Israel Experience for Europe

Israeli
Financing
Innovation
Schemes for
Europe
Final Report
Published by the University of Pavia
The University-Enterprise Liaison Ofﬁce

Ifise Final Report
PLANNING FOR THE CREATION OF SEED AND
START-UP CAPITAL SOURCES FOR HIGH-
TECH FIRMS IN ITALY FOLLOWING THE
ISRAELI SUCCESS STORIES OF THE YOZMA
AND THE TECHNOLOGICAL
INCUBATORS PROGRAMMES
PARTICIPANTS IN THE PROJECT
Vittorio Modena (P.I.)
Gil Avnimelech
Margherita Balconi
Roberto Del Giudice
Yigal Erlich
Matteo Facoetti
Tobia Fiorilli
Amnon Frenkel
Patrizia Gattoni
Anna Gervasoni
Dan Kaufmann
Aric Leibovitch
Chen Levin
Michal Miller
Gordon Murray
Peter Nijkamp
Fabio Palmieri
Francesco Pellizzari
Arie Sadovski
Daniel Shefer
Morris Teubal
Paola Vita-Finzi
This document was developed and edited by Vittorio Modena (vmodena@libero.it)

INDEX
Executive Summary 1
Introduction 4
Chapter 1 The Yozma Programme, or How to Create a Venture 6
Capital Industry from Scratch
1.1 The Yozma Programme - Definition Process and its 6
Final Structure
1.2 Validation of the Yozma Programme 8
1.2.1 Economic Impact - Output Indicators 9
1.2.2 Economic Impact - Outcome Indicators 11
1.3 The Israeli VC Evolution - Main Features 13
1.4 Success Factors, Lessons and Issues from the Yozma 14
Programme and the Evolution of the Israeli VC Industry
1.5 Conclusions 19
Chapter 2 The Technological Incubators Programme and the Provision 20
of Seed Capital to Research-Intensive New Firms
2.1 Programme Background and Operation 20
2.2 Validation of the Technological Incubators Programme 22
2.2.1 Economic impact - Output indicators 22
2.2.2 Economic impact - Outcome indicators 27
2.3 Evolution of the Technological Incubators Programme 29
Over Time
2.4 Success Factors, Lessons and Planning Issues from the 31
Technological Incubators Programme and its Evolution
Chapter 3 The Italian Innovation System and its Potential for High-tech 38
Start-ups
3.1 General Characteristics of the Italian Innovation System 38
3.2 High-tech Activity per Sector and Geographical Region 40
3.3 The Electronics and Telecommunication Sector 45
3.4 The Biotech Sector 47
3.5 The Supply of Private Seed and Venture Capital Sources 49
3.6 Public Incentives to Innovative Firms in Italy 53
3.6.1 The EU regulations 53
I

3.6.2 Law 297/99 and the incentives to research 54
operated by new firms
3.6.3 Regional programmes 54
3.6.4 European programmes 54
3.6.5 The Startech programme 55
3.6.6 Laws 95/95 for the incentive of juvenile 56
entrepreneurship
Chapter 4 A Proposal for Seed and Venture Capital Schemes in Italy: 58
Four Projects
4.1 General Planning Orientations 58
4.2 Project 1. Rotational Seed Capital Funds for New 62
High-tech Companies in Regions with High Potential
4.2.1 Motivations behind the project 62
4.2.2 Project outline 63
4.2.3 Requirements for seed funds’ management companies 65
4.2.4 Additional criteria for the selection of the 65
management company
4.2.5 Fund of funds’ role and monitoring 66
4.2.6 Qualified supporting institutions 67
4.3 Project 2. Biotech-Pharmaceuticals Incubators 68
4.3.2 Basic facts and guidelines used for planning 68
4.3.3 Programme definition and incentives 69
4.3.4 Investment rules 70
4.3.5 Qualified management companies 70
4.3.6 Selection criteria for management companies 71
4.3.7 Role of the central agency and monitoring 71
4.3.8 Possible launching institutions 72
4.4 Project 3. VC Funds for Depressed Regions 73
4.4.2 Description of the proposed project 73
4.4.3 Qualified management companies 75
4.4.4 Rules of investment 75
II

4.4.5 Monitoring 75
4.4.6 Possible launching institutions 75
4.5 Project 4. A Coordinating Institution for High-tech 76
Industries’ Incentive Policies
4.6 Recommendations for Future Research and for the 77
Definition of Innovation Policies
Acknowledgements 78
Bibliography 79
LIST OF TABLES
Table 1.1 - Original Yozma Funds and their Evolution 9
Table 1.2 - Growth Rate of Yozma-Affiliated Companies vs. a Sample 12
of Non-Yozma-Affiliated Companies
Table 1.3 - Sales of Yozma-Affiliated Companies vs. a Sample of Non-Yozma- 13
Affiliated Companies
Table 2.1 - Graduating Projects that Succeeded in Securing Financial 23
Support, by Location
Table 2.2 - Sectorial Distribution of Incubated Projects as Opposed to a 25
Representative Sample of High-tech Firms in Israel
Table 2.3 - Project Initiators’ Level of Satisfaction from Services Provided 26
vs. Level of Importance Attached to these Services
Table 2.4 - Incubator Managers’ Level of Satisfaction 27
Table 2.5 - Previous Occupation of the Founders - “Incubator” Companies 28
vs. Generic Sample Companies
Table 2.6 - The Working Environment for the Genesis of the New Idea 29
Table 2.7 - Sales Revenues (2000) of Incubator-Graduate Companies 29
Vs. Non-Incubator Sample Companies
Table 2.8 - Average Source of Funding of Incubators, by Location 32
Table 2.9 - Project Selection Process in the 21 Israeli Incubators, by Location 33
Table 3.1 - Major R&D Indicators per Geographical Region 42
Table 3.2 - R&D Indicators per Main High-tech Sector and Local System 44
Table 3.3 - Electronic Components, Computer Hardware and 45
Telecommunication Equipment - National Basic Indicators
Table 3.4 - R&D Investments and Personnel in the Biotech-Pharmaceutical 47
Sector in Italy and in the Major Industrialized Countries
III

Table 3.5 - Number of Investments and of Early Stage Investments in the 49
Biotech and Pharmaceuticals Sector - year 2001
Table 3.6 - Seed and Start-up Investments of VC Funds in Italy - year 2000 52
LIST OF FIGURES
Figure 2.1 - Project Selection Process - General Flow Chart and Percentage 21
Approved
Figure 2.2 - Government Investment vs. Private Investments in Incubator 31
Graduate Projects
Figure 3.1 - Main Innovation Indicators, Italy vs. Europe 38
Figure 3.2 - Enterprises in the Biotech Sector in Main European Countries 48
per Country
Figure 3.3 - Internal VC Investments as a Percentage of GDP 50
Figure 3.4 - Early Stage Investment by Italian VC Funds by Region 51
(2000 - 2001)
Figure 3.5A - Major Objective 1 (depressed) Areas 57
Figure 3.5B - Concentrations of Inventors 57
Figure 4.1 - Scheme for Public Incentives to Seed Funds 64
Figure 4.2 - Public Incentive Scheme for Investment Funds in Economically 74
Depressed Areas
LIST OF ACRONYMS
EC -European Commission
EU - European Union
GDP - Gross Domestic Product
IPO - Initial Public Offering
ICT - Information and Communications Technology
IRR - Internal Rate of Return
IT - Information Technology
IVA - Israel Venture Capital Association
M&A - Mergers & Acquisitions
OCS - Office of the Chief Scientist at the Ministry of Industry and Trade in Israel
R&D - Research and Development
VC - Venture Capital, Venture Capital Management Company
IV

EXECUTIVE SUMMARY
This document represents the final results of the project IFISE (Israeli Financing
Innovation Schemes for Europe), which was supported by the European
Commission under the Innovation and SMEs programme of the Fifth Framework
Programme. Aims of this project were: (1) The validation of two Israeli
programmes: Yozma and the Technological Incubators Programme; (2) The
extrapolation of principles useful for the efficient creation of seed and venture
capital schemes in Europe; and (3) The proposal of public schemes for the efficient
creation of seed and venture capital sources in Italy.
All papers presented by partners in this project are available on the website
http://ifise.unipv.it.
Results of the project indicate that the Yozma programme, launched in Israel in the
early 1990s, was an outstanding success. All indicators are consistent with this
affirmation and indeed suggest that this simple and relatively small programme has
created the current venture capital industry in Israel. It has thereby become a very
strong contributor towards the incredible blossoming of the Israeli high-tech
industry in the second half of the nineties.
The Technological Incubators Programme (T.I.P.) can also be described as
successful, having given opportunities to inexperienced entrepreneurs or to
initiatives in sectors that are uncommon in Israel. However, not all success
indicators are consistent and some improvements should be made to the
programme.
Some of the most important lessons derived from these two programmes are the
following:
1. Public intervention for the establishment of seed and venture capital funds is
usually necessary and desirable. While for seed funds (€0.1-1 million) this has
to 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 for
mature situations, i.e. for regions that already feature a strong potential for
high-tech spin-offs and some demand for private equity.
1

3. The state should play a passive role in venture capital schemes. Any decisions
about 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 one
sector, should be used.
5. Any targeted programme must be inserted into a context of innovation policy
which is integrated and interdisciplinary. For this purpose it is advisable to set
up 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 data
elaboration. The main results used as a basis for planning are the following:
1. Distinction between generally innovative firms and research-intensive firms is
crucial in Italy, where there is an abundance of the former, but very few of the
latter.
2. Italy lacks seed capital for the high-tech industry, especially in the regions that
have the strongest potential for high-tech start-ups.
3. Hardly any new biotech-pharmaceutical firms are found in Italy, despite large
markets and significant academic research.
4. Economically depressed areas in Italy lack venture capital activity in all
industrial sectors.
5. Existing public programmes for the support of new high-tech firms seem
inadequate.
Planning for investment schemes in Italy has led to the suggestion of four
proposals to the Italian authorities:
1. The creation of rotational seed capital funds for new research intensive firms in
the regions with the highest potential. The public incentive will be by way of
participation in the funds, with private investors given the option to buy the
public shares under privileged conditions. The programmes shall be repeated
every four years.
2. The establishment of biotech incubators in the areas with the highest potential
for this sector. These shall be linked to the best local university research
centres and will give financial, consulting and infrastructure support. Given
2

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 all
industrial sectors. In this case, venture capital funds will be entitled to invest in
any industrial sector. Private investors will have the option to buy public shares
under favourable conditions. This program is meant to be a trigger for the
venture capital and private equity industry which is considered self-sustainable;
therefore, after a certain number of funds are established in each region this
programme will terminate.
4. The establishment of a National Institution for the coordination of all
incentives for the high-tech industry. This shall have a large budget, broad
capabilities and the power to launch, modify or stop any programmes for the
high-tech industry in Italy.
3

INTRODUCTION
In an attempt to follow the American example and create their own pool of New
Technology-based firms, several European countries and the European
Commission 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 and
private equity is crucial. Various forms of venture capital schemes for the creation
or strengthening of an industry have been adopted since the second half of the
nineties. However, since most of these instruments are less than five years old, it
has been quite difficult to validate their performance and analyse their operation
over time [Dimov and Murray, 2001]. This makes the Israeli schemes particularly
interesting: 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 track
record.
The aims of the IFISE (Israeli Financing Innovation Schemes for Europe) included
the validation of the Yozma and Technological Incubators Programme, the
extrapolation 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 to
reach its conclusions, the project underwent the following phases:
1.
2.
3.
4.
The thorough analysis of the Yozma and Technological Incubators Programme
in Israel by means of literature and field surveys, including interviews with
venture capital and incubator managers, entrepreneurs, and policy makers, and
a review of similar projects in Europe.
The extrapolation of success factors and various planning issues from the two
programmes, and from the review of similar European programmes, which
could prove useful for policy makers.
An analysis of the characteristics and potential of the Italian reality through
available 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 and
industrial sector.
4

5.
6.
The planning of adequate programmes for Italy by applying the lessons
gathered from Israel, and the consultation of senior experts in the Italian reality
as analysed in all its relevant aspects.
The involvement of Italian policy makers in the planning process and their
suggestions taken into account for the various proposed programmes.
It is important to mention that although academic papers will result from this
project, it is primarily meant to help policy makers define their instruments at
various levels. Therefore, a variety of planning issues are proposed, be these the
results of the surveys conducted in Italy and Israel, the interviews conducted with
various market actors, or the brainstorming that was done by IFISE partners at
various stages of the project. This document was written by Vittorio Modena who
has originated and coordinated the IFISE project. Whenever a result was obtained
by a different partner, the source is cited.
Results of this project have been made public by means of two workshops, in
Pavia, Italy, and Amsterdam, Holland, which were held in May, 2002. Many Italian
and other European policy-makers participated. Project results are also available on
the site: http://ifise.unipv.it/downloads.html.
Chapter 1 deals with the validation of the Yozma programme and the resulting
planning issues. Chapter 2 examines the validation of the Technological Incubators
Programme and its issues. Chapter 3 looks at the Italian Innovation System, with
some insights into the provision of private venture capital and the existing public
schemes for the support of VCs and new innovative firms, and Chapter 4 outlines
the 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

CHAPTER 1
THE YOZMA PROGRAMME, OR HOW TO CREATE A
VENTURE CAPITAL INDUSTRY FROM SCRATCH
This chapter is aimed at presenting the results of the IFISE project associated with
the validation and analysis of the Yozma programme. The evolution of the Israeli
VC industry was also taken into account, as we have proceeded with extracting
lessons, rules of thumb, and stimulating thoughts with the goal of creating VC
industries in other regions. This part of the project has been carried out mostly by
Prof. Morris Teubal and Mr. Gil Avnimelech of the Jerusalem Institute for Israel
Studies [Teubal and Avnimelech, 2002]; when other research is employed, the
source is cited.
1.1 - The Yozma Programme - Definition Process and its Final Structure
The situation in Israel at the end of the 1980’s showed clearly that background
conditions existed for the creation of venture capital funds, but the venture and
seed 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 be
questioned by the Chief Scientist1
in charge, Mr.Yigal Erlich. He reasoned that
despite the good work carried out by professional evaluators before giving money
to private firms, the state could not be as effective as private investors. After
several visits to countries with strong venture capital programmes, he was
convinced that the future of Israel's high-tech industry was rooted in venture
capital, and that the state must make an effort to trigger its creation. Erlich and his
team also sought the advice of world experts, and of key figures both from Israel’s
high-tech industry and from Israel's Capital Market. They also assessed alternative
courses of action. This process of search, analysis and research led to the shaping
1
The Office of the Chief Scientist at the Ministry of Industry and Trade is Israel's most
powerful R&D policy institution, commanding around $400 million annually.
6

of their mission: to put in place a mechanism that would stimulate the creation of
venture capital funds in Israel. This plan can be summarized in the following
points:
-
-
-
-
in order to create a serious venture capital industry in Israel, it would be
necessary to invest at least $200 million;
foreign organizations (venture capital funds, investment banks, etc.) will not
invest in Israel without significant incentives. Lacking such incentives, these
investors will turn to other countries with which they have experience and
whose 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 when
support for the program ends, the VC industry would continue to operate and
develop; to ensure a minimum of government intervention in the fund's
management; and last but not least, to ensure that the proposed program
would in fact be implemented.
It was clear to Yozma promoters that the existence of background conditions was
not in itself sufficient to assure success; it was crucial also to assure the positive
involvement of the various government bodies in order to implement real change.
In order to assure the Treasury’s support, some of that body's members became
part 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 with
government investment, and (2) the creation of a large number of smaller VC funds
with a total sum of $200m.
The first option was supported both by the Ministry of Treasury, and by a large
international investment company which tried to achieve a monopoly of the
government incentives. However, Erlich was committed to the principle of
avoiding 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 fund's equity, but this
proposal was objected to, even by the private sector consultants. The 50-50 option
had also been discussed, and finally it was decided that government investment be
limited to 40%. The final assets of the Yozma programme were as follows:
7

-
-
-
-
-
-
-
Yozma would be organized as an independent entity under contract to the
Office 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 be
used 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 at
their 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 VC
investments;
the investors' team must include a local financial partner.
It should be mentioned that parallel to Yozma, in 1992, the "Inbal" Program was
implemented. Its central idea was to stimulate VC funds by guaranteeing the
downside of their investments. The mechanism used was the creation of a
Government Insurance Company (“Inbal”) that provided a 70% guarantee to VC
funds which are traded in the stock market (calculated as 70% of the value of their
public 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 of
Holding Companies (low valuations). The funds encountered bureaucratic
problems 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 renounced
their guarantees in order to free themselves from the bureaucratic restrictions,
which they eventually succeeded in doing.
1.2 - Validation of the Yozma Programme
Validation 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 result
of the operation of the Yozma programme; and Outcome Indicators, i.e., what is
8

believed to have been the long term indirect result of the programme. It should be
mentioned that while the first set of indicators very accurately depicts the
programme's operation, the second can only be regarded as a general picture of the
VC industry. Indeed, many factors may have affected the incredibly fast evolution
of the Israeli VC industry in the 1990's. Unless otherwise mentioned, these
indicators have been measured by Prof. Teubal and Mr. Avnimelech of the
Jerusalem Institute for Israel Studies [Teubal and Avnimelech, 2002].
1.2.1 - Economic Impact - Output Indicators
The output indicators which have been measured are as follows:
1 - Number of new funds launched. Yozma has directly created 10 funds. The
funds’ names, their present size and principal foreign investors are shown in Table
1.1.
Table 1.1 - Original Yozma Funds and their Evolution
Original Foreign
Investor
Fund’s Name
Original State
Contribution (M$)
Present Capital under
Management (M$)-
year 2000 (*)
Daimler-Benz (DEG) Eurofund 8 72
Advent (USA) Gemini 8 350
Van Leer Group (NL) Inventech 8 100
Oxton (USA/Far East)
Jerusalem Ventures
Partners
8 255
MVP (USA) Medica 8 70
AVX, Kyocera (JP) Nitzanim-Concord 8 270
CMS (USA) Polaris 8 700
TVM (DEG) &
Singapore Tech
Star 8 600
Vertex International VERTEX 8 150
Walden (USA) Walden 8 120
Yozma Yozma 20 180
Total 100 2870
Source: Sadovski, 2001a
(*) – Size of the first fund raised was around $ 20m
9

2 - Number of management companies created. Ten management companies were
created. 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 teams
created by Yozma had more than 30 new partners and approximately 100 new
employees.
3 - Amount of money allocated from private sources to investment in new high-tech
industries. Yozma has directly caused the allocation of $150m from private funds
to high tech start-ups.
4 - Number of highly reputable VC organizations that entered the market as a
result of the project. Having required the participation of international partners of
prime importance, Yozma caused 5 high-reputation entities (Advent, Daimler-
Benz, Walden, Vertex and TVM) to enter the Israeli market, thereby creating a
positive reputation for Israel even before the first successful exits occurred (see
table 1.1).
4A - Variety of reputable investors that entered the market as a result of the
project, by type of investor. In order to achieve an optimal mix in the market, the
program aimed at attracting reputable investors in the following different
categories: investment banks, strategic partners, private equity funds, U.S. business
angels and U.S. pension funds.
5 - Number of high-tech companies that have received venture capital from a newly
created fund. The 10 Yozma funds have supported 256 high-tech firms during their
existence.
6 - Internal Rate of Return (IRR) of the funds. Although IRR could not be measured
precisely, 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. Yozma
funds 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 (Mergers
and Acquisitions).
10

8 - Opinion of venture capital funds' managers about the importance of the impact
of the Yozma programme. All of the VC managers that were interviewed (a total of
15 both from Yozma and other funds) believed Yozma to be one of the major
triggers of the growth of the Israeli VC industry.
9 - Contribution to initial critical mass: size of the total allocation to high-tech
start-ups as initiated by the programme, as a percentage of the total capital
available for start-ups in the first years. A government contribution of $100m to
the Israeli VC industry in 1993 was leveraged by $150m from private entities. In
general, out of the $440m managed until 1994, $250m originated from Yozma
funds.
10 - Number of funds as a percentage of total funds available in 1993-4. Yozma
has created 9 (the tenth was created in 1997), or 53% of the 17 funds existing at the
time.
1.2.2 - Economic Impact - Outcome Indicators
The outcome indicators, i.e. impact indicators that were measured several years
after the programme was completed, were measured as follows:
1 - Total number of funds created by the management companies that were started
under the original programme. All of the 10 management companies that were
created as a result of the Yozma programme have created additional, subsequent
funds, although the Yozma programme no longer supported those funds. Thirty
nine 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 by
Yozma management companies add up to $3.2 billion (+$250m managed by
Yozma funds), as opposed to the total capital under management of all other 118
Israeli and foreign investment organizations active in Israel ($6.8b after eight
years). 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 result
of the original programme. Eight years after Yozma's establishment, 100% of the
companies are still operational.
4 - Percentage of the Yozma funds that have used the option to buy government
shares. Of the management companies that were formed as a result of the original
11

programme, 80% used their option to buy government shares in the funds after five
years (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 as
a percentage of the total capital available for start-ups several years later. A
government contribution of $100m to the Israeli VC industry in 1993 was a major
trigger to a total allocation of almost $10b during the years 1993-2001. This would
make the government contribution only 1% of the final result.
6 - Reputable investors. Out of fourteen strategic investors involved in Israeli VC
until 1997, seven strategic investors were involved in Yozma management
companies. Six out of twelve reputable investment bank investors previously
involved in Israeli VC until 1997 were involved in Yozma management companies.
Reputable investors were found to correlate positively with good performance of
the fund.
7 - Growth of start-up enterprises financed by Yozma funds. Table 1.2 compares a
sample of 24 firms that have been financed by the ten Yozma funds, as opposed to
a sample of 105 high-tech enterprises (a representative sample) in Israel. It is
evident 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 Companies
Years 1998 1999 2000
Yozma
affiliation
Yozma
affiliated
Non
Yozma
affiliated
Yozma
affiliated
Non
Yozma
affiliated
Yozma
affiliated
Non
Yozma
Affiliated
Number of
respondents
13 48 15 55 17 63
Growth % Companies (% of total)
No Growth 46 64 47 51 24 41
1-40% 8 15 13 29 35 33
>41% 46 21 40 20 41 26
Source: Sadovski, 2001
12

8 - Sales of Yozma-affiliated companies as opposed to the average high-tech
companies. Table 3 shows how the group of enterprises that were financed by one
of 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
$1 million in year 2000, only 18% of the sample companies did so [Sadovski,
2001].
Table 1.3 - Sales of Yozma-Affiliated Companies vs. a Sample of Non-Yozma-
Affiliated Companies (*)
Responding companies (% of total)
Sales Yozma-affiliated Non-Yozma-affiliated
No sales 46 55
100k$-1m$ 12.5 27
>1m$ 41.5 18
Source Sadovski, 2001
*24 Yozma-affiliated companies were compared to 105 non-affiliated companies
9 - Rate of enterprises that went IPO. While 4.9% of Israeli high-tech firms
managed to raise money on the stock exchange, enterprises that were financed by
one of the ten Yozma funds reached a rate of 17.9% [Sadovski, 2001].
10 - Average number of employees in an enterprise. Yozma-affiliated enterprises
have 88 employees on average, while the average Israeli high-tech enterprise has
22 employees [Sadovski, 2001].
1.3 - The Israeli VC Evolution - Main Features
The 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 maturity
phase, 1999-2000.
The beginning of the VC industry in Israel (1993) is characterized by an excess of
demand and little competition, which made it easy for the first Yozma funds to spot
the right firms and to be successful in their resale. The typical size of these funds
was around $20 million, there was no specialization, and both investment and
13

divestment sizes were relatively small ($1-2 million of investment per deal, $10-70
million of sales for the successful exits). There was very little experience among
Israeli managers.
In phase two (1996-1999), funds grew larger - $100 million - and more
experienced. Pension funds and a larger number of strategic partners invested in
Israeli 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 financial
stages was also seen. Some funds even specialized into links with financial
institutions rather than industrial partners, and vice-versa.
Between 1999 and 2000, funds’ size continued to grow and reached $200 million
on average. In this period we saw the most important exits, like Chromatis, which
sold for $4.5 billion. There was a trend to link more directly with big strategic
partners such as Nortel, Cisco, AOL, Yahoo, etc. Israeli VCs had by now acquired
some good experience and they were not very different from their American
colleagues. Competition was fierce, as there was (probably) more money than good
ideas. 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 managers
to acquire skills and links until they became experts. Their reputation grew
steadily, until the recession came (at the end of year 2000) and took the sector into
a deep crisis. At the time this report is being written, a hard recession has caught
the telecom sector, which is the most important industrial sector in Israel.
Competition is fierce and the sector is shrinking, with many management
companies going out of business.
1.4 - Success Factors, Lessons and Issues from the Yozma Programme and the
Evolution of the Israeli VC Industry
After analysing the history of the Yozma programme and the emergence of the
Israeli VC industry, the IFISE team led by Vittorio Modena has extrapolated the
success factors, the lessons, and the issues to be kept in mind when planning for the
14

creation of a venture capital industry in another region. These have been discussed
at various occasions at IFISE meetings. A brief presentation of them follows.
1. Background conditions and the existing demand for VC
Venture capital can be used as a means of economic development in mature
situations, i.e. when background conditions already exist. Necessary background
conditions can be roughly divided into two categories: (1) The investment of
substantial 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 at
least partially successful ventures before the start of the programme.
While the first factor leads to potentialities and capabilities on the technological
side, the second factor is more linked to cultural attitudes and the motivation to
create new companies.
It is extremely important to check for background conditions before starting a
public scheme aimed at the creation of a VC industry. In this respect one should
not confuse the need to develop a high tech industry with the need to develop the
economies of disadvantaged regions, which, more often than not, have little
potential for high-tech.
2. The problem of timing and flexibility in R&D policy and how the Israeli system
copes with it
Timing has proven to be of the essence for the extraordinary success of the Yozma
programme. This factor was made up of components both cyclical and unique, the
former including the positive trend of the high-tech industry in general (e.g., as
measured by the U.S. NASDAQ index), and the latter, one-time events such as the
massive immigration from the former USSR and the concomitant lay-off of
scientific personnel in the 1980s. At the inception of Yozma, all these factors were
present.
At first sight, finding the right timing for policy-making may appear as much a
gamble as any other; but deeper insight is gained from the analysis of the
operations of the Office of the Chief Scientist (OCS) at the Ministry of Industry
and Trade in Israel, the institution that shapes Israeli high-tech policy. The OCS
commands around $400m per year under the framework of the 1984 law for the
encouragement of industrial R&D. It is entitled to launch and stop R&D incentive
15

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 Office
of the Chief Scientist is an ad-hoc institution able to either take advantage of
opportunities or to stop useless public spending. Therefore it is recommended that
any region with high-tech potential should establish an institution such as Israel's
OCS, which is able to cope with sudden changes.
3. Capabilities creation, reputation and disclosure - initial involvement of an
international partner, as most of these firms are “global” oriented
One of the rules of the Yozma programme stated that, in order to be eligible for
incentives, a fund must have the participation of an experienced foreign partner.
This simple demand caused some of the most important VCs from around the
world to participate in the Yozma funds. The “social” importance of their
participation, in terms of image, and the crucial opportunity to learn from their
specific experience and international networking, has been thoroughly analysed.
This appears to be particularly important in the wake of increased market
globalisation.
4. Importance of the Israeli (local) body involved
Another condition for eligibility of a fund for the Yozma incentives was the
participation of a known Israeli financial body. This was the base for the necessary
local commitment and financial monitoring.
5. Public intervention as a trigger to the creation of the venture capital industry in
Israel
The Yozma programme was initiated in 1993 and privatisation was completed in
1998. Indeed, unlike seed capital provision, the start-up capital is supplied from
around the world, from well-established private funds. The role of public support is
therefore to trigger the emergence of the industry by generous incentives for a few
years, but it must not be intended as a permanent intervention.
The simple awareness that the state is involved only for a limited period of time
has led to more confidence on the part of private investors.
16

6. The state as a passive investor
In spite of its significant share in the first Yozma funds, the state has never
interfered with decisions made by the funds’ managers. This has allowed for
market-oriented decisions.
A representative of the public sector was part of the Board only to make sure that
the VC fund was acting according to regulations, but he was not involved in the
process of decisions concerning investment [Erlich, 2002].
It appears that it is always important to decide at the outset under which rules the
state will withdraw from the programme. The reason for the state's withdrawal is
not only to allow the opportunity to increase the fund’s profit (in case this
possibility is given by the programme), but also in order to free the fund from the
bureaucracy involved with working with public representatives. Similar
conclusions were reached by Nijkamp, et al. [2001] who studied the case of the
Twinning Programme in the Netherlands.
7. A team with a strong technology background (both educational and working) is a
critical factor to success
Management company teams with strong technological backgrounds have been
shown to be more successful than average.
8. Upside vs. downside incentives
As has been shown in other cases [Murray, 2002], upside incentives (incentives
that cause funds to be more profitable in case of success) appear to be more
appropriate than downside incentives (incentives that limit the investors’ losses in
case of bad investments). The IFISE team reasoned that if guarantee schemes are to
be used, it is important to make sure that they apply only to passive investors such
as pension funds, and not to management companies or strategic investors who
actually influence the investments’ choice and support.
9. Avoid giving monopoly to any one fund
In the process of building the venture capital industry, Mr. Erlich, manager of the
programme on behalf of the Israeli government, took particular care that all public
funds were not controlled by the same management company.
17

10. A variety of instruments for the market must be considered. It is important to
pilot and to be ready for failures or amendments
It was shown that the Inbal programme, which had been launched at the same
(convenient) moment as the Yozma programme, was much less successful. While
the reasons could be different (downside incentive, much bureaucracy), it is clear
that there is a need for flexibility; that is, the ability to launch different
programmes, or to amend existing ones continuously, so as to be able to cope with
any misjudgements from the beginning.
On the other hand, it is important to stress that any initiative should be at least
partially successful from the beginning. Indeed, programme failures cause poor
reputations both for the public institution involved and for the whole industry,
thereby inhibiting its development for the foreseeable future.
11. Fund size
Following the evolution of the funds over time it is clear that they have grown
considerably in size. Indeed, from an average of $20 million at the start of the
Yozma programme, the funds reached more than $500 million in 2000.
The implication for policy concerning this evolution may not be clear-cut, as there
always is a limit to the extent of governmental participation in private ventures.
Moreover, we reason that venture capital schemes are only needed where the VC
industry does not exist or is still in its infancy. Therefore, public participation in the
range of $8 million (which was the case in the Yozma programme) may provide
the right order of magnitude of public participation.
12. Funds and sectoral specialization
All Yozma funds but one (Medica, which specialized in medical devices and
biotech) had no restrictions for investments in any sector, provided that the
investee firm was high-tech.
With time, many funds tended to specialize in one or more fields, most notably
telecommunication and software, as this was where the strongest potential was
found. The two planning approaches most discussed were the following: (1) the
state should be absolutely neutral with respect to sectoral investment and limit
itself to checking that the investee firm are high-tech, and (2) the public sector
18

should invest in those sectors that have a strong and unexploited potential in their
region.
While both approaches are interesting and each has its rationale, the IFISE team
reasoned that it is quite difficult to identify the strong and unexploited sectors, and
that adding constraints to the fund managers is usually very badly perceived;
therefore neutrality seems to be the best alternative. An exception should be
envisaged for sectors that need particular infrastructure, such as the biotech-
pharmaceutical sector.
1.5 - Conclusions
Since the Yozma programme has been validated as an extremely successful one, it
comes as no surprise that various countries such as New Zealand, Australia,
Denmark, Korea, the former Czechoslovakia, Taiwan, and South Africa adopted
the same or similar schemes [Erlich, 2002a]. Many good lessons can be learnt and
different issues raised from the analysis of this programme.
In the framework of the IFISE project, analysis of the programme and the Israeli
VC industry has been used for extrapolating new lessons to be transferred to other
countries, and has then been applied to the Italian reality. Details on the analysis of
the Yozma programme and part of the extrapolated lessons are found in [Teubal
and Avnimelech, 2002], those on the comparison of Yozma-affiliated enterprises
and other Israeli companies are found in [Sadovski, 2002], additional extrapolated
principles and the application of the extracted lessons to the Italian reality are
found in [Modena, 2002].
19

CHAPTER 2
THE TECHNOLOGICAL INCUBATORS PROGRAMME
AND THE PROVISION OF SEED CAPITAL TO RESEARCH-
INTENSIVE NEW FIRMS
2.1 - Programme Background and Operation
In 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 Incubators
Programme (T.I.P), with the aim of both helping the immigrant scientists and
engineers find employment in their own fields of expertise, and of creating new
high-tech and export-oriented companies.
Between 1991 and 1993, 28 incubators were established around the country on the
initiative of large firms, universities, and local authorities, or a combination
thereof. An incubator is a not-for-profit organization providing financial support,
office space and professional consulting to each incubated project. It usually hosts
eight 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 grants
incentives to both the incubator management and the incubated projects: the
incubator 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 to
individual entrepreneurs, as existing firms are not eligible subjects. As of the end
of year 2001, the T.I.P. featured:
-
-
-
-
23 technological incubators which have remained operational (5 have merged
with 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, the
T.I.P. has launched a framework programme for two bio-technological incubators
which are currently being set up.
20

It should be mentioned that the T.I.P. only accepts projects that are both rooted in
research and development and have a high level of innovation and uniqueness.
Other selection criteria are that the projects have significant market potential, and
are feasible with the available resources.
The selection process follows various steps. First, the incubator’s manager, with
the help of a group of professional advisors, selects the most promising projects
from a multitude of inquiries. Then, together with the project’s entrepreneur and an
advisor, they prepare a “project folder” for submission to the incubator’s steering
committee (normally composed of academics, industrialists, and community
leaders), which gives its preliminary approval or denial to the funding. The final
decision is determined by the Central Incubators Administration in the Office of
the Chief Scientist, who may request the advice of additional experts. The
incubator manager’s opinion is the most influential. Approved projects are
evaluated anew after one year, and the decision is made as to whether to give them
a second year of support. Figure 2.1 gives an idea of the “deal flow” in the average
incubators.
Figure 2.1: Project Selection Process - General Flow Chart and Percentage
Approved
Step 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

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/her
field of expertise (there is no sectoral restriction), financial situation (the state
provides most of the needed funds) or lack of experience (consulting is provided by
the incubator itself) has the chance to set up his/her own company. It also worth
noting 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 Programme
In order to validate the Technological Incubators Programme, we have again made
use of two sets of indicators: output indicators aimed at checking for the direct
impact of the programme, and outcome indicators used to evaluate the indirect
impact of the programme; that is, to measure figures that may also have been
influenced by other factors.
2.2.1. Economic Impact – Output Indicators
The output indicators that were measured for the Technological Incubators
Programme are as follows:
1. Number of incubators established since the programme’s inception
Between 1991 and 2000, 28 incubators have been established.
2. Incubator’s survival rate
After 11 years of operation, out of 28 incubators, 23 (82%) are still operational.
3. Number of incubated projects since inception and per year
Since its inception, 735 new enterprises have entered the incubators’ programme.
In 2001 there were 200 projects in all the incubators (an average of eight per
incubator). The average number of projects per incubator was the same as in 1996
[Modena and Shefer, 1998].
4. Graduation from the programme
In the years 1999-2000-2001, 235 (86.4%) of the 272 incubated projects have
graduated, that is, they have completed the two year period in their incubator
[Shefer and Frenkel, 2002].
22

5. Percentage of enterprises which succeeded in securing financial support at the
end of the incubation period
According to Shefer and Frenkel [2002], 77.9% of the graduated projects have
succeeded in securing financial support (in addition to that granted by the
incubators) 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 of
the large amount of venture capital offered in Israel.
6. Financial support securement by location
One of the objectives of the programme was to create industrial development in
economically depressed areas. Validation of the programme in this respect shows
that projects incubated in peripheral, non-metropolitan regions showed a lower rate
of success (67.9%). The metropolitan areas show a success rate (78.6%) close to
the average, and the intermediate region resulted in the highest (84.3%).
Table 2.1 - Graduating Projects that Succeeded in Securing Financial
Support, by Location
Location
Metropolitan
region
Intermediate
region
Peripheral
region
Field
Number
% of
Total
Number
% of
Total
Number
% of
Total
1. 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, and
electronic components
9 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

7. Financial support securement by industrial sector
Table 2.1 shows financial securement by industrial sector. As can be seen, the most
successful projects are those in the fields of pharmaceuticals (drugs),
biotechnology and software. In general, Table 2.1 shows how the structure of the
Technological Incubator may be suitable for a wide variety of sectors.
8. Contribution to the variety of the economy
Variety has always been considered an important feature of any economy. This has
been seen very clearly in the last two years (2001-2002), where regions whose
industry was too strongly focused on the telecommunication sectors (like Israel and
California) suffered strong recession. The T.I.P. appears to contribute to variety
within the Israeli industrial structure by giving opportunities to entrepreneurs
operating in sectors that are not part of the strongest in the country. Indeed, as
shown by Table 2.2, the distribution of incubated projects among various sectors is
considerably 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 those
firms’ potential and invest in them. On the other hand, initiatives that were not part
of the “mainstream” sectors could find start-up opportunities in the incubators,
thereby contributing to crucial variety within the national industrial production.
24

Table 2.2 – Sectorial Distribution of Incubated Projects as Opposed to a
Representative Sample of High-tech Firms in Israel
Incubators General
Field
Number % 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 and
industrial automation
24 11.5% 5 3.6%
5. Hardware, communication, and
electronic components
17 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 the
sample of Israeli start-ups are due to Sadovski (2001). The surveys were made consistent (and
compared 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’ services
Table 2.3 provides for a subjective evaluation of the incubator’s services made by a
project’s initiator. In order to evaluate which features really matter in a technology
incubator, both the effectiveness of each service provided by the incubator (column
A 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 services
more strongly, a sample of Israeli high-tech entrepreneurs who were not linked to
the incubators were asked to evaluate the importance of each of the aspects in an
incubator (column C). Moreover, they were asked to state whether they would
expect government incentives to help for each of the incubator items (column D).
From the comparison of the responses we can spot those functions (services) that
are perceived as most important, and to which functions the T.I.P. does not give
serious enough response. These main services are: help in marketing and in links
with international collaborators, networking with strategic partners, and links to
financial sources. From this brief analysis we come to the conclusion that the T.I.P.
25

programme cannot be validated with respect to these functions. The importance of
public 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 Services
A - Inc.
Initiators –
Satisfaction of
incubator
service
B - Inc.
Initiators -
Importance
attached to
services
C – Generic
sample- of
initiators -
Importance
attached to
services
D - Consider
government
intervention
appropriate
Service (function)
Score
(5 most satisfied
– 1 least
satisfied)
Score
(5 most satisfied
– 1 least
satisfied)
Score
(5 most satisfied
– 1 least
satisfied)
Percentage of
interviewees
answering
positively
Available 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/
recruiting
3.06 2.63 3.2 13.3%
Links to financial sources 3.04 4.42 2.9 30.7%
Connections with
suppliers
3.04 2.27 1.9 4.9%
Networking with strategic
partners
2.98 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 technological
information
2.56 2.78 2.0 15.4%
Advanced studies and re-
training
2.46 2.52 1.8 18.2%
Number of projects 109 109 143
100%
(143)
Source: Data on incubated projects are taken from Shefer and Frenkel (2002), whereas data on the
sample of Israeli start-ups are due to Sadovski (2001). The surveys were made consistent as they were
both carried out in the framework of the IFISE project.
26

10. Incubator managers’ level of satisfaction
Incubator managers’ level of satisfaction of the program varies according to the
different 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 23
incubators’ managers for each service is shown in table no. 2.4. [Shefer and
Frenkel, 2002].
Table 2.4 – Incubator Managers’ Level of Satisfaction
Variable Score Std. Deviation
Available suitable space 3.81 0.98
Legal counselling 3.81 1.17
IPR protection 3.67 1.20
Management support 3.67 0.97
Strategic counselling 3.52 1.17
Market information 3.48 1.03
Connections with suppliers 3.33 1.24
Access to inputs 3.29 0.90
International collaborators 3.24 1.22
Professional networks 3.19 0.81
Networking of plants 3.19 0.98
Sources of technological information 3.14 1.20
Networking with strategic partners 3.10 1.00
Financial support 3.00 1.26
Marketing 2.81 1.12
Links to financial sources 2.76 1.30
Access to labor pool 2.67 1.11
Advanced studies and re-training 2.52 0.87
Number of incubators’ managers: 21
Source: Shefer and Frenkel, 2002
When asked to point out the major barriers in running projects in the incubator, the
managers mentioned budget limitations and the lack of management knowledge
[Shefer and Frenkel, 2002].
2.2.2. Economic Impact - Outcome Indicators
This 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. Some
27

of these indicators may well be influenced by factors other than the programme
itself.
1. Percentage of incubated firms as a share of total high-tech firms in Israel
Sadovski [2001] has shown that 14.7% of the existing high-tech companies in
Israel in 2001 were supported by the Technological Incubators Programme. This
percentage is quite significant when one takes into account that Israel has a huge
number of high-tech start-ups (according to some, it has the largest absolute
number in the world after the U.S.).
2. Percentage of entrepreneurs coming from academia (helping technology
transfer from academia to industry)
Table 2.5 and 2.6 are concerned with the (at least partial) validation of the T.I.P. as
a means of technology transfer from academia to industry. It is easily noted that
many founders of firms that pass through an incubator are much more likely to
come 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 Companies
Previous occupation (% of total)
Industry
Academic and
research
institution
Other
occupations
Total
Number of
Companies (100%)
Incubators
Graduates
41% 36% 23% 22
Sample
companies
78% 12% 10% 98
3. Percentage of firms whose ideas came from academia (helping technology
transfer from academia to industry)
A second indicator was aimed at checking the contribution of the T.I.P. towards the
transfer of technology from academia to industry. Sadovski [2002] has checked the
environment in which the basic idea of the new product was conceived. Table 2.6
shows clearly that an incubator graduate’s new technologies are much more likely
to have stemmed from university research than from other high tech companies.
28

Table 2.6 - The Working Environment for the Genesis of the New Idea
Companies (% of total)
Environment
High-tech
industry
Traditional
industries
Academic
institutions
High-tech
& academic
institutions
Total
Incubator graduates 28% 11% 50% 11% 100%
Sample companies 63.5% 20% 15% 1.5% 100%
4. Total private investment in incubated or formerly incubated firms as opposed to
total public expenditures
As of the end of 2001, a total of $627m had been invested by private entities into
incubator projects, versus a total governmental investment of $254.1m; a ratio of
247% [Pridor, 2002a].
5. Sales revenues of incubator-graduate companies as opposed to sample
companies
Table 2.7 shows the sales revenues of a sample of incubated companies as opposed
to a sample of high-tech companies in Israel. Incubator graduates seem to perform
more poorly than average.
Table 2.7 - Sales Revenues (2000) of Incubator-Graduate Companies vs. Non-
Incubator Sample Companies
Respondents (% of total)
Sales Incubator Graduate Non Incubator Graduate
No sales 63% 52%
100k$-1m$ 37% 22%
>1m$ 0% 26%
Total 100% 100%
2.3 - Evolution of the Technological Incubators Programme Over Time
In the course of its 11 years of existence, a few changes have occurred in the
regulation and organization of the T.I.P., as follows:
29

1. The initial effort of the public sector has proven to be successful in attracting
private investors. Figure 2.2 shows the cumulative investment of the private vs.
the public sectors. The latter reached the “break even point” (a situation where
the private investors endow as much money as the public) in 1998, and the gap
seems to be widening [Pridor, 2002a].
2. The number of incubators has diminished from 28 to 23, with 5 incubators
having merged with others.
3. Rules for the acceptance and management of projects, which are revised every
few years, have become slightly more flexible. In particular, the previous rule
by which at least 50% of the entrepreneurs had to be new immigrants has been
lifted. In addition, rules that posed limits to the wages of the workers have been
softened.
4. The rule that prevented the sale of intellectual property to foreign entities or
transfer of the company abroad is being substituted with a rule whereby if the
shareholders 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 governmental
high-tech programmes.
5. In spite of the success of the biotech and pharmaceutical (drug) related projects
within the existing incubators, the T.I.P. has found that the existing potential in
the country was not exploited, and that in order to do so it would be necessary
to create a new ad hoc programme. As a result, a tender for three biotech
incubators has been launched with some important new features: (1) Incubators
will include research equipment to be used by the projects. (2) Projects will be
permitted to receive the loan for three years (as opposed to only 2 years in
regular incubators). (3) The maximum governmental loan will be $1.8 million
for these projects. This is done by means of convertible bonds, i.e. if the
incubator is not able to refund the debt, the state will have the option to turn it
into shares of the relevant companies. (4) Contribution to management
companies is only for the acquisition of new equipment, up to 50% of the
approved 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 new
30

proposal, incubators will be for-profit entities which will not receive any
budget for management. They will be entitled to state loans for projects, the
loans 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 Incubator
Graduate Projects
0
100000
200000
300000
400000
500000
600000
700000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- - - Government investment
Private investment
Source: Pridor, 2002
2.4 - Success Factors, Lessons and Planning Issues from the Technological
Incubators Programme and its Evolution
1 - Importance of strong public support for seed finance
In spite of the enhanced involvement of the private sector, state contributions still
account for 64.4% of the incubated firms’ budgets. Venture capital funds, which
are supposed to be the most natural source of co-financing, entered in only 2.4% of
projects as they started and in 14% of projects after incubation. This data is
especially significant in Israel, where 52% of high-tech firms are VC invested. It
31

also worth noting that in spite of very generous state contributions (up to 85% of
the budget; up to $350,000), both project initiators and incubators’ managers agree
that the provision of seed capital is the most important and necessary function for
setting up new high-tech start-ups. This finding is in line with extensive
international 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-up
capital sources ($1-2 million) does not have to be continuous, as it only needs to
trigger the establishment of private sources that would become self-sustainable
after some time. The provision of seed capital has to be strongly supported by the
public sector, although private sources participate in the investments.
2 - Private funding to the incubator management team increases over time, which
means public intervention may be reduced over time (although not stopped)
Table 2.8 shows incubator budgets according to the nature of the sources (private
or public). Keeping in mind that state contributions accounted for 100% of the
budget at the beginning, these data show how the state's contribution has
diminished over time in relative terms. This can be explained by the fact that
private sources would not be interested in joining a new programme before they
have at least an initial record of it. On these grounds, we came to the preliminary
conclusion that when a new public programme is launched, there might be a point
in planning for a strong incentive at the beginning, which may then be reduced
with time.
Table 2.8 - Average Source of Funding of Incubators, by Location
Location of incubators
Sources of funding Total
Metropolitan
region
Intermediate
region
Peripheral
region
Total budget per average
incubator (in $)
$565,381 $602,111 $498,000 $566,286
Government 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 7
32

3 - Locational factors and the need for background conditions
The question of location is of extreme importance when we consider the problem
of where to locate facilities such as incubators or seed capital funds. Indeed,
economic policy oriented to the development of the high-tech sectors is often
confused (or wrongly combined) with policy aimed at the development of
depressed areas. It was pointed out (see section 2.2, point 6) that the T.I.P.’s
peripheral incubators performed less successfully than others. This could have been
linked to the lower number of proposals submitted to this kind of incubator, or to
the less stringent selection process (see table 2.9). The real issue turns out to be
that, in order to launch successful programmes, it is necessary to check the
existence of background conditions. It is imperative that there be a critical mass of
potential 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 Location
Total Location
Metropolitan region Intermediate region Peripheral region
Filtering
Process
(per average
incubator)
Number %
Number % Number % Number %
Number of
inquiries
345 100% 397 100% 372 100% 259 100%
Number of
proposals
submitted
194 56% 232 59% 252 68% 104 40%
Incubator
manager’s
selection
126 37% 145 37% 152 41% 84 33%
Expert
committee’s
selection
38 11% 40 10% 30 8% 40 15%
Chief
Scientist’s
approval
21 6% 24 6% 17 5% 20 8%
Projects
admitted into
program
18 5% 18 5% 17 5% 20 8%
Number of
incubators
21 9 5 7
33

If background conditions exist, it appears that there is quite a good probability of
graduate projects remaining in the vicinity of the incubator, thereby contributing to
industrial development at the local level. This, at least, has been found to be the
case in Israel [Shefer and Frenkel, 2002; see also Modena and Shefer, 1998].
4 - Neutrality vs. sectoral specialization
The dilemma of whether to encourage sectoral or neutral incubators can be phrased
as follows. On the one hand, an incubator (or seed fund) focused on a particular
sector seems to be more efficient than one which accepts initiatives from any
sector. Indeed, the management team of a sectoral incubator/seed fund would come
from that same sector, and would be more competent both in the evaluation of the
proposals and in helping entrepreneurs network with partners to better define their
own product. On the other hand, a sectoral incubator automatically rules out the
opportunity for a wide range of initiatives, among which valuable ones may be
found. 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 the
criteria by which the opportunity to set up a new company must be given to any
valuable entrepreneur.
The question becomes even more difficult when the region for which the
incubators are planned is a small one, and only a few funds can be set up. Shall one
concentrate efforts into the one or few sectors that have the potential to grow and to
create the necessary critical mass, or just be neutral and let the market drive the
incubators’ deal flow and choices?
In the framework of the IFISE project, Shefer and Frenkel [2002] have shown that
in spite of the trend of most incubators’ managers to support specialization, and in
spite of a slight trend of existing incubators to actually specialize in two or three
sectors, no major differences were found between the performance of the more
specialized versus the neutral incubators.
The conclusion we reached is that there should be no restriction by the state as to
whether the incubator/seed fund should focus on one or more sectors, or be totally
neutral. However, extreme care should be taken in checking that the proposal is
consistent, i.e. the proposers should show why they decided to focus on particular
34

sectors (e.g., what is the potential of the area in that sector? How is the
management team track record consistent with that choice?).
An exception should be made for sectors that need specific infrastructure, as in the
biotech/pharmaceutical sector, which should be dedicated through an ad hoc
programme.
5 - Integrative approach vs. division of functions
Generally the T.I.P. provides for a one-stop shop for high-tech entrepreneurs. It
includes all necessary functions such as seed money supply, professional
consulting 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. Also
according to Pridor [Pridor, 2002a], these are also essential factors in light of the
finding that 70% of project failures are attributed to the personality of the
entrepreneurs (20% to misunderstanding of the market, and only 10% to technical
failure).
6. - Evaluation by an expert network
The Technological Incubators Programme has set up a national database of experts
in almost all fields of science and technology. This is of crucial importance, as the
incubators are submitted for evaluation along with ideas that come from widely
varied 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 be
networked, and that they share the opportunity to get professional advice from a
large national database of experts.
7. - Transferring the firm abroad or selling the intellectual property
In general, the public authority that launches a support programme to high-tech
start-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 Israel
have historically imposed various limits on the companies that received grants
from the government. These limits have caused considerable distress among
entrepreneurs, as the sale of either a company to foreign entities, or the sale of
intellectual property for a certain product, is common practice in the high-tech
sector. Israeli authorities have coped with this problem by introducing the rule by
35

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 financial
grant.
8 - The importance of the entrepreneur’s share
One of the most important rules of the newly incubated projects is that the
entrepreneur team owns at least 30% of the shares after the first round of
investment (entrance into the incubator). Indeed, according to Rina Pridor [Pridor,
2002], it is very important to keep the inventor, who has the necessary know-how
on the new technology used by the firm, motivated. By the same token, he should
be working as much as possible on the project, up to the ideal of his full time
employment.
9 - Enterprise governance and entrance of new investors
If the entrepreneur is crucial in the first stages of the venture, he can become a
burden after some time, when the firm should insert new investors, and by doing
so, make the entrepreneur less influential. Indeed, it has been shown that many
entrepreneurs are reluctant to relinquish control of their firms, thereby limiting its
growth. In order to cope with this, some incubators have been authorized to act as
trustees, and keep 20% of the shares in their hands with the power to sell them to
an external investor, without the prior acceptance of the other shareholders [Pridor,
2002].
10 - Importance of the incubator’s manager
Shefer and Frenkel (2002) have shown that the capability and motivation of the
incubators’ managers is crucial. "Growing" a new initiative is no easier than
running an existent and established one; therefore the manager and his team are to
be carefully chosen and adequately remunerated and motivated.
11 - University incubators and seed funds
Proximity to a university research centre has been shown to be a significant factor
for entrepreneurs in the field of biotechnology, pharmaceuticals and medical
devices [Shefer and Frenkel, 2002]. This can also be linked to the higher academic
level that is usually held by such entrepreneurs.
Moreover, when establishing a university incubator or a seed fund, one should take
into account a few problems that are likely to arise:
36

11 A - Conflict of interest. It may happen that due to research aspirations of the
university, researchers are tempted to use seed capital for funding their research
even though it is not market-oriented. For this reason, it is sensible to avoid a
university’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’s
management or the seed fund’s dependency on university management [Pridor,
2002].
11B - Professors as entrepreneurs. It is quite common that university researchers do
not have the managerial skills needed to set up and run the new company. There
are two ways to deal with this problem: (A) a professional manager coming from
the industry (possibly the same sector as the entrepreneur) is put in tandem with the
researcher, and becomes the firm’s manager. The researcher invests the necessary
time (typically one or two days per week) to provide needed technical advice, but
is still able to keep his position within the university; or (B) ad hoc business
courses are established for the inexperienced entrepreneur, and he has the
possibility to refine his business plan within their framework [Pridor, 2002].
37

CHAPTER 3
THE ITALIAN INNOVATION SYSTEM AND ITS
POTENTIAL FOR HIGH-TECH START-UPS
This chapter summarizes figures and characteristics of the Italian Innovation
System through the analysis of general indicators for high-tech activity, the
available start-up capital and seed capital sources, and the identification of
concentrations of high-tech activity. Findings on the Italian Innovation System
have been used as basic facts and data for planning the proposed projects which
will be presented in Chapter 4.
3.1 - General Characteristics of the Italian Innovation System
Figure 3.1 presents the major innovation and R&S indicators for Italy as opposed
to the EU average. It is easy to mark the sharp contrast between the first five
indicators (representing the Italian position in the high-tech industry), all
significantly below the EU average, and the last one (new-to-market products)
which is significantly higher than the EU average. In order to correctly interpret
this data, it is necessary to distinguish between two different and often misused
concepts: 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-tech
Public R&D expense/GDP
Business R&D expense/GDP
High-tech sectors value added
EPO high-tech patent applications
New-to-market products
Source: University of Pavia elaboration on Eurostat and OECD data
38

An innovative firm often changes its products, services, or its production processes.
It often (but not always) uses new technologies, but does not necessarily produce
them. When such a firm is founded, its time-to-market is usually not longer than
six months. Extremely common in Italy, this kind of firm usually deals with
incremental innovation or with the diffusion of existing technologies and their
adaptation to different kinds of customers. This has been the case for a large
number of Internet companies that were newly created in Italy in the 1990's. One of
them, Tiscali, has become one of the largest Internet service providers in Europe. It
is 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 medium
enterprises in a variety of low and medium-tech sectors, from fashion to
mechanics.
On the other hand, a research-intensive firm is one that actually creates new
technologies or new products by means of scientific and technological research. It
has 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 significant
financial effort is needed even before the first prototype is produced, and time-to-
market is no less than two years. 2
It is important to stress that, unlike “simply innovative” companies, research-
intensive firms are very rare in any part of Italy. Orsi (2001), for example, remarks
that while 80% of R&S industrial expenditures are sustained by firms with over
500 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 Italy
while the latter hardly exist, policy orientation must distinguish between these two
kinds of activity. For this purpose a uniform policy for both innovative firms and
generic New Technology-Based Firms would be inadequate. For additional studies
on the Italian Innovation System please refer to Malerba, 1993; Malerba and
Gavetti, 1996 and Modena et al., 2001.
2
More on the importance of this distinction can be found in Oakey, 1995 or, in the Italian
case, in Calderini, 2000.
39

3.2 - High-tech Activity per Sector and Geographical Region
Since the Italian territory is large and non-uniform, it was found necessary to map
the potential for high-tech spin-offs according to various geographical areas. This
was especially important because, as was explained in section 1.4 (paragraph 1), it
is imperative that venture capital funds for the high-tech industry are launched in
areas where conducive background conditions already exist, and where there is
significant potential for high-tech start-ups.
Various data have been processed, such as R&S expenses, production units and
skilled personnel per region, as well as inventors3
per local systems4
, and sector.
This part of the IFISE project, which was conducted by Modena et al, (2001), has
come to the following conclusions:
1. The region in Italy with the highest potential for high-tech start-ups is
Lombardia. 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 sectors
except for industrial automation (to the extent that this can be considered a
high-tech sector).
3. The central and northern regions of the country have significantly larger
potential in the high-tech sector than the southern regions. This is especially
true for industrial research, but academic research is also stronger and more
efficient in these areas (see also Balconi et al, 2002; Murst, 1999).
4. Lazio, and Rome in particular, have a high concentration of academic research
activity.
5. Few significant local systems exist in Italy in terms of high-tech activity. These
include electronics in the Milan and Turin areas, biotech (pharmaceuticals) in
Milan and Rome, industrial automation in Milan, Turin, and Bologna, and, to a
lesser degree, semiconductors in Catania.
3
Inventors were defined as individuals who have filed at least one patent in a high-tech
sector. This definition, and the use of inventors as an indicator of high-tech activity, has
already been used by Ferrari et al [1999]. For the use of patents as a ST indicator, see
OECD, 1994.
4
These are defined as job-intense commuting areas – see also ISTAT, 1998.
40

6. Although the Milan area is by far the most active of the high-tech sectors, its
potential is divided into different sectors such that it cannot be considered a
cluster, 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-tech
development - and for start-ups in particular - is skilled manpower, much attention
was 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 addressed
in the framework of this project. Such a task would involve assessing the readiness
of skilled manpower to set up their own company. However, it is our belief that
well-planned public programmes (including VC provision, assistance and
advertising) do in fact affect the readiness of an individual to become an
independent entrepreneur. Therefore the basic empirical indicator to look at
remains the skilled manpower concentrations.
41

Table 3.1 – Major R&D Indicators per Geographical Region
Region
R&D
personnel in
public and
private
enterprise:
% of
national
total
R&D
personnel in
public
institutions:
% of
national
total
Total
R&D
person-
nel: % of
national
total
R&D
person-
nel total
per
1,000
inhabi-
tants
Added
value:
% of
national
total
Civilian
R&D
expen-
diture
% of
national
total
(1994)
Index
of R&D
expen-
diture
(per
popula-
tion) 1
Piemonte,
Valle d’Aosta
24.5 4.4 13.2 4.3 11.3 15,4 0.33
Lombardia 33.2 11.9 21.2 3.4 27.3 23.6 0.2
Trentino Alto
Adige
0.5 0.9 0.7 1.2 1.4 0.8 -0.33
Veneto 4.6 4.6 4.6 1.5 11.1 4.7 -0.24
Friuli Venezia
Giulia
2.2 2.1 2.2 2.6 2.2 2.5 0.09
Liguria 3.3 3.7 3.5 3.0 3.0 3.5 0.08
Emilia
Romagna
7.6 8.1 7.9 2.9 9.7 7.4 0.03
Toscana 3.9 8.2 6.3 2.5 7.3 5.9 -0.02
Umbria 0.4 1.8 1.2 2.1 1.4 0.9 -0.22
Marche 0.6 1.6 1.2 1.2 2.7 1.0 -0.43
Lazio 9.9 27.4 19.7 5.5 6.6 19.0 0.35
Abruzzo,
Molise
2.0 2.0 2.0 1.8 2.1 1.8 -0.22
Campania 4.1 8.8 6.7 1.7 4.1 5.4 -0.29
Puglia 1.5 3.5 2.6 0.9 3.4 2.2 -0.53
Calabria
Basilicata
0.4 1.8 1.2 0.6 1.3 1.1 -0.62
Sicily 1.0 6.5 4.1 1.2 3.5 3.5 -0.43
Sardinia 0.3 2.7 1.7 1.4 1.6 1.3 -0.38
Total 100.0 100.0 100.0 2.5 100.0 100.0 0.00
Northwest 61.0 20.0 37.9 3.6 41.6 42.5 0.23
Northeast 14.9 15.7 15.4 2.1 24.4 15.4 -0.09
Centre 14.8 39.0 28.4 3.7 18 26.8 0.17
South and
islands
9.3 25.3 18.3 1.3 16 15.3 -0.4
Highest values are shown in bold
1
(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 corresponds
to zero
42

Table 3.2 below was created so as to locate any concentrations of high-tech activity
in a local system in a given sector. A local system is defined as a work-intensive
area, the extent of which is defined by commuting distance. Looking at a local
system rather than looking at a whole region permits us to spot smaller realities that
would fade within a regional context. Moreover, this analysis gives some insight
into the various sectors, thereby permitting identification of local advantage within
local systems. For example, we have found that Catania, which is part of the
underdeveloped region of Sicily, has significant activity in the field of
semiconductors. The analysis also shows how the high-tech activity in Milan is
distributed among different sectors. The last column in Table 3.2 gives a measure
of the ratio of inventors to employees in a given sector and a given local system as
opposed to the same ratio as calculated at national level. This gives a comparison
of innovative trends between areas that are active in the same sector. For instance
while the area of Milan shows a higher level of employees and production units in
the 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 processes
innovation. A deeper analysis of the interpretation of these indicators can be found
in Modena [2002].
43

Table 3.2 - R&D Indicators per Main High-tech Sector and Local System
Sector Region
Labour local
system (LLS) 1
Inventors per
LLS and % of
total investors
in the period
1995-99 2
Weighted
inventors per LLS
and % of total
number of patents
- 1995-99 2
Production
units per
LLS and %
of sector
total - 1996 3
Employees per
LLS and % of
sector total –
1996 3
Index of
inventors
Intensity
4
Lombardia Milano 224 (31.8%) 108 (32.2%) 281 (30.1%) 27,420 (40.9%) -0.13
Lazio Rome 85 (12.1%) 58 (17.3%) 125 (13.4%) 6,864 (10.2%) 0.08
Pharmaceutical
Sector (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%) 0.05
Sicilia Catania 39 (11.2%) 50 (7.8%) 13 (0.7%) 1,969 (3.9%) 0.08
Computer hardware,
semiconductors and
electronics 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%) -0.02
Piemonte Torino 62 30 103 1,872 0.52
Ivrea (TO) 15 6 8 129 0.83
Total 77 (13.4%) 36 (9.7%) 111 (5.1%) 2,001 (3.7%) 0.57
Lazio Roma 48 (8.4%) 35 (9.4%) 173 (7.9%) 5,802 (10.6%) -0.12
Consumer electronics
and telecommunication
hardware
Sector (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%) 0.01
Piemonte Torino 38 (6.8%) 19 (5.4%) 90 (5.5%) 1,422 (5.2%) 0.14
Emilia Romagna Bologna 27 (4.8%) 20 (5.7%) 41 (2.5%) 1,110 (4.0%) 0.09
Precision instruments
Lombardia Milano 67 37 400 7,794 -0.07
Bergamo 7 15 58 1,198 -0.26
Como 12 11 30 941 0.12
Total 86 (25.7%) 63 (30.7%) 488 (21.3%) 9,933 (29.5%) -0.07
Liguria Cairo Montenotte (SV) 55 (16.5%) 35 (17.1%) 1 (0.0%) 1,499 (4.5%) 0.57
Piemonte Novara 26 (7.8%) 13 (6.3%) 17 (0.7%) 788 (2.3%) 0.54
Fine chemistry
Piemonte Torino 39 (16.6%) 34 (15.7%) 62 (7.2%) 722 (4.9%) 0.54
Lombardia Milano 21 (8.9%) 19 (8.8%) 156 (18.1%) 3,406 (23.1%) -0.44
Emilia Romagna Bologna 11 (4.7%) 17 (7.8%) 33 (3.8%) 886 (6.0%) -0.12
44
Industrial Automation
Sector (national) total 235 (100%) 217 (100%) 862 (100%) 14,772 (100%)
1
Source: ISTAT, 1997, Local Labour Systems
2
Source: University of Pavia elaboration on EPO data
3
Source: ISTAT, 1996
4
Intensity 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 average
value for a sector at national level corresponds to zero
44

In order to get further insights on high-tech activity by sector, it was decided to
look into more details of the biotech, electronics, and telecommunication sectors. A
short outline follows in the next two sections.
3.3 - The Electronics and Telecommunication Sector
Although Italy is a large market for electronics and telecom businesses (it is the
largest European market for mobile phones), the country creates little production -
and innovation - as testified by the negative trade balance shown in table 3.3. The
relatively strong VC investment in 2000-2001 can be easily explained by industry
deregulation, which led to a large number of small carrier providers.
Table 3.3 - Electronic Components, Computer Hardware and
Telecommunication Equipment - National Basic Indicators
Electronics components 1998 1999 2000 99/98 00/99
Turnover 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 00/99
Turnover 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 00/99
Turnover 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, 2002
To the extent that the Internet can be considered part of the telecommunications
sector, it is worth recalling that the tide of new Internet companies that swept
through Europe in the late 1990's also touched Italy. However, in addition to some
Internet providers like the aforementioned Tiscali, most of the resulting firms were
“dotcoms”, i.e., websites aimed at the commercialisation of various products or
services. No significant radical innovation appears to have been developed in Italy.
45

The computer sector has been heavily affected by the closing of the Olivetti
computer production company, which was one of largest manufacturers in Europe
in the 1980's. Currently, no computer producer is active in the country.
In the field of electronics, the only large firm with significant operations in Italy is
STMicroelectronics, which holds its major R&D centres in Milan and Catania
(Sicily). Other significant R&D firms are Alcatel, Siemens, Bull, Ericsson and
Telecom Italia; however, none of these has more than 1,000 R&D personnel in
Italy [Modena et al, 2001].
The activity in Milan and Catania for this sector has been studied further in order to
check the spin-off potential in both areas. As clearly emerges from table 3.1 and
3.2, the greater Milan area (including Pavia, Bergamo, Brescia and Varese) has the
highest activity for the electronics sectors. The technical schools of Milan and
Pavia together count some 500 researchers in electronics-related fields. The R&D
centres of large multinationals, including Alcatel, Bull, Ericsson, Siemes, Pirelli
and 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 companies
are located in the area, but no significant public support grants are obtainable as the
area is not considered a priority development area.
The IFISE team reasoned that given these conditions, the provision of seed capital
for the high-tech industry could bring more research-intensive firms to the level at
which they could be of interest to venture capital funds (which mostly provide
subsequent funding), thereby enhancing their success probability. Project One in
Chapter 4 is also aimed at answering this need.
As far as the area of Catania (Sicily) is concerned, it was found that approximately
1,200 engineers and scientists are present in the area. A little less than 1,000 of
these are currently working for STMicroelectronics, which dominates the industry
in the region. Between 10 to 20 start-ups (according to definition) were found in
the 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 established
in the area and only one VC investment has been reported. Torrisi [2002], who has
studied the Catania area, defines this set of conditions as a “pre-cluster” situation.
46

We reasoned that the existing conditions in Catania are not sufficient to justify the
creation 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 continue
attracting 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 the
generous 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 Sector
In 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 of
genetics. Despite being the fifth-largest world market for pharmaceuticals, Italy has
largely remained out of the industrial blossoming that has swept the sector. Table
3.4 shows how both investments and human resources in industrial R&S are lower
in Italy than in the major developed countries.
Table 3.4 – R&D Investments and Personnel in the Biotech-Pharmaceutical
Sector in Italy and in the Major Industrialized Countries
Investments in R&D
Italy France Germany UK U.S.A. Japan
Investments
R&S/turnover (%)
6.02 12.33 10.72 19.97 15.91 20.04
R&D Personnel
Italy France Germany UK U.S.A. Japan
R&D Personnel
(number)
5,02
4
15,200 15,000
20,90
0
51,000 34,437
R&D personnel/total
personnel (%)
7.18 16.87 12.99 28.25 19.62 28.24
Source: Farmindustria, 2000
47

However, Italy boasts strong academic research in this sector. It was found that as
many as 10,000 researchers (or about half of all researchers in S&T) are active in
related fields (genetics, medicine, biotech or pharmaceuticals). These are relatively
evenly distributed throughout the country [Modena, 2002]. It is also worth noting
that the number of physicians per capita in Italy is twice as large as the average in
other European countries. Although doctors as such may not be considered
potential entrepreneurs, they certainly make up a reservoir of skilled manpower in
the 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 significant
concentrations 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 lowest
number of enterprises in the biotech sector in Europe (around 50). This number is
even lower than that of countries like Finland and Denmark, whose population is
less 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 Countries
per Country
0 50 100 150 200 250 300 350 400
Other countries
Ireland
Belgium
Finland
Switzerland
Sweden
U.K.
Source: Ernst & Young, 2003
48

The identification of such a market failure is of great importance, as it helps to
show that a generous public programme dedicated to the biotech sector would be in
the common interest of Italy and Europe, in that it would help use unexploited
potential. In order to strengthen our case, we should mention that private VC fund
investments in the biotech-related field also hardly exist (see table 3.5). Moreover,
as compared to their colleagues in the U.S., U.K., Germany and France, large firms
in Italy are very reluctant to invest in the acquisition of licenses for new products if
these have not reached phase three of development [Farmindustria, 2000]. Fiorilli
[2002] has validated these results by interviewing a number of market actors in
Italy. These interviews also pointed out that a programme for targeting early stage
investments would be most useful for bringing research results from academic
laboratories to a point where they could be of interest for private investors.
Table 3.5 - Number of Investments and of Early Stage Investments in the
Biotech and Pharmaceuticals Sectors - year 2001
Sector Number of investments
Number of early stage
investments
Biotech 6 1
Pharmaceuticals 5 3
Total 11 4
Source: Gervasoni, 2002
It is our belief that the above arguments could be used by any public authority
wishing to launch a programme dedicated to the biotech sector as partial
demonstration that the programme does not “adversely affect trading conditions to
an extent contrary to the common interest”, in compliance with article 87 of the EU
regulations concerning state investment (see also section 3.6.1.).
3.5 - The Supply of Private Seed and Venture Capital Sources
Venture capital in Italy has remained largely underdeveloped; a conclusion that
clearly emerges from figure 3.3, which shows that Italy’s VC investment as a
percentage of GDP is among the lowest in the industrial economies. However, in
recent years, and especially between 1999 and 2000, a positive growth trend was
49

detected. In particular, seed and start-up investments have increased from 153 in
1999 to 339 in 2000, corresponding to 130 and 244 firms respectively. This was
probably due to the explosion of the Internet sector and to the privatisation of the
telecommunication sector. The crisis of these two sectors in 2001 has caused a
restriction of activity for both.
Figure 3.3 - Internal VC Investments as a Percentage of GDP
Israel
U.S.
Canada
UnitedKingdom
France
TheNetherlands
SouthAfrica
Ireland
Norway
Germany
Sweden
Finland
Spain
Belgium
Australia
Portugal
India
Italy
NewZealand
Denmark
Poland
Hungary
Japan
Singapore
SouthKorea
0
0,2
0,4
0,6
0,8
1
1,2
1,4
2000 1999
Source: GEM – Copyright © 2001, Paul D. Reynolds, S. Michael Camp, William D. Bygrave, Erkko
Autio, Michael Hay and Kauffman Centre for Entrepreneurial Leadership at the Ewing Marion
Kauffman Foundation. All rights reserved. In Murray, 2002
Figure 3.4 shows the investments of venture capital funds in early stages, by region
of investment. It is quite clear that there is a strong bias for investment in the
region of Lombardia. We reasoned that although it was shown that Lombardia has
the strongest potential for innovative new firms, the concentration of VC
investments there is also biased by the strong concentration of VC headquarters,
which in turn is likely to be the result of most of the financial institutions in Italy
being located in that area.
50

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