlich. He reasoned thatdespite the good work carried out by professional evaluators before giving moneyto private firms, the state could not be as effective as private investors. Afterseveral visits to countries with strong venture capital programmes, he wasconvinced that the future of Israels high-tech industry was rooted in venturecapital, and that the state must make an effort to trigger its creation. Erlich and histeam also sought the advice of world experts, and of key figures both from Israel’shigh-tech industry and from Israels Capital Market. They also assessed alternativecourses of action. This process of search, analysis and research led to the shaping1The Office of the Chief Scientist at the Ministry of Industry and Trade is Israels mostpowerful R&D policy institution, commanding around $400 million annually.6
  13. 13. of their mission: to put in place a mechanism that would stimulate the creation ofventure capital funds in Israel. This plan can be summarized in the followingpoints:----in order to create a serious venture capital industry in Israel, it would benecessary to invest at least $200 million;foreign organizations (venture capital funds, investment banks, etc.) will notinvest in Israel without significant incentives. Lacking such incentives, theseinvestors will turn to other countries with which they have experience andwhose markets they know well;it is important to ensure that there would be no monopoly in a new market;it is important to promote learning within the industry, such that whensupport for the program ends, the VC industry would continue to operate anddevelop; to ensure a minimum of government intervention in the fundsmanagement; and last but not least, to ensure that the proposed programwould in fact be implemented.It was clear to Yozma promoters that the existence of background conditions wasnot in itself sufficient to assure success; it was crucial also to assure the positiveinvolvement of the various government bodies in order to implement real change.In order to assure the Treasury’s support, some of that bodys members becamepart of the program team and participated in the discussions at the planning stage.Two instruments were considered: (1) the creation of a large $200m fund withgovernment investment, and (2) the creation of a large number of smaller VC fundswith a total sum of $200m.The first option was supported both by the Ministry of Treasury, and by a largeinternational investment company which tried to achieve a monopoly of thegovernment incentives. However, Erlich was committed to the principle ofavoiding monopolies; therefore the second option was finally adopted.Another interesting issue was the decision of the size of government investment.Some proposed that the government invest up to 80% of the funds equity, but thisproposal was objected to, even by the private sector consultants. The 50-50 optionhad also been discussed, and finally it was decided that government investment belimited to 40%. The final assets of the Yozma programme were as follows:7
  14. 14. -------Yozma would be organized as an independent entity under contract to theOffice of the Chief Scientist;the government would allocate $120 million to the fund of funds Yozma,which would participate in VC funds, with up to 40% and up to $8 million(whichever the lower of the two figures). A small part of that sum would beused for one venture capital fund to be run by Yozma itself.the new funds would be managed by private management companies;investors in the new funds would have the option to buy government shares attheir original cost +7% annual interest;the state will withdraw from the programme after 7 years;the investors team must include a foreign partner with expertise in VCinvestments;the investors team must include a local financial partner.It should be mentioned that parallel to Yozma, in 1992, the "Inbal" Program wasimplemented. Its central idea was to stimulate VC funds by guaranteeing thedownside of their investments. The mechanism used was the creation of aGovernment Insurance Company (“Inbal”) that provided a 70% guarantee to VCfunds which are traded in the stock market (calculated as 70% of the value of theirpublic issue). The program imposed certain restrictions to the investments of the‘protected’ funds."Inbal" was not a great success. Four funds were established - Mofet, Marathon,Teuza, and Sdot Mop. Their valuations in the stock market were like those ofHolding Companies (low valuations). The funds encountered bureaucraticproblems and had to go to great lengths to prepare regular period reports.Eventually, all of the funds attempted to leave the program, i.e., they renouncedtheir guarantees in order to free themselves from the bureaucratic restrictions,which they eventually succeeded in doing.1.2 - Validation of the Yozma ProgrammeValidation of the Yozma programme has been carried out by a series of indicators.We have divided these into Output Indicators, i.e., what has been the direct resultof the operation of the Yozma programme; and Outcome Indicators, i.e., what is8
  15. 15. believed to have been the long term indirect result of the programme. It should bementioned that while the first set of indicators very accurately depicts theprogrammes operation, the second can only be regarded as a general picture of theVC industry. Indeed, many factors may have affected the incredibly fast evolutionof the Israeli VC industry in the 1990s. Unless otherwise mentioned, theseindicators have been measured by Prof. Teubal and Mr. Avnimelech of theJerusalem Institute for Israel Studies [Teubal and Avnimelech, 2002].1.2.1 - Economic Impact - Output IndicatorsThe output indicators which have been measured are as follows:1 - Number of new funds launched. Yozma has directly created 10 funds. Thefunds’ names, their present size and principal foreign investors are shown in Table1.1.Table 1.1 - Original Yozma Funds and their EvolutionOriginal ForeignInvestorFund’s NameOriginal StateContribution (M$)Present Capital underManagement (M$)-year 2000 (*)Daimler-Benz (DEG) Eurofund 8 72Advent (USA) Gemini 8 350Van Leer Group (NL) Inventech 8 100Oxton (USA/Far East)Jerusalem VenturesPartners8 255MVP (USA) Medica 8 70AVX, Kyocera (JP) Nitzanim-Concord 8 270CMS (USA) Polaris 8 700TVM (DEG) &Singapore TechStar 8 600Vertex International VERTEX 8 150Walden (USA) Walden 8 120Yozma Yozma 20 180Total 100 2870Source: Sadovski, 2001a(*) – Size of the first fund raised was around $ 20m9
  16. 16. 2 - Number of management companies created. Ten management companies werecreated. In the beginning, each management company was directing only one fund.The creation of ten specialized management teams was of huge importance.2A - Number of employees in the management teams. The management teamscreated by Yozma had more than 30 new partners and approximately 100 newemployees.3 - Amount of money allocated from private sources to investment in new high-techindustries. Yozma has directly caused the allocation of $150m from private fundsto high tech start-ups.4 - Number of highly reputable VC organizations that entered the market as aresult of the project. Having required the participation of international partners ofprime importance, Yozma caused 5 high-reputation entities (Advent, Daimler-Benz, Walden, Vertex and TVM) to enter the Israeli market, thereby creating apositive reputation for Israel even before the first successful exits occurred (seetable 1.1).4A - Variety of reputable investors that entered the market as a result of theproject, by type of investor. In order to achieve an optimal mix in the market, theprogram aimed at attracting reputable investors in the following differentcategories: investment banks, strategic partners, private equity funds, U.S. businessangels and U.S. pension funds.5 - Number of high-tech companies that have received venture capital from a newlycreated fund. The 10 Yozma funds have supported 256 high-tech firms during theirexistence.6 - Internal Rate of Return (IRR) of the funds. Although IRR could not be measuredprecisely, it is known that Yozma funds were very successful.At least 4 Yozma funds (40% of the funds) had an IRR of more than 100%.7 - Number (percentage) of exits out of total investments of Yozma funds. Yozmafunds succeeded in exiting in 70 cases (27.3% of their investments); out of these 38(14.8%) were IPO’s (Initial Public Offering) and 32 (12.5%) were M&A (Mergersand Acquisitions).10
  17. 17. 8 - Opinion of venture capital funds managers about the importance of the impactof the Yozma programme. All of the VC managers that were interviewed (a total of15 both from Yozma and other funds) believed Yozma to be one of the majortriggers of the growth of the Israeli VC industry.9 - Contribution to initial critical mass: size of the total allocation to high-techstart-ups as initiated by the programme, as a percentage of the total capitalavailable for start-ups in the first years. A government contribution of $100m tothe Israeli VC industry in 1993 was leveraged by $150m from private entities. Ingeneral, out of the $440m managed until 1994, $250m originated from Yozmafunds.10 - Number of funds as a percentage of total funds available in 1993-4. Yozmahas created 9 (the tenth was created in 1997), or 53% of the 17 funds existing at thetime.1.2.2 - Economic Impact - Outcome IndicatorsThe outcome indicators, i.e. impact indicators that were measured several yearsafter the programme was completed, were measured as follows:1 - Total number of funds created by the management companies that were startedunder the original programme. All of the 10 management companies that werecreated as a result of the Yozma programme have created additional, subsequentfunds, although the Yozma programme no longer supported those funds. Thirtynine funds have been created from the inception of Yozma until the end of 2001.2 - Total capital under management of all subsequent funds. Total funds raised byYozma management companies add up to $3.2 billion (+$250m managed byYozma funds), as opposed to the total capital under management of all other 118Israeli and foreign investment organizations active in Israel ($6.8b after eightyears). Fifty percent of all total funds can be related to the Yozma programme.3 - Survival percentage of the management companies that were formed as a resultof the original programme. Eight years after Yozmas establishment, 100% of thecompanies are still operational.4 - Percentage of the Yozma funds that have used the option to buy governmentshares. Of the management companies that were formed as a result of the original11
  18. 18. programme, 80% used their option to buy government shares in the funds after fiveyears (before the fund was closed), at a price of the initial investment plus 7%interest.5 - Size of the total allocation to high-tech start-ups initiated by the programme asa percentage of the total capital available for start-ups several years later. Agovernment contribution of $100m to the Israeli VC industry in 1993 was a majortrigger to a total allocation of almost $10b during the years 1993-2001. This wouldmake the government contribution only 1% of the final result.6 - Reputable investors. Out of fourteen strategic investors involved in Israeli VCuntil 1997, seven strategic investors were involved in Yozma managementcompanies. Six out of twelve reputable investment bank investors previouslyinvolved in Israeli VC until 1997 were involved in Yozma management companies.Reputable investors were found to correlate positively with good performance ofthe fund.7 - Growth of start-up enterprises financed by Yozma funds. Table 1.2 compares asample of 24 firms that have been financed by the ten Yozma funds, as opposed toa sample of 105 high-tech enterprises (a representative sample) in Israel. It isevident that the first group outperforms the second [Sadovski, 2001].Table 1.2 - Growth Rate of Yozma-Affiliated Companies vs. a Sample of Non-Yozma-Affiliated CompaniesYears 1998 1999 2000YozmaaffiliationYozmaaffiliatedNonYozmaaffiliatedYozmaaffiliatedNonYozmaaffiliatedYozmaaffiliatedNonYozmaAffiliatedNumber ofrespondents13 48 15 55 17 63Growth % Companies (% of total)No Growth 46 64 47 51 24 411-40% 8 15 13 29 35 33>41% 46 21 40 20 41 26Source: Sadovski, 200112
  19. 19. 8 - Sales of Yozma-affiliated companies as opposed to the average high-techcompanies. Table 3 shows how the group of enterprises that were financed by oneof the ten Yozma funds clearly outperforms the compared sample of companies.For instance, while 41.5% of the Yozma-affiliated enterprises sold for more than$1 million in year 2000, only 18% of the sample companies did so [Sadovski,2001].Table 1.3 - Sales of Yozma-Affiliated Companies vs. a Sample of Non-Yozma-Affiliated Companies (*)Responding companies (% of total)Sales Yozma-affiliated Non-Yozma-affiliatedNo sales 46 55100k$-1m$ 12.5 27>1m$ 41.5 18Source Sadovski, 2001*24 Yozma-affiliated companies were compared to 105 non-affiliated companies9 - Rate of enterprises that went IPO. While 4.9% of Israeli high-tech firmsmanaged to raise money on the stock exchange, enterprises that were financed byone of the ten Yozma funds reached a rate of 17.9% [Sadovski, 2001].10 - Average number of employees in an enterprise. Yozma-affiliated enterpriseshave 88 employees on average, while the average Israeli high-tech enterprise has22 employees [Sadovski, 2001].1.3 - The Israeli VC Evolution - Main FeaturesThe evolution of the Israeli VC industry can roughly be divided into three phases:the Yozma phase, 1993-1996; the expansion phase, 1996-1999; and the maturityphase, 1999-2000.The beginning of the VC industry in Israel (1993) is characterized by an excess ofdemand and little competition, which made it easy for the first Yozma funds to spotthe right firms and to be successful in their resale. The typical size of these fundswas around $20 million, there was no specialization, and both investment and13
  20. 20. divestment sizes were relatively small ($1-2 million of investment per deal, $10-70million of sales for the successful exits). There was very little experience amongIsraeli managers.In phase two (1996-1999), funds grew larger - $100 million - and moreexperienced. Pension funds and a larger number of strategic partners invested inIsraeli funds. Many efforts were made during this period to develop links with U.S.financial institutions. A trend to specialize both in specific sectors and financialstages was also seen. Some funds even specialized into links with financialinstitutions rather than industrial partners, and vice-versa.Between 1999 and 2000, funds’ size continued to grow and reached $200 millionon average. In this period we saw the most important exits, like Chromatis, whichsold for $4.5 billion. There was a trend to link more directly with big strategicpartners such as Nortel, Cisco, AOL, Yahoo, etc. Israeli VCs had by now acquiredsome good experience and they were not very different from their Americancolleagues. Competition was fierce, as there was (probably) more money than goodideas. Therefore, funds looked more into seed investment and started, for example,taking equities in technological incubators. They also started investing in non-Israeli companies.In general, we can certainly see a learning process which led the Israeli managersto acquire skills and links until they became experts. Their reputation grewsteadily, until the recession came (at the end of year 2000) and took the sector intoa deep crisis. At the time this report is being written, a hard recession has caughtthe telecom sector, which is the most important industrial sector in Israel.Competition is fierce and the sector is shrinking, with many managementcompanies going out of business.1.4 - Success Factors, Lessons and Issues from the Yozma Programme and theEvolution of the Israeli VC IndustryAfter analysing the history of the Yozma programme and the emergence of theIsraeli VC industry, the IFISE team led by Vittorio Modena has extrapolated thesuccess factors, the lessons, and the issues to be kept in mind when planning for the14
  21. 21. creation of a venture capital industry in another region. These have been discussedat various occasions at IFISE meetings. A brief presentation of them follows.1. Background conditions and the existing demand for VCVenture capital can be used as a means of economic development in maturesituations, i.e. when background conditions already exist. Necessary backgroundconditions can be roughly divided into two categories: (1) The investment ofsubstantial funds into applied research both by the public and the private sector,and the consequent presence of skilled personnel. (2) The existence of a few atleast partially successful ventures before the start of the programme.While the first factor leads to potentialities and capabilities on the technologicalside, the second factor is more linked to cultural attitudes and the motivation tocreate new companies.It is extremely important to check for background conditions before starting apublic scheme aimed at the creation of a VC industry. In this respect one shouldnot confuse the need to develop a high tech industry with the need to develop theeconomies of disadvantaged regions, which, more often than not, have littlepotential for high-tech.2. The problem of timing and flexibility in R&D policy and how the Israeli systemcopes with itTiming has proven to be of the essence for the extraordinary success of the Yozmaprogramme. This factor was made up of components both cyclical and unique, theformer including the positive trend of the high-tech industry in general (e.g., asmeasured by the U.S. NASDAQ index), and the latter, one-time events such as themassive immigration from the former USSR and the concomitant lay-off ofscientific personnel in the 1980s. At the inception of Yozma, all these factors werepresent.At first sight, finding the right timing for policy-making may appear as much agamble as any other; but deeper insight is gained from the analysis of theoperations of the Office of the Chief Scientist (OCS) at the Ministry of Industryand Trade in Israel, the institution that shapes Israeli high-tech policy. The OCScommands around $400m per year under the framework of the 1984 law for theencouragement of industrial R&D. It is entitled to launch and stop R&D incentive15
  22. 22. programmes or to modify their rules, as well as to select projects for funding.Decision making at the OCS takes no longer than a few weeks.Uncertainty is a natural characteristic of high-tech markets, and the Israeli Officeof the Chief Scientist is an ad-hoc institution able to either take advantage ofopportunities or to stop useless public spending. Therefore it is recommended thatany region with high-tech potential should establish an institution such as IsraelsOCS, which is able to cope with sudden changes.3. Capabilities creation, reputation and disclosure - initial involvement of aninternational partner, as most of these firms are “global” orientedOne of the rules of the Yozma programme stated that, in order to be eligible forincentives, a fund must have the participation of an experienced foreign partner.This simple demand caused some of the most important VCs from around theworld to participate in the Yozma funds. The “social” importance of theirparticipation, in terms of image, and the crucial opportunity to learn from theirspecific experience and international networking, has been thoroughly analysed.This appears to be particularly important in the wake of increased marketglobalisation.4. Importance of the Israeli (local) body involvedAnother condition for eligibility of a fund for the Yozma incentives was theparticipation of a known Israeli financial body. This was the base for the necessarylocal commitment and financial monitoring.5. Public intervention as a trigger to the creation of the venture capital industry inIsraelThe Yozma programme was initiated in 1993 and privatisation was completed in1998. Indeed, unlike seed capital provision, the start-up capital is supplied fromaround the world, from well-established private funds. The role of public support istherefore to trigger the emergence of the industry by generous incentives for a fewyears, but it must not be intended as a permanent intervention.The simple awareness that the state is involved only for a limited period of timehas led to more confidence on the part of private investors.16
  23. 23. 6. The state as a passive investorIn spite of its significant share in the first Yozma funds, the state has neverinterfered with decisions made by the funds’ managers. This has allowed formarket-oriented decisions.A representative of the public sector was part of the Board only to make sure thatthe VC fund was acting according to regulations, but he was not involved in theprocess of decisions concerning investment [Erlich, 2002].It appears that it is always important to decide at the outset under which rules thestate will withdraw from the programme. The reason for the states withdrawal isnot only to allow the opportunity to increase the fund’s profit (in case thispossibility is given by the programme), but also in order to free the fund from thebureaucracy involved with working with public representatives. Similarconclusions were reached by Nijkamp, et al. [2001] who studied the case of theTwinning Programme in the Netherlands.7. A team with a strong technology background (both educational and working) is acritical factor to successManagement company teams with strong technological backgrounds have beenshown to be more successful than average.8. Upside vs. downside incentivesAs has been shown in other cases [Murray, 2002], upside incentives (incentivesthat cause funds to be more profitable in case of success) appear to be moreappropriate than downside incentives (incentives that limit the investors’ losses incase of bad investments). The IFISE team reasoned that if guarantee schemes are tobe used, it is important to make sure that they apply only to passive investors suchas pension funds, and not to management companies or strategic investors whoactually influence the investments’ choice and support.9. Avoid giving monopoly to any one fundIn the process of building the venture capital industry, Mr. Erlich, manager of theprogramme on behalf of the Israeli government, took particular care that all publicfunds were not controlled by the same management company.17
  24. 24. 10. A variety of instruments for the market must be considered. It is important topilot and to be ready for failures or amendmentsIt was shown that the Inbal programme, which had been launched at the same(convenient) moment as the Yozma programme, was much less successful. Whilethe reasons could be different (downside incentive, much bureaucracy), it is clearthat there is a need for flexibility; that is, the ability to launch differentprogrammes, or to amend existing ones continuously, so as to be able to cope withany misjudgements from the beginning.On the other hand, it is important to stress that any initiative should be at leastpartially successful from the beginning. Indeed, programme failures cause poorreputations both for the public institution involved and for the whole industry,thereby inhibiting its development for the foreseeable future.11. Fund sizeFollowing the evolution of the funds over time it is clear that they have grownconsiderably in size. Indeed, from an average of $20 million at the start of theYozma programme, the funds reached more than $500 million in 2000.The implication for policy concerning this evolution may not be clear-cut, as therealways is a limit to the extent of governmental participation in private ventures.Moreover, we reason that venture capital schemes are only needed where the VCindustry does not exist or is still in its infancy. Therefore, public participation in therange of $8 million (which was the case in the Yozma programme) may providethe right order of magnitude of public participation.12. Funds and sectoral specializationAll Yozma funds but one (Medica, which specialized in medical devices andbiotech) had no restrictions for investments in any sector, provided that theinvestee firm was high-tech.With time, many funds tended to specialize in one or more fields, most notablytelecommunication and software, as this was where the strongest potential wasfound. The two planning approaches most discussed were the following: (1) thestate should be absolutely neutral with respect to sectoral investment and limititself to checking that the investee firm are high-tech, and (2) the public sector18
  25. 25. should invest in those sectors that have a strong and unexploited potential in theirregion.While both approaches are interesting and each has its rationale, the IFISE teamreasoned that it is quite difficult to identify the strong and unexploited sectors, andthat adding constraints to the fund managers is usually very badly perceived;therefore neutrality seems to be the best alternative. An exception should beenvisaged for sectors that need particular infrastructure, such as the biotech-pharmaceutical sector.1.5 - ConclusionsSince the Yozma programme has been validated as an extremely successful one, itcomes as no surprise that various countries such as New Zealand, Australia,Denmark, Korea, the former Czechoslovakia, Taiwan, and South Africa adoptedthe same or similar schemes [Erlich, 2002a]. Many good lessons can be learnt anddifferent issues raised from the analysis of this programme.In the framework of the IFISE project, analysis of the programme and the IsraeliVC industry has been used for extrapolating new lessons to be transferred to othercountries, and has then been applied to the Italian reality. Details on the analysis ofthe Yozma programme and part of the extrapolated lessons are found in [Teubaland Avnimelech, 2002], those on the comparison of Yozma-affiliated enterprisesand other Israeli companies are found in [Sadovski, 2002], additional extrapolatedprinciples and the application of the extracted lessons to the Italian reality arefound in [Modena, 2002].19
  26. 26. CHAPTER 2THE TECHNOLOGICAL INCUBATORS PROGRAMMEAND THE PROVISION OF SEED CAPITAL TO RESEARCH-INTENSIVE NEW FIRMS2.1 - Programme Background and OperationIn the wake of massive immigration of skilled personnel from the former U.S.S.R.,the Israeli government decided in 1990 to establish the Technological IncubatorsProgramme (T.I.P), with the aim of both helping the immigrant scientists andengineers find employment in their own fields of expertise, and of creating newhigh-tech and export-oriented companies.Between 1991 and 1993, 28 incubators were established around the country on theinitiative of large firms, universities, and local authorities, or a combinationthereof. An incubator is a not-for-profit organization providing financial support,office space and professional consulting to each incubated project. It usually hostseight projects, which have the right to remain for a maximum period of two years.The Office of the Chief Scientist at the Ministry of Industry and Trade grantsincentives to both the incubator management and the incubated projects: theincubator is given up to $180,000 annually and up to 100% of its annual budget.The projects are individually given up to 85% of their approved budget, plus up to$150,000 annually, for a maximum of two years. Incentives are only directed toindividual entrepreneurs, as existing firms are not eligible subjects. As of the endof year 2001, the T.I.P. featured:----23 technological incubators which have remained operational (5 have mergedwith larger incubators);200 projects currently operating;8 projects on average in each of the incubators;735 projects already have “graduated” from the incubators.In addition, theT.I.P. has launched a framework programme for two bio-technological incubatorswhich are currently being set up.20
  27. 27. It should be mentioned that the T.I.P. only accepts projects that are both rooted inresearch and development and have a high level of innovation and uniqueness.Other selection criteria are that the projects have significant market potential, andare feasible with the available resources.The selection process follows various steps. First, the incubator’s manager, withthe help of a group of professional advisors, selects the most promising projectsfrom a multitude of inquiries. Then, together with the project’s entrepreneur and anadvisor, they prepare a “project folder” for submission to the incubator’s steeringcommittee (normally composed of academics, industrialists, and communityleaders), which gives its preliminary approval or denial to the funding. The finaldecision is determined by the Central Incubators Administration in the Office ofthe Chief Scientist, who may request the advice of additional experts. Theincubator manager’s opinion is the most influential. Approved projects areevaluated anew after one year, and the decision is made as to whether to give thema second year of support. Figure 2.1 gives an idea of the “deal flow” in the averageincubators.Figure 2.1: Project Selection Process - General Flow Chart and PercentageApprovedStep 1: Initiator inquiries (100%)Step 2: Submission of project portfolios (56%)Step 3: Incubator manager’s selection (37%)Step 4: Incubator expert committee’s selection (11%)Step 5: Chief scientist’s selection committee (6%)Step 6: Approved project admitted into the program (5%)Source: Shefer and Frenkel (2002) – See also Modena and Shefer (1998)21
  28. 28. In general, we might say that the T.I.P. is built in such a way that any entrepreneur,regardless of his/her place of residence (incubators are almost everywhere), his/herfield of expertise (there is no sectoral restriction), financial situation (the stateprovides most of the needed funds) or lack of experience (consulting is provided bythe incubator itself) has the chance to set up his/her own company. It also worthnoting that 84% of the entrepreneurs hold either a Master’s or a Ph.D. degree,clearly testifying to the high-tech, research-oriented nature of their ventures.2.2 - Validation of the Technological Incubators ProgrammeIn order to validate the Technological Incubators Programme, we have again madeuse of two sets of indicators: output indicators aimed at checking for the directimpact of the programme, and outcome indicators used to evaluate the indirectimpact of the programme; that is, to measure figures that may also have beeninfluenced by other factors.2.2.1. Economic Impact – Output IndicatorsThe output indicators that were measured for the Technological IncubatorsProgramme are as follows:1. Number of incubators established since the programme’s inceptionBetween 1991 and 2000, 28 incubators have been established.2. Incubator’s survival rateAfter 11 years of operation, out of 28 incubators, 23 (82%) are still operational.3. Number of incubated projects since inception and per yearSince its inception, 735 new enterprises have entered the incubators’ programme.In 2001 there were 200 projects in all the incubators (an average of eight perincubator). The average number of projects per incubator was the same as in 1996[Modena and Shefer, 1998].4. Graduation from the programmeIn the years 1999-2000-2001, 235 (86.4%) of the 272 incubated projects havegraduated, that is, they have completed the two year period in their incubator[Shefer and Frenkel, 2002].22
  29. 29. 5. Percentage of enterprises which succeeded in securing financial support at theend of the incubation periodAccording to Shefer and Frenkel [2002], 77.9% of the graduated projects havesucceeded in securing financial support (in addition to that granted by theincubators) at the end of the programme. It should be mentioned that the year 2000,in which the survey took place, is considered to have been exceptional in terms ofthe large amount of venture capital offered in Israel.6. Financial support securement by locationOne of the objectives of the programme was to create industrial development ineconomically depressed areas. Validation of the programme in this respect showsthat projects incubated in peripheral, non-metropolitan regions showed a lower rateof success (67.9%). The metropolitan areas show a success rate (78.6%) close tothe average, and the intermediate region resulted in the highest (84.3%).Table 2.1 - Graduating Projects that Succeeded in Securing FinancialSupport, by LocationLocationMetropolitanregionIntermediateregionPeripheralregionFieldNumber% ofTotalNumber% ofTotalNumber% ofTotal1. Pharmaceutical (Drugs) 5 100.0% 4 100.0% 0 -2. Medical equipment 16 69.6% 9 81.8% 9 75.0%3. Chemicals and raw materials 18 90.0% 8 72.7% 6 60.0%4. Mechanical engineering 13 65.0% 3 60.0% 4 57.1%5. Hardware, communication, andelectronic components9 69.2% 4 66.7% 2 100.0%6. Optical and precision equipment 10 71.4% 1 100.0% 2 50.0%7. Biotechnology 1 100.0% 17 100.0% 8 80.0%8. Energy and ecology 4 100.0% 1 100.0% 4 66.7%9. Software 12 100.0% 12 85.7% 1 50.0%Total 88 78.6% 59 84.3% 36 67.9%Source: Shefer and Frenkel (2002)23
  30. 30. 7. Financial support securement by industrial sectorTable 2.1 shows financial securement by industrial sector. As can be seen, the mostsuccessful projects are those in the fields of pharmaceuticals (drugs),biotechnology and software. In general, Table 2.1 shows how the structure of theTechnological Incubator may be suitable for a wide variety of sectors.8. Contribution to the variety of the economyVariety has always been considered an important feature of any economy. This hasbeen seen very clearly in the last two years (2001-2002), where regions whoseindustry was too strongly focused on the telecommunication sectors (like Israel andCalifornia) suffered strong recession. The T.I.P. appears to contribute to varietywithin the Israeli industrial structure by giving opportunities to entrepreneursoperating in sectors that are not part of the strongest in the country. Indeed, asshown by Table 2.2, the distribution of incubated projects among various sectors isconsiderably different than that of a general sample of the Israeli high-tech start-ups. It appears that firms operating in the major sectors of Israeli industry(telecommunications, software, etc) did not need the support of the incubators as,in all probability, private venture capitalists/investors were able to evaluate thosefirms’ potential and invest in them. On the other hand, initiatives that were not partof the “mainstream” sectors could find start-up opportunities in the incubators,thereby contributing to crucial variety within the national industrial production.24
  31. 31. Table 2.2 – Sectorial Distribution of Incubated Projects as Opposed to aRepresentative Sample of High-tech Firms in IsraelIncubators GeneralFieldNumber % Number %1. Drugs 19 9.1% 1 0.7%2. Medical equipment 44 21.2% 15 10.7%3. Chemicals and new materials 26 12.5% 4 2.9%4. Mechanical engineering andindustrial automation24 11.5% 5 3.6%5. Hardware, communication, andelectronic components17 8.2% 36 25.7%6. Optical and precision equipment 18 8.7% 10 7.1%7. Biotechnology (excluding drugs) 26 12.5% 10 7.1%8. Energy and ecology 21 10.1% 0 0%9. Software 13 6.3% 59 42.1%Total 208 100% 140 99.9%Source: Data on incubated projects are taken from Shefer and Frenkel (2002), whereas data on thesample of Israeli start-ups are due to Sadovski (2001). The surveys were made consistent (andcompared in Modena, 2002) as they were both carried out in the framework of the IFISE project.9. Incubated projects initiator’s level of satisfaction of the incubators’ servicesTable 2.3 provides for a subjective evaluation of the incubator’s services made by aproject’s initiator. In order to evaluate which features really matter in a technologyincubator, both the effectiveness of each service provided by the incubator (columnA in the table) and its actual importance for the setting up of a new firm incubator(column B) were evaluated. To verify the importance of the incubator servicesmore strongly, a sample of Israeli high-tech entrepreneurs who were not linked tothe incubators were asked to evaluate the importance of each of the aspects in anincubator (column C). Moreover, they were asked to state whether they wouldexpect government incentives to help for each of the incubator items (column D).From the comparison of the responses we can spot those functions (services) thatare perceived as most important, and to which functions the T.I.P. does not giveserious enough response. These main services are: help in marketing and in linkswith international collaborators, networking with strategic partners, and links tofinancial sources. From this brief analysis we come to the conclusion that the T.I.P.25
  32. 32. programme cannot be validated with respect to these functions. The importance ofpublic financial support is also easily inferred from this table.Table 2.3 - Project Initiators’ Level of Satisfaction from Services Provided vs.Level of Importance Attached to these ServicesA - Inc.Initiators –Satisfaction ofincubatorserviceB - Inc.Initiators -Importanceattached toservicesC – Genericsample- ofinitiators -Importanceattached toservicesD - ConsidergovernmentinterventionappropriateService (function)Score(5 most satisfied– 1 leastsatisfied)Score(5 most satisfied– 1 leastsatisfied)Score(5 most satisfied– 1 leastsatisfied)Percentage ofintervieweesansweringpositivelyAvailable suitable space 3.72 2.31 1.8 13.2%Legal counselling 3.46 3.35 2.1 9.1%IPR Protection 3.43 3.32 2.8 22.4%Management support 3.43 2.74 2.2 11.9%Financial support 3.36 4.68 4.2 40.6%Strategic counselling 3.11 3.47 2.5 11.2%Access to labor pool/recruiting3.06 2.63 3.2 13.3%Links to financial sources 3.04 4.42 2.9 30.7%Connections withsuppliers3.04 2.27 1.9 4.9%Networking with strategicpartners2.98 4.08 3.5 25.9%Professional network 2.90 2.82 2.4 4.9%Market information 2.81 3.31 2.4 16.8%International collaborators 2.80 4.15 3.3 34.3%Marketing 2.74 4.17 3.8 31.5%Source of technologicalinformation2.56 2.78 2.0 15.4%Advanced studies and re-training2.46 2.52 1.8 18.2%Number of projects 109 109 143100%(143)Source: Data on incubated projects are taken from Shefer and Frenkel (2002), whereas data on thesample of Israeli start-ups are due to Sadovski (2001). The surveys were made consistent as they wereboth carried out in the framework of the IFISE project.26
  33. 33. 10. Incubator managers’ level of satisfactionIncubator managers’ level of satisfaction of the program varies according to thedifferent proposed functions made available by the incubators. On a scale of 1 to 5,with 5 showing the highest satisfaction, the average score given by 21 out of the 23incubators’ managers for each service is shown in table no. 2.4. [Shefer andFrenkel, 2002].Table 2.4 – Incubator Managers’ Level of SatisfactionVariable Score Std. DeviationAvailable suitable space 3.81 0.98Legal counselling 3.81 1.17IPR protection 3.67 1.20Management support 3.67 0.97Strategic counselling 3.52 1.17Market information 3.48 1.03Connections with suppliers 3.33 1.24Access to inputs 3.29 0.90International collaborators 3.24 1.22Professional networks 3.19 0.81Networking of plants 3.19 0.98Sources of technological information 3.14 1.20Networking with strategic partners 3.10 1.00Financial support 3.00 1.26Marketing 2.81 1.12Links to financial sources 2.76 1.30Access to labor pool 2.67 1.11Advanced studies and re-training 2.52 0.87Number of incubators’ managers: 21Source: Shefer and Frenkel, 2002When asked to point out the major barriers in running projects in the incubator, themanagers mentioned budget limitations and the lack of management knowledge[Shefer and Frenkel, 2002].2.2.2. Economic Impact - Outcome IndicatorsThis section presents the indicators of validity as measured 11 years after the T.I.P.inception and which relate to the larger impact produced by the programme. Some27
  34. 34. of these indicators may well be influenced by factors other than the programmeitself.1. Percentage of incubated firms as a share of total high-tech firms in IsraelSadovski [2001] has shown that 14.7% of the existing high-tech companies inIsrael in 2001 were supported by the Technological Incubators Programme. Thispercentage is quite significant when one takes into account that Israel has a hugenumber of high-tech start-ups (according to some, it has the largest absolutenumber in the world after the U.S.).2. Percentage of entrepreneurs coming from academia (helping technologytransfer from academia to industry)Table 2.5 and 2.6 are concerned with the (at least partial) validation of the T.I.P. asa means of technology transfer from academia to industry. It is easily noted thatmany founders of firms that pass through an incubator are much more likely tocome from the world of academia than founders of the rest of Israeli firms.Table 2.5 - Previous Occupation of the Founders - “Incubator” Companies vs.Generic Sample CompaniesPrevious occupation (% of total)IndustryAcademic andresearchinstitutionOtheroccupationsTotalNumber ofCompanies (100%)IncubatorsGraduates41% 36% 23% 22Samplecompanies78% 12% 10% 98Source: Sadovski, 20013. Percentage of firms whose ideas came from academia (helping technologytransfer from academia to industry)A second indicator was aimed at checking the contribution of the T.I.P. towards thetransfer of technology from academia to industry. Sadovski [2002] has checked theenvironment in which the basic idea of the new product was conceived. Table 2.6shows clearly that an incubator graduate’s new technologies are much more likelyto have stemmed from university research than from other high tech companies.28
  35. 35. Table 2.6 - The Working Environment for the Genesis of the New IdeaCompanies (% of total)EnvironmentHigh-techindustryTraditionalindustriesAcademicinstitutionsHigh-tech& academicinstitutionsTotalIncubator graduates 28% 11% 50% 11% 100%Sample companies 63.5% 20% 15% 1.5% 100%Source: Sadovski, 20014. Total private investment in incubated or formerly incubated firms as opposed tototal public expendituresAs of the end of 2001, a total of $627m had been invested by private entities intoincubator projects, versus a total governmental investment of $254.1m; a ratio of247% [Pridor, 2002a].5. Sales revenues of incubator-graduate companies as opposed to samplecompaniesTable 2.7 shows the sales revenues of a sample of incubated companies as opposedto a sample of high-tech companies in Israel. Incubator graduates seem to performmore poorly than average.Table 2.7 - Sales Revenues (2000) of Incubator-Graduate Companies vs. Non-Incubator Sample CompaniesRespondents (% of total)Sales Incubator Graduate Non Incubator GraduateNo sales 63% 52%100k$-1m$ 37% 22%>1m$ 0% 26%Total 100% 100%Source: Sadovski, 20022.3 - Evolution of the Technological Incubators Programme Over TimeIn the course of its 11 years of existence, a few changes have occurred in theregulation and organization of the T.I.P., as follows:29
  36. 36. 1. The initial effort of the public sector has proven to be successful in attractingprivate investors. Figure 2.2 shows the cumulative investment of the private vs.the public sectors. The latter reached the “break even point” (a situation wherethe private investors endow as much money as the public) in 1998, and the gapseems to be widening [Pridor, 2002a].2. The number of incubators has diminished from 28 to 23, with 5 incubatorshaving merged with others.3. Rules for the acceptance and management of projects, which are revised everyfew years, have become slightly more flexible. In particular, the previous ruleby which at least 50% of the entrepreneurs had to be new immigrants has beenlifted. In addition, rules that posed limits to the wages of the workers have beensoftened.4. The rule that prevented the sale of intellectual property to foreign entities ortransfer of the company abroad is being substituted with a rule whereby if theshareholders pay back to the state twice as much as their company was granted,they are freed from such restrictions. This rule will apply to all governmentalhigh-tech programmes.5. In spite of the success of the biotech and pharmaceutical (drug) related projectswithin the existing incubators, the T.I.P. has found that the existing potential inthe country was not exploited, and that in order to do so it would be necessaryto create a new ad hoc programme. As a result, a tender for three biotechincubators has been launched with some important new features: (1) Incubatorswill include research equipment to be used by the projects. (2) Projects will bepermitted to receive the loan for three years (as opposed to only 2 years inregular incubators). (3) The maximum governmental loan will be $1.8 millionfor these projects. This is done by means of convertible bonds, i.e. if theincubator is not able to refund the debt, the state will have the option to turn itinto shares of the relevant companies. (4) Contribution to managementcompanies is only for the acquisition of new equipment, up to 50% of theapproved budget [Web-Site Technological Incubators, 2002].6. A pilot project for partial privatisation is being tested parallel to the T.I.P.programme [Web-Site Technological Incubators, 2002]. According to this new30
  37. 37. proposal, incubators will be for-profit entities which will not receive anybudget for management. They will be entitled to state loans for projects, theloans will become equity, in case the incubator is not able to refund it(convertible bonds). The state loan is under condition to a series of rules,including that the equity held by the incubators should range between 30-70%.The new framework is being proposed first to the existing incubators [Web-Site Technological Incubators, 2002].Figure 2.2 - Government Investment vs. Private Investments in IncubatorGraduate Projects01000002000003000004000005000006000007000001991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001- - - Government investmentPrivate investmentSource: Pridor, 20022.4 - Success Factors, Lessons and Planning Issues from the TechnologicalIncubators Programme and its Evolution1 - Importance of strong public support for seed financeIn spite of the enhanced involvement of the private sector, state contributions stillaccount for 64.4% of the incubated firms’ budgets. Venture capital funds, whichare supposed to be the most natural source of co-financing, entered in only 2.4% ofprojects as they started and in 14% of projects after incubation. This data isespecially significant in Israel, where 52% of high-tech firms are VC invested. It31
  38. 38. also worth noting that in spite of very generous state contributions (up to 85% ofthe budget; up to $350,000), both project initiators and incubators’ managers agreethat the provision of seed capital is the most important and necessary function forsetting up new high-tech start-ups. This finding is in line with extensiveinternational literature dealing with market failure in early stage financing of high-tech ventures (Hall, 1989; Murray and Marriott, 1998; Oakey, 1995).As we have seen in Chapter 1, public intervention for the creation of start-upcapital sources ($1-2 million) does not have to be continuous, as it only needs totrigger the establishment of private sources that would become self-sustainableafter some time. The provision of seed capital has to be strongly supported by thepublic sector, although private sources participate in the investments.2 - Private funding to the incubator management team increases over time, whichmeans public intervention may be reduced over time (although not stopped)Table 2.8 shows incubator budgets according to the nature of the sources (privateor public). Keeping in mind that state contributions accounted for 100% of thebudget at the beginning, these data show how the states contribution hasdiminished over time in relative terms. This can be explained by the fact thatprivate sources would not be interested in joining a new programme before theyhave at least an initial record of it. On these grounds, we came to the preliminaryconclusion that when a new public programme is launched, there might be a pointin planning for a strong incentive at the beginning, which may then be reducedwith time.Table 2.8 - Average Source of Funding of Incubators, by LocationLocation of incubatorsSources of funding TotalMetropolitanregionIntermediateregionPeripheralregionTotal budget per averageincubator (in $)$565,381 $602,111 $498,000 $566,286Government funding (%) 38.0% 30.4% 36.9% 49.1%Other sources of funding (%) 62.0% 69.6% 63.0% 50.9%Number of incubators 21 9 5 7Source: Shefer and Frenkel, 200232
  39. 39. 3 - Locational factors and the need for background conditionsThe question of location is of extreme importance when we consider the problemof where to locate facilities such as incubators or seed capital funds. Indeed,economic policy oriented to the development of the high-tech sectors is oftenconfused (or wrongly combined) with policy aimed at the development ofdepressed areas. It was pointed out (see section 2.2, point 6) that the T.I.P.’speripheral incubators performed less successfully than others. This could have beenlinked to the lower number of proposals submitted to this kind of incubator, or tothe less stringent selection process (see table 2.9). The real issue turns out to bethat, in order to launch successful programmes, it is necessary to check theexistence of background conditions. It is imperative that there be a critical mass ofpotential entrepreneurs (deal flow) and that subsequent sources of financing exist,usually private venture capital funds.Table 2.9 - Project Selection Process in the 21 Israeli Incubators, by LocationTotal LocationMetropolitan region Intermediate region Peripheral regionFilteringProcess(per averageincubator)Number %Number % Number % Number %Number ofinquiries345 100% 397 100% 372 100% 259 100%Number ofproposalssubmitted194 56% 232 59% 252 68% 104 40%Incubatormanager’sselection126 37% 145 37% 152 41% 84 33%Expertcommittee’sselection38 11% 40 10% 30 8% 40 15%ChiefScientist’sapproval21 6% 24 6% 17 5% 20 8%Projectsadmitted intoprogram18 5% 18 5% 17 5% 20 8%Number ofincubators21 9 5 7Source: Shefer and Frenkel, 200233
  40. 40. If background conditions exist, it appears that there is quite a good probability ofgraduate projects remaining in the vicinity of the incubator, thereby contributing toindustrial development at the local level. This, at least, has been found to be thecase in Israel [Shefer and Frenkel, 2002; see also Modena and Shefer, 1998].4 - Neutrality vs. sectoral specializationThe dilemma of whether to encourage sectoral or neutral incubators can be phrasedas follows. On the one hand, an incubator (or seed fund) focused on a particularsector seems to be more efficient than one which accepts initiatives from anysector. Indeed, the management team of a sectoral incubator/seed fund would comefrom that same sector, and would be more competent both in the evaluation of theproposals and in helping entrepreneurs network with partners to better define theirown product. On the other hand, a sectoral incubator automatically rules out theopportunity for a wide range of initiatives, among which valuable ones may befound. In other words, the deal flow of the sectoral investor is strongly limited.From a public point of view, a sectoral incubator appears not to respond to thecriteria by which the opportunity to set up a new company must be given to anyvaluable entrepreneur.The question becomes even more difficult when the region for which theincubators are planned is a small one, and only a few funds can be set up. Shall oneconcentrate efforts into the one or few sectors that have the potential to grow and tocreate the necessary critical mass, or just be neutral and let the market drive theincubators’ deal flow and choices?In the framework of the IFISE project, Shefer and Frenkel [2002] have shown thatin spite of the trend of most incubators’ managers to support specialization, and inspite of a slight trend of existing incubators to actually specialize in two or threesectors, no major differences were found between the performance of the morespecialized versus the neutral incubators.The conclusion we reached is that there should be no restriction by the state as towhether the incubator/seed fund should focus on one or more sectors, or be totallyneutral. However, extreme care should be taken in checking that the proposal isconsistent, i.e. the proposers should show why they decided to focus on particular34
  41. 41. sectors (e.g., what is the potential of the area in that sector? How is themanagement team track record consistent with that choice?).An exception should be made for sectors that need specific infrastructure, as in thebiotech/pharmaceutical sector, which should be dedicated through an ad hocprogramme.5 - Integrative approach vs. division of functionsGenerally the T.I.P. provides for a one-stop shop for high-tech entrepreneurs. Itincludes all necessary functions such as seed money supply, professionalconsulting and office space. According to Rina Pridor, T.I.P. Director [Pridor,2002], this is of particular importance as it creates the necessary trust atmosphere,involvement, and discipline necessary for the inexperienced entrepreneur. Alsoaccording to Pridor [Pridor, 2002a], these are also essential factors in light of thefinding that 70% of project failures are attributed to the personality of theentrepreneurs (20% to misunderstanding of the market, and only 10% to technicalfailure).6. - Evaluation by an expert networkThe Technological Incubators Programme has set up a national database of expertsin almost all fields of science and technology. This is of crucial importance, as theincubators are submitted for evaluation along with ideas that come from widelyvaried fields, and it is often difficult to find an expert able to evaluate them,especially at the local level. It is strongly recommended that incubators benetworked, and that they share the opportunity to get professional advice from alarge national database of experts.7. - Transferring the firm abroad or selling the intellectual propertyIn general, the public authority that launches a support programme to high-techstart-ups is usually interested in developing the economy of its area of jurisdiction.Consequently, some authorities such as the Office of the Chief Scientist in Israelhave historically imposed various limits on the companies that received grantsfrom the government. These limits have caused considerable distress amongentrepreneurs, as the sale of either a company to foreign entities, or the sale ofintellectual property for a certain product, is common practice in the high-techsector. Israeli authorities have coped with this problem by introducing the rule by35
  42. 42. which a company is completely free to do as it wishes concerning the matter,provided it refunds back to the state a sum which is the double of its financialgrant.8 - The importance of the entrepreneur’s shareOne of the most important rules of the newly incubated projects is that theentrepreneur team owns at least 30% of the shares after the first round ofinvestment (entrance into the incubator). Indeed, according to Rina Pridor [Pridor,2002], it is very important to keep the inventor, who has the necessary know-howon the new technology used by the firm, motivated. By the same token, he shouldbe working as much as possible on the project, up to the ideal of his full timeemployment.9 - Enterprise governance and entrance of new investorsIf the entrepreneur is crucial in the first stages of the venture, he can become aburden after some time, when the firm should insert new investors, and by doingso, make the entrepreneur less influential. Indeed, it has been shown that manyentrepreneurs are reluctant to relinquish control of their firms, thereby limiting itsgrowth. In order to cope with this, some incubators have been authorized to act astrustees, and keep 20% of the shares in their hands with the power to sell them toan external investor, without the prior acceptance of the other shareholders [Pridor,2002].10 - Importance of the incubator’s managerShefer and Frenkel (2002) have shown that the capability and motivation of theincubators’ managers is crucial. "Growing" a new initiative is no easier thanrunning an existent and established one; therefore the manager and his team are tobe carefully chosen and adequately remunerated and motivated.11 - University incubators and seed fundsProximity to a university research centre has been shown to be a significant factorfor entrepreneurs in the field of biotechnology, pharmaceuticals and medicaldevices [Shefer and Frenkel, 2002]. This can also be linked to the higher academiclevel that is usually held by such entrepreneurs.Moreover, when establishing a university incubator or a seed fund, one should takeinto account a few problems that are likely to arise:36
  43. 43. 11 A - Conflict of interest. It may happen that due to research aspirations of theuniversity, researchers are tempted to use seed capital for funding their researcheven though it is not market-oriented. For this reason, it is sensible to avoid auniversity’s control over a seed fund, although it may participate in that fund. Also,to avoid conflicts of interest, it is important to avoid either the incubator’smanagement or the seed fund’s dependency on university management [Pridor,2002].11B - Professors as entrepreneurs. It is quite common that university researchers donot have the managerial skills needed to set up and run the new company. Thereare two ways to deal with this problem: (A) a professional manager coming fromthe industry (possibly the same sector as the entrepreneur) is put in tandem with theresearcher, and becomes the firm’s manager. The researcher invests the necessarytime (typically one or two days per week) to provide needed technical advice, butis still able to keep his position within the university; or (B) ad hoc businesscourses are established for the inexperienced entrepreneur, and he has thepossibility to refine his business plan within their framework [Pridor, 2002].37
  44. 44. CHAPTER 3THE ITALIAN INNOVATION SYSTEM AND ITSPOTENTIAL FOR HIGH-TECH START-UPSThis chapter summarizes figures and characteristics of the Italian InnovationSystem through the analysis of general indicators for high-tech activity, theavailable start-up capital and seed capital sources, and the identification ofconcentrations of high-tech activity. Findings on the Italian Innovation Systemhave been used as basic facts and data for planning the proposed projects whichwill be presented in Chapter 4.3.1 - General Characteristics of the Italian Innovation SystemFigure 3.1 presents the major innovation and R&S indicators for Italy as opposedto the EU average. It is easy to mark the sharp contrast between the first fiveindicators (representing the Italian position in the high-tech industry), allsignificantly below the EU average, and the last one (new-to-market products)which is significantly higher than the EU average. In order to correctly interpretthis data, it is necessary to distinguish between two different and often misusedconcepts: innovative as opposed to research-intensive firms.Figure 3.1 - Main Innovation Indicators, Italy vs. Europe-16%-27%-53%-28%-73%108%-100%-80%-60%-40%-20%0%20%40%60%80%100%120% Employment in high-techPublic R&D expense/GDPBusiness R&D expense/GDPHigh-tech sectors value addedEPO high-tech patent applicationsNew-to-market productsSource: University of Pavia elaboration on Eurostat and OECD data38
  45. 45. An innovative firm often changes its products, services, or its production processes.It often (but not always) uses new technologies, but does not necessarily producethem. When such a firm is founded, its time-to-market is usually not longer thansix months. Extremely common in Italy, this kind of firm usually deals withincremental innovation or with the diffusion of existing technologies and theiradaptation to different kinds of customers. This has been the case for a largenumber of Internet companies that were newly created in Italy in the 1990s. One ofthem, Tiscali, has become one of the largest Internet service providers in Europe. Itis worth mentioning that even if the Internet can be regarded as a special case,Northern Italy would still be well known for its many small and mediumenterprises in a variety of low and medium-tech sectors, from fashion tomechanics.On the other hand, a research-intensive firm is one that actually creates newtechnologies or new products by means of scientific and technological research. Ithas a large percentage of highly skilled personnel and a high R&S to turnover ratio,and its innovation is often radical. With the creation of such a firm, a significantfinancial effort is needed even before the first prototype is produced, and time-to-market is no less than two years. 2It is important to stress that, unlike “simply innovative” companies, research-intensive firms are very rare in any part of Italy. Orsi (2001), for example, remarksthat while 80% of R&S industrial expenditures are sustained by firms with over500 employees, only 2% are sustained by firms with less than 50 employees.Given the different financial needs of innovative firms as opposed to the research-intensive ones, and having established that the former are very common in Italywhile the latter hardly exist, policy orientation must distinguish between these twokinds of activity. For this purpose a uniform policy for both innovative firms andgeneric New Technology-Based Firms would be inadequate. For additional studieson the Italian Innovation System please refer to Malerba, 1993; Malerba andGavetti, 1996 and Modena et al., 2001.2More on the importance of this distinction can be found in Oakey, 1995 or, in the Italiancase, in Calderini, 2000.39
  46. 46. 3.2 - High-tech Activity per Sector and Geographical RegionSince the Italian territory is large and non-uniform, it was found necessary to mapthe potential for high-tech spin-offs according to various geographical areas. Thiswas especially important because, as was explained in section 1.4 (paragraph 1), itis imperative that venture capital funds for the high-tech industry are launched inareas where conducive background conditions already exist, and where there issignificant potential for high-tech start-ups.Various data have been processed, such as R&S expenses, production units andskilled personnel per region, as well as inventors3per local systems4, and sector.This part of the IFISE project, which was conducted by Modena et al, (2001), hascome to the following conclusions:1. The region in Italy with the highest potential for high-tech start-ups isLombardia. Activity in this region is distributed among different sectors;mainly electronics, biotech, fine chemistry, and industrial automation.2. Italy does not have a comparative advantage in any of the high-tech sectorsexcept for industrial automation (to the extent that this can be considered ahigh-tech sector).3. The central and northern regions of the country have significantly largerpotential in the high-tech sector than the southern regions. This is especiallytrue for industrial research, but academic research is also stronger and moreefficient in these areas (see also Balconi et al, 2002; Murst, 1999).4. Lazio, and Rome in particular, have a high concentration of academic researchactivity.5. Few significant local systems exist in Italy in terms of high-tech activity. Theseinclude electronics in the Milan and Turin areas, biotech (pharmaceuticals) inMilan and Rome, industrial automation in Milan, Turin, and Bologna, and, to alesser degree, semiconductors in Catania.3Inventors were defined as individuals who have filed at least one patent in a high-techsector. This definition, and the use of inventors as an indicator of high-tech activity, hasalready been used by Ferrari et al [1999]. For the use of patents as a ST indicator, seeOECD, 1994.4These are defined as job-intense commuting areas – see also ISTAT, 1998.40
  47. 47. 6. Although the Milan area is by far the most active of the high-tech sectors, itspotential is divided into different sectors such that it cannot be considered acluster, at the European level, in any of the high-tech sectors.These conclusions have been inferred from, among others, tables 3.1 and 3.2.Keeping in mind that the single most important ingredient for any high-techdevelopment - and for start-ups in particular - is skilled manpower, much attentionwas given to the indicators relating to that factor. To what extent a researcher or an“inventor” (an individual that has filed a patent pertaining to a high-tech sector)can be considered a potential entrepreneur is a question that could not be addressedin the framework of this project. Such a task would involve assessing the readinessof skilled manpower to set up their own company. However, it is our belief thatwell-planned public programmes (including VC provision, assistance andadvertising) do in fact affect the readiness of an individual to become anindependent entrepreneur. Therefore the basic empirical indicator to look atremains the skilled manpower concentrations.41
  48. 48. Table 3.1 – Major R&D Indicators per Geographical RegionRegionR&Dpersonnel inpublic andprivateenterprise:% ofnationaltotalR&Dpersonnel inpublicinstitutions:% ofnationaltotalTotalR&Dperson-nel: % ofnationaltotalR&Dperson-nel totalper1,000inhabi-tantsAddedvalue:% ofnationaltotalCivilianR&Dexpen-diture% ofnationaltotal(1994)Indexof R&Dexpen-diture(perpopula-tion) 1Piemonte,Valle d’Aosta24.5 4.4 13.2 4.3 11.3 15,4 0.33Lombardia 33.2 11.9 21.2 3.4 27.3 23.6 0.2Trentino AltoAdige0.5 0.9 0.7 1.2 1.4 0.8 -0.33Veneto 4.6 4.6 4.6 1.5 11.1 4.7 -0.24Friuli VeneziaGiulia2.2 2.1 2.2 2.6 2.2 2.5 0.09Liguria 3.3 3.7 3.5 3.0 3.0 3.5 0.08EmiliaRomagna7.6 8.1 7.9 2.9 9.7 7.4 0.03Toscana 3.9 8.2 6.3 2.5 7.3 5.9 -0.02Umbria 0.4 1.8 1.2 2.1 1.4 0.9 -0.22Marche 0.6 1.6 1.2 1.2 2.7 1.0 -0.43Lazio 9.9 27.4 19.7 5.5 6.6 19.0 0.35Abruzzo,Molise2.0 2.0 2.0 1.8 2.1 1.8 -0.22Campania 4.1 8.8 6.7 1.7 4.1 5.4 -0.29Puglia 1.5 3.5 2.6 0.9 3.4 2.2 -0.53CalabriaBasilicata0.4 1.8 1.2 0.6 1.3 1.1 -0.62Sicily 1.0 6.5 4.1 1.2 3.5 3.5 -0.43Sardinia 0.3 2.7 1.7 1.4 1.6 1.3 -0.38Total 100.0 100.0 100.0 2.5 100.0 100.0 0.00Northwest 61.0 20.0 37.9 3.6 41.6 42.5 0.23Northeast 14.9 15.7 15.4 2.1 24.4 15.4 -0.09Centre 14.8 39.0 28.4 3.7 18 26.8 0.17South andislands9.3 25.3 18.3 1.3 16 15.3 -0.4Highest values are shown in bold1(Regional expenditure divided by national expenditure)/(regional population/national population).The index was normalized as to give results in the interval [-1,1]. National average value correspondsto zero42
  49. 49. Table 3.2 below was created so as to locate any concentrations of high-tech activityin a local system in a given sector. A local system is defined as a work-intensivearea, the extent of which is defined by commuting distance. Looking at a localsystem rather than looking at a whole region permits us to spot smaller realities thatwould fade within a regional context. Moreover, this analysis gives some insightinto the various sectors, thereby permitting identification of local advantage withinlocal systems. For example, we have found that Catania, which is part of theunderdeveloped region of Sicily, has significant activity in the field ofsemiconductors. The analysis also shows how the high-tech activity in Milan isdistributed among different sectors. The last column in Table 3.2 gives a measureof the ratio of inventors to employees in a given sector and a given local system asopposed to the same ratio as calculated at national level. This gives a comparisonof innovative trends between areas that are active in the same sector. For instancewhile the area of Milan shows a higher level of employees and production units inthe field of fine chemistry, employees in the areas of Novara and Cairo Montenotte(Savona) show a stronger trend to patenting and therefore to product or processesinnovation. A deeper analysis of the interpretation of these indicators can be foundin Modena [2002].43
  50. 50. Table 3.2 - R&D Indicators per Main High-tech Sector and Local SystemSector RegionLabour localsystem (LLS) 1Inventors perLLS and % oftotal investorsin the period1995-99 2Weightedinventors per LLSand % of totalnumber of patents- 1995-99 2Productionunits perLLS and %of sectortotal - 1996 3Employees perLLS and % ofsector total –1996 3Index ofinventorsIntensity4Lombardia Milano 224 (31.8%) 108 (32.2%) 281 (30.1%) 27,420 (40.9%) -0.13Lazio Rome 85 (12.1%) 58 (17.3%) 125 (13.4%) 6,864 (10.2%) 0.08PharmaceuticalSector (national) total 705 (100%) 335 (100%) 933 (100%) 67,032 (100%)Lombardia Milano 186 (28.4%) 228 (35.4%) 260 (13. 4%) 12,966 (25. 9%) 0.05Sicilia Catania 39 (11.2%) 50 (7.8%) 13 (0.7%) 1,969 (3.9%) 0.08Computer hardware,semiconductors andelectronics components Sector (national) total 655 (100%) 644 (100%) 1,943 (100%) 49,984 (100%)Lombardia Milano 145 (25.3%) 104 (28.0%) 331 (15.1%) 14˙253 (26.1%) -0.02Piemonte Torino 62 30 103 1,872 0.52Ivrea (TO) 15 6 8 129 0.83Total 77 (13.4%) 36 (9.7%) 111 (5.1%) 2,001 (3.7%) 0.57Lazio Roma 48 (8.4%) 35 (9.4%) 173 (7.9%) 5,802 (10.6%) -0.12Consumer electronicsand telecommunicationhardwareSector (national) total 573 (100%) 371 (100%) 2,198 (100%) 54,618 (100%)Lombardia Milano 121 (21.7%) 65 (18.6%) 355 (21.8%) 5,839 (21.2%) 0.01Piemonte Torino 38 (6.8%) 19 (5.4%) 90 (5.5%) 1,422 (5.2%) 0.14Emilia Romagna Bologna 27 (4.8%) 20 (5.7%) 41 (2.5%) 1,110 (4.0%) 0.09Precision instrumentsSector (national) total 557 (100%) 349 (100%) 1,631 (100%) 27,581 (100%)Lombardia Milano 67 37 400 7,794 -0.07Bergamo 7 15 58 1,198 -0.26Como 12 11 30 941 0.12Total 86 (25.7%) 63 (30.7%) 488 (21.3%) 9,933 (29.5%) -0.07Liguria Cairo Montenotte (SV) 55 (16.5%) 35 (17.1%) 1 (0.0%) 1,499 (4.5%) 0.57Piemonte Novara 26 (7.8%) 13 (6.3%) 17 (0.7%) 788 (2.3%) 0.54Fine chemistrySector (national) total 334 (100%) 205 (100%) 2,228 (100%) 33,656 (100%)Piemonte Torino 39 (16.6%) 34 (15.7%) 62 (7.2%) 722 (4.9%) 0.54Lombardia Milano 21 (8.9%) 19 (8.8%) 156 (18.1%) 3,406 (23.1%) -0.44Emilia Romagna Bologna 11 (4.7%) 17 (7.8%) 33 (3.8%) 886 (6.0%) -0.1244Industrial AutomationSector (national) total 235 (100%) 217 (100%) 862 (100%) 14,772 (100%)1Source: ISTAT, 1997, Local Labour Systems2Source: University of Pavia elaboration on EPO data3Source: ISTAT, 19964Intensity of inventors is defined as the ratio of inventors to personnel in a specific sector and local system. The index was normalized as to give results in the interval [-1,1]. The averagevalue for a sector at national level corresponds to zero44
  51. 51. In order to get further insights on high-tech activity by sector, it was decided tolook into more details of the biotech, electronics, and telecommunication sectors. Ashort outline follows in the next two sections.3.3 - The Electronics and Telecommunication SectorAlthough Italy is a large market for electronics and telecom businesses (it is thelargest European market for mobile phones), the country creates little production -and innovation - as testified by the negative trade balance shown in table 3.3. Therelatively strong VC investment in 2000-2001 can be easily explained by industryderegulation, which led to a large number of small carrier providers.Table 3.3 - Electronic Components, Computer Hardware andTelecommunication Equipment - National Basic IndicatorsElectronics components 1998 1999 2000 99/98 00/99Turnover 2,117 2,159 2,319 2.0% 7.4%Export 1,020 1,137 1,198 11.4% 5.4%Import 1,539 1,562 1,647 1.4% 5.5%Trade balance -519 -425 -449 18.1% -5.6%Computer hardware 1998 1999 2000 99/98 00/99Turnover 3,712 3,935 4,328 6.0% 10.0%Export 1,978 2,012 2,133 1.7% 6.0%Import 2,999 3,285 3,739 9.4% 13.9%Trade balance -1,021 -1,273 -1,606 -24.7% -26.1%Telecommunications equipment 1998 1999 2000 99/98 00/99Turnover 10,716 11,290 12,627 5.3% 11.8%Export 2,789 2,846 2,918 2.0% 2.5%Import 3,202 3,424 3,951 6.9% 15.4%Trade balance -413 -578 -1,033 -39.9% -78.7%Source: Website ANIE, 2002To the extent that the Internet can be considered part of the telecommunicationssector, it is worth recalling that the tide of new Internet companies that sweptthrough Europe in the late 1990s also touched Italy. However, in addition to someInternet providers like the aforementioned Tiscali, most of the resulting firms were“dotcoms”, i.e., websites aimed at the commercialisation of various products orservices. No significant radical innovation appears to have been developed in Italy.45
  52. 52. The computer sector has been heavily affected by the closing of the Olivetticomputer production company, which was one of largest manufacturers in Europein the 1980s. Currently, no computer producer is active in the country.In the field of electronics, the only large firm with significant operations in Italy isSTMicroelectronics, which holds its major R&D centres in Milan and Catania(Sicily). Other significant R&D firms are Alcatel, Siemens, Bull, Ericsson andTelecom Italia; however, none of these has more than 1,000 R&D personnel inItaly [Modena et al, 2001].The activity in Milan and Catania for this sector has been studied further in order tocheck the spin-off potential in both areas. As clearly emerges from table 3.1 and3.2, the greater Milan area (including Pavia, Bergamo, Brescia and Varese) has thehighest activity for the electronics sectors. The technical schools of Milan andPavia together count some 500 researchers in electronics-related fields. The R&Dcentres of large multinationals, including Alcatel, Bull, Ericsson, Siemes, Pirelliand STMicroelectronics, as well as smaller centres of Agilent, Lucent and Phillips,account together for some 5,300 R&D personnel (Gattoni, et al, 2001).Private venture capital is available in Milan, as most VC management companiesare located in the area, but no significant public support grants are obtainable as thearea is not considered a priority development area.The IFISE team reasoned that given these conditions, the provision of seed capitalfor the high-tech industry could bring more research-intensive firms to the level atwhich they could be of interest to venture capital funds (which mostly providesubsequent funding), thereby enhancing their success probability. Project One inChapter 4 is also aimed at answering this need.As far as the area of Catania (Sicily) is concerned, it was found that approximately1,200 engineers and scientists are present in the area. A little less than 1,000 ofthese are currently working for STMicroelectronics, which dominates the industryin the region. Between 10 to 20 start-ups (according to definition) were found inthe area at various levels of research intensity; at least five of them are STM spin-offs and related to the semiconductor sector. No venture capital fund is establishedin the area and only one VC investment has been reported. Torrisi [2002], who hasstudied the Catania area, defines this set of conditions as a “pre-cluster” situation.46
  53. 53. We reasoned that the existing conditions in Catania are not sufficient to justify thecreation of venture capital funds dedicated to the high-tech sectors. In other words,a critical mass of activity and skilled personnel is not present in the region[Modena, 2002]. Therefore the desirable policy for this area would be to continueattracting R&D departments of large multinational firms, as was done in the past,until a critical mass of activity is achieved. This can be done by means of thegenerous funds available under the EU structural funds, since Catania (Sicily) is an“Objective 1 area” (see also section 3.6.6).3.4 - The Biotech SectorIn the last ten years the biotech sector has created interest among investors,especially due to the scientific revolution which has occurred mainly in the field ofgenetics. Despite being the fifth-largest world market for pharmaceuticals, Italy haslargely remained out of the industrial blossoming that has swept the sector. Table3.4 shows how both investments and human resources in industrial R&S are lowerin Italy than in the major developed countries.Table 3.4 – R&D Investments and Personnel in the Biotech-PharmaceuticalSector in Italy and in the Major Industrialized CountriesInvestments in R&DItaly France Germany UK U.S.A. JapanInvestmentsR&S/turnover (%)6.02 12.33 10.72 19.97 15.91 20.04R&D PersonnelItaly France Germany UK U.S.A. JapanR&D Personnel(number)5,02415,200 15,00020,90051,000 34,437R&D personnel/totalpersonnel (%)7.18 16.87 12.99 28.25 19.62 28.24Source: Farmindustria, 200047
  54. 54. However, Italy boasts strong academic research in this sector. It was found that asmany as 10,000 researchers (or about half of all researchers in S&T) are active inrelated fields (genetics, medicine, biotech or pharmaceuticals). These are relativelyevenly distributed throughout the country [Modena, 2002]. It is also worth notingthat the number of physicians per capita in Italy is twice as large as the average inother European countries. Although doctors as such may not be consideredpotential entrepreneurs, they certainly make up a reservoir of skilled manpower inthe biotech-pharmaceutical field.The most active centres in Italy are the greater Milan and Rome metropolitan areas,although only Milan can count on significant industrial R&D. Other significantconcentrations of academic activity exist throughout the country (such as Turin,Padova, Bologna, Pavia and Naples).In spite of a large market and the significant potential found in the academic sector,biotech spin-offs hardly exist. Figure 3.2 shows that Italy has one of the lowestnumber of enterprises in the biotech sector in Europe (around 50). This number iseven lower than that of countries like Finland and Denmark, whose population isless than a tenth of Italy’s and which have no exceptional life science industry.Figure 3.2 - Enterprises in the Biotech Sector in Major European Countriesper Country0 50 100 150 200 250 300 350 400Other countriesIrelandBelgiumFinlandSwitzerlandSwedenU.K.Source: Ernst & Young, 200348

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