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  1. 1. Paper to be presented at the Summer Conference 2009 on CBS - Copenhagen Business School Solbjerg Plads 3 DK2000 Frederiksberg DENMARK, June 17 - 19, 2009 VC POLICY: YOZMA PROGRAM 15-YEARS PERSPECTIVE Gil Avnimelech UNC at Chapel Hill Abstract: This paper deals with a policy instrument supporting the emergence of VC industries. It is based on the Israeli experience with the Yozma program, which triggered the creation of the VC industry. This program dealt with specific system failures of the entrepreneurship process the early stage equity gap and the lack of complementary assets and skills in entrepreneurial firms. VC emergence in Israel was a policy-enhanced process in the sense that a targeted government policy directed to this goal (Yozma Program, 1993-1998) triggered it. Accompanying the process of VC emergence was the transformation of Israel's high tech sector toward a startup-intensive ICT cluster. We suggest that the feasibility of building a dynamic and innovative cluster, which exploits the ICT revolution, may be depended on the emergence of a capable domestic VC industry. Therefore, understanding the specific characteristics of Yozma program and the process it triggered could generate significant policy implication related to the process of VC industries and high tech clusters development in other countries. Therefore, the paper present a full case study of Yozma program 15 years after its implementation. JEL - codes: C, E, -
  2. 2. VC Policy: Yozma Program 15-Years perspective 1. Introduction This paper deals with a policy instrument supporting the emergence of VC industries. It is based on the Israeli experience with the Yozma program, which triggered the creation of the VC industry. This program dealt with specific system failures of the entrepreneurship process – the early stage equity gap and the lack of complementary assets and skills in entrepreneurial firms. Israel’s high tech cluster development was strongly related to the development of a local VC industry (Avnimelech & Teubal 2004a, 2004b, 2004c). VC emergence in Israel was a policy-enhanced process in the sense that a targeted government policy directed to this goal (Yozma Program, 1993-1998) triggered it. Accompanying the process of VC emergence was the transformation of Israel's high tech sector toward a startup-intensive ICT cluster. We suggest that the feasibility of building a dynamic and innovative cluster, which exploits the ICT revolution, may be depended on the emergence of a capable domestic VC industry. Therefore, understanding the specific characteristics of Yozma program and the process it triggered could generate significant policy implication related to the process of VC industries and high tech clusters development in other countries. 1.1 The Role of Venture Capital in Cluster Emergence The identification of new forms of intermediation lies at the heart of the creation of new industries. Gompers and Lerner (1999) have been very clear that VC (a new ‘supply agent’) mediates between capital and startups in ways that the traditional banking system (old "supply agent") did not, thereby overcoming "market failures" with startup and innovation financing. Thus, the VC industry has an important role in creation of new industries and clusters. According to Florida and Kenney (1988), the VC industry plays a central role in coordinating various high-tech agents: entrepreneurs and managers; professional employees; specialized suppliers; investors and capital markets; and product markets. Therefore, we can conceptualize the role the VC industry as both providing direct value to startups through direct interaction with their portfolio companies (Gompers & Lerner, 1999, 2001) and as providing indirect value to the innovation process within the cluster.
  3. 3. 2. The Development of the Israeli ICT Cluster Chapter 5 described the development of the Israeli ICT cluster in five phases. We will briefly describe the second and the third phases of development. At the Pre-Emergence (phase 2, 1986-1992) there were first signs of regional high tech industrial concentration. A central feature of this phase is the appearance of significant startup activity and the gradual acceptance of technological entrepreneurship. Some startup financing took place. However, a VC industry did not exist yet. A critical mass of startups accumulated towards the end of this phase and, correspondingly, a measure of ‘demand’ for the VC services. As a result significant startup and VC-related experimentation and learning took place. Two major conditions for transition to the Pre-Emergence phase were: the ongoing technological revolution that made the pool of technological opportunities continuously renewable1, and the significant diffusion of R&D and innovation capabilities throughout the Israeli business sector. This is necessary for the country to transform a pool of technological opportunities into a stream of potential business opportunities. The Emergence process (phase 3, 1993-2000) presented rapid quantitative growth of startup and VC activities and the eventual emergence both of the startup-intensive ICT cluster and of the VC industry. Israel's VC industry was triggered by a government targeted-program – the Yozma program. The rapid growth of the cluster was an outcome of the VC industry emergence and of a few early successful startups (many of them backed by VCs) that were the source of spin-off and imitation by many new agents. This enhanced a critical mass that created cluster externalities. Emergence began with a fluid sub-phase (1993-1995) followed by rapid growth (1996-1998) that eventually led to the bubble (1999-2000). During the fluid sub-phase significant experimentation and collective learning took place both with respect to startup and VC strategies and with respect to their form of organization. During the rapid growth sub-phase an accelerated entry of startups and VC companies occurred. A domestic VC industry was created. It is then that the cluster attained a size, which enabled it to sustain a large number of supporting services. This induces entry of additional leading multinational companies and of additional domestic and foreign VCs, rapid creation of startups and rapid growth in the IPOs and acquisition 1 Such conditions occurred in Israel at the mid-80s (the creation of the software industry and the PC industry, and the change in the business model in the semiconductor industry toward the fables model).
  4. 4. activities. As long as external and internal conditions remain unchanged, the process of creation of large numbers of startups continued and the cluster continue to grow. 3. VC Emergence VC emergence involves two groups of conditions: first, those underpinning demands for VC services; second, those underpinning rapid growths of VC supply. The existence of an adequate demand for VC services in Israel depends on a prior appearance of a critical mass of startups in the pre-emergence phase. The supply-side pre-conditions for VC emergence include liberalization of capital markets, other institutional changes, restructuring of defense industries, the appearance of the startup business model, experimentation with VC-related activities since the late 1980s, and the implementation of the Yozma program (1993-1998). 3.1 Triggers for VC Emergence In the late 1980s a new phase in the globalization process began: foreign high tech startups could more easily float in NASDAQ, provided the economy had adapted to the new opportunities. Part of Israel’s adaptation involved new government programs, which complemented the existing R&D support program. These included Targeted programs supporting VC (Inbal and Yozma), and complementary programs raising the demand for VC-services (e.g. the Technology Incubators’ Program, and the extension of the regular R&D program). The actual trigger was implementation of Yozma in 1993. This provided the critical mass for the cumulative, self-reinforcing process of growth of VCs and startups. Yozma funds raised 263M$ up to 1998 and significant amounts were invested. In addition, significant imitation by other private VCs occurred during this period. This triggered strong collective learning processes, which contributed to attain the critical mass, which made this process effective and self-sustaining. This further stimulated entry of new VC companies, and accelerated creation of second and third funds by existing Yozma VC companies and other VC companies. The cumulative process was also fueled by favorable changes in the external environment in particular the rise of the NASDAQ Index, and deregulation of communications markets. Additional internal factors were the Oslo peace agreements, the highly educated Russian immigration to Israel, Israeli highly experienced returnees from the U.S. during the early 1990s, and domestic regulatory changes favoring VC investment and entrepreneurship.
  5. 5. ITP in Israel The Israeli Government’s ITP towards the business sector began in 1969 with the implementation of the industrial R&D support program. The new “R&D legislation” of 1984 further consolidated Israel's support of business sector R&D. This program was the first of the set of programs comprising Israel’s Program Portfolio; and it was the backbone of Israel’s innovation and technology strategy. This R&D support program was widely regarded as having been a success in terms of stimulating R&D in the business sector, in stimulating exports resulting from R&D, and in contributing to the creation of a high tech sector during the 1980s (Justman & Zuscovitch 1999). Moreover, the dynamic processes unleashed by its successful implementation led to the other programs comprising Israel’s ITP of the 1990s (see Box C1). Box C1: New ITP Programs in Israel during the 1990s 1) Inbal (1992-1998) - a Government owned Insurance company, which gave partial (70%) guarantees to traded VC funds. Four VC companies were established under Inbal regulations. 2) Yozma (1993-1998)—a 100M$ Government owned VC company, which invested in 10 private earlyphase oriented VC Funds which operated in Israel (8M$ per fund). 3) Magnet Program (1992--)—a Horizontal Program supporting cooperative, generic R&D involving group of firms and at least one University (annual budget 40-60M$). 4) Technological Incubators’ Program (1992--)—a program supporting startups during the first three years of their operation. The incubators are privately managed (since 2001 they became also privately owned). Both they and the projects approved get financial support from the Government (annual total program budget 25-30M$). Table C1: OCS Grants and VC Investments 1970-2008 (in M$) 1970 1980 3 39 OCS Budget 0 0 VC Investments Sources: OCS (2009) and IVC (2009). 1985 107 0 1990 136 ~20 1995 346 ~250 1997 397 436 2000 440 3,092 2005 263 1,337 2008 349 2,076 4. VC Targeted Policies New national priorities emerged with the beginnings of the massive immigration from the former Soviet Union during the early 1990s. The government of Israel began searching for means to employ the thousands of engineers that came to this country. Simultaneously the military industries had laid-off hundreds of engineers; and there were many attempts to create startup companies, which largely failed. One of the main targets was enhancement of startup formation, survival, and growth. Till the 1990s, the percentage of successful young companies was extremely low and the accepted view was that this resulted from weak management abilities. Experts in the field realized that despite massive government support for R&D there
  6. 6. still was a clear 'market failure', which blocked the successful creation and development of startup companies. The head of OCS at the time, Yigal Erlich, pondered about how to make OCS support more effective. The basic problem was lack of capability to grow after the product development phase. He thought that the missing link was marketing and management skills; and that the way to get it was to foster VC activity. At the time, there were only 2-3 VCs in Israel, and it was clear that the total capital available and the scope of VC activity were inadequate for the task at hand. 4.1 Inbal It is important to consider not only programs like Yozma, which were successful but also precursor programs like Inbal, which, even though they failed to generate a VC industry, indirectly promoted the successful program. The Inbal Program was the first attempt at implementing a targeted ITP directed to the VC industry. It was launched in 1991, 1-2 years before the implementation of Yozma. Its central idea was to stimulate VC funds by guaranteeing the downside of their investments. The mechanism used was a Government insurance company ("Inbal") that provided a 70% guarantee to VC funds traded in Israeli stock market (TASE). The program imposed certain restrictions on the investments of the 'protected' funds. Four funds were established. They and the Inbal program, as a whole was not a great success. Fund valuations in the stock market were low and the funds encountered bureaucratic problems. In addition, publicly traded VCs has greater difficulty in exploiting reputation earned from early exits to increase the capital invested (in LP form of VC organization it would be easy to rapidly raise a second fund); and they absence of incentives relevant to the upside. Eventually all of Inbal funds attempted to leave the program, which they eventually succeeded in doing all the (former) Inbal Funds were merged into other investment/holding companies. 4.1.1 Lessons from Inbal failed VC program Inbal supported publicly traded VCs with guarantees to the downside. There was no mechanism for drawing professional VC agents into the program; it did not generate VC investors and partners with adding value capabilities; and it was exposed to 'stock market sicknesses' and short-term thinking. Other Israeli VC agents did not imitate this form of VC organization. However, our interviews reveal that policymakers and businessmen alike learned from Inbal's weak impact: the difficulty in publicly traded VCs of having investors contribute to the operation of the fund; greater difficulty to
  7. 7. rapidly exploits the reputation earned from early successful exits in order to raise new capital, limits on decisions making flexibility and on management compensation; and the absence of incentives for the “upside” (an important factor in attracting professional VC partners and investors). We conclude that the indirect contribution of Inbal to the eventual design (see Box C2 and C3) and implementation of a successful VC policy in Israel was quite high (such as influencing Yozma’s selection of Limited Partnership as the form of VC organization and the selection of the early stage investment focus). 4.2 Yozma Program2 There is wide consensus that one of the major factors triggering emergence of Israeli VCs was Yozma. Four sets of factors seem to have been responsible for Yozma to become an effective trigger of Israel's ICT Cluster: a) favorable background conditions; b) policy and market forces’ experimentation during the pre-emergence period; c) timing - the time overlap between Yozma implementation on the one hand and the rising Nasdaq index and expanding market for ICT on the other; and d) the successful design and implementation of the Yozma program. Let us recall some of the background conditions, which were operating at the time, that transformed Yozma into an effective trigger of Israel's ICT cluster: the industrial R&D support Program; the restructuring of the military industries, the massive highly educated immigration for the former Soviet Union, and new global innovation opportunities opened by the ICT revolution. These, together with a cultural shift where entrepreneurship were increasingly being considered prestigious in Israeli society, generated a spurt of startup activity during the early 1990s. More specifically, we argue that at the beginning of operation of Yozma, there was a clear demand for VC services. The pool of startups included also some very high quality ones (such as RAD Group, Checkpoint, Ornet, Galileo, and M-systems) who made a significant direct and indirect contribution to emergence (see also Ellies at el., 2008). In addition, we should not underestimate the specifics of the design and of the implementation of Yozma. 4.2.1 Yozma Design The program began operating in late 1992 and the first fund was created in 1993. The explicit objective was to create a solid base for a competitive VC industry with 2 Most of the material below was obtained from two interviews (01/1998 and 05/2000) with Yigal Erlich the CEO of Yozma and one of the most important architects of the Program. Additional material was obtained from joint work with him at the UFISE and ESTER research programs during the years 2001-2006.
  8. 8. critical mass of capital and activity; to learn from foreign limited partners; and to acquire a network of international contacts. It was based on a 100M$ Government owned VC fund (with the same name) oriented to two functions: a) investment in ten private VC funds ('Yozma Funds'-80M$); and b) direct investments in high tech companies-20M$. The basic thrust was to promote the establishment of domestic LP VC funds that invested in very young Israeli high tech startups with the support of government and with the involvement of reputable foreign VC investors. Each ‘Yozma Fund’ had to engage as LPs one such foreign institution together with a wellestablished Israeli financial institution. However, the VC Company itself had to be a completely new organization not own by any existing financial institution (this was made to assure a competitive industry, which is not lacked-in to the old financial system’s routines). When a fund fulfilled these conditions, the Government would invest (through Yozma) 40% (up to 8M$) of the funds raised. Thus the $100M of Government funds would draw at least $150M of private sector funds (domestic and foreign). Each Yozma fund had a call option on Government shares, at cost (plus interest) for a period of five years. Thus, Yozma did not simply provide supply, risk sharing incentives to investors, but it also provided an upside incentive (the private investors could leverage their profits through acquisition of the government shares). The incentives to the 'upside' also stimulated entry of professional VC firms and managers (when you have higher returns the government incentive becomes more significant). The program also assured the realization of learning through the compulsory participation of foreign financial institutions (most of them were wellexperienced foreign VC companies – See table C2). Table C2: Yozma Funds – capital, foreign investors and portfolio Name Eurofund Gemini Inventech JVP Medica Nitzanim Polaris (Pitango) Star Vertex Walden Yozma Total Est. Capital Foreign LP $20M Daimler-Benz, DEG 1993 $36M Advent 1993 $20M Van Leer Group 1993 $20M Oxton 1995 $15M MVP 1994 $20M AVX, Kyocera 1993 $20M CMS 1993 $20M TVM Siemmens 1996 $39M Vertex Int., Singapore tech 1993 $33M Walden International 1993 $20M None 1994 $263M LP Orion Germany USA Netherlands USA USA Japan, Japan USA Germany USA , Singapore USA IL Gov. Portfolio 14 25 33 12 10 13 19 27 29 21 16 217 Exits 7 (50%) 13 (52%) 16 (48%) 10 (83%) 5 (50%) 7 (54%) 13 (68%) 15 (56%) 16 (55%) 10 (48%) 10 (63%) 122 (56%)
  9. 9. Box C2: Critical Dimensions of Yozma Program Design Yozma Funds were Independent Israeli Limited Partnership VC Companies A focus on early stage investments in high tech startup companies Target level of capital aimed at $250M (Government Support $100M)- an assumed Critical Mass A multiplicity of privately-owned Israeli VC funds (10), each one managed by a local management company and involving a reputable foreign VC company (and one domestic financial institution) Government Participation in each Fund $8M (representing 40% of the capital raised) Strong incentive to the “upside” – the possibility, within a 5-year period, of purchasing government’s share at cost (all funds except two made use of this option). Planned ‘Privatization’ of Yozma Venture Fund and its Hybrid Funds: has taken place since 1998. These previous features assured that the Yozma program was a Catalytic Program. Box C3: Factors explaining the differential Yozma-Inbal impact YOZMA Design INBAL Design The program was promoted by the OCS and structured as Fund of Funds (equity investments in the hybrid funds without intervention in the operation of the funds) Single Objective: Creating a competitive domestic VC industry in Israel A targeted level of capital aimed at $250M (government support of $100M) created a critical mass of capital A clear objective to create a competitive market – aiming at creating 10 LP form of VC organization - the ideal form of organization according to U.S. experience Investments focused on early stages – Focus Strong incentive to collective learning and to 'learning from others' (through requirement of having a reputable foreign financial institution) The Government owned fund started to invest immediately - encouraged VCs to invest fast. Managers’ abilities were also an important criterion for selection of 'Yozma Funds' Limited number of Yozma funds- created an incentive to join fast, and a clear way out of the program pre-planed privatization. Leveraged incentives to the upside - a 5-year option to buy the government’s share at cost Attracting professional VC teams. The program was promoted by the treasury and structured, as a government Insurance company (guarantees to the funds) YOZMA - Impact INBAL - Impact Created a critical mass of VC investment Most 'Yozma fund' are among the 20 leading VCs in Israel Very high private VC performance Follow up funds & strong growth of capital Yozma Funds were models for the design of many other VC companies in Israel Critical mass of VC activity was not achieved Non of the INBAL funds are among the 20 leading VCs in Israel Low private VC performance Very few secondary issues Very few other public traded VC were established in Israel Dual objective: Promoting the Israeli local stock exchange and promoting VC activity in Israel. No targeted level of capital did not lead to a critical mass of capital No clear objective regarding the competition in the VC market only 4 funds were created Publicly traded form of VC- hard to leverage current success to fundraising and bureaucracy Investments also in later stages and non-high tech No incentive to collective learning, to learning from others or to VC cooperation. Did not attract any global financial nor strategic investor into Israel No mechanism to encourage VC firms to invest immediately Administrative and financial criteria figured prominently in selection of Inbal VCs No explicit limit to the number & timing of funds that could enjoy the INBAL benefit; and a complex way out of the program. Downside guarantees, which favor entry of nonprofessional VC firms 5. Yozma Impact In total the Yozma Program created ten private VC funds (and the Yozma fund itself that was eventually privatized in 1998). Six funds were founded in 1993: Gemini, Star, Pitango, Walden, Invantech, and JVP; two in 1994: Nitzanim and Eurofund; one
  10. 10. in 1995: Medica; and one in 1996: Vertex. The total capital raised by Yozma funds was $263 million (100M$ out of it government capital) and they invested in 164 startup companies (the aggregate number of portfolio companies in table C2 is 217, however there were syndications between various Yozma funds in a few investments). Eventually, these funds had an Exit (IPO or M&A) rate of 56%, which is much above the “regular VC Exit rate”3 (in table C3 we can see that the Exit rate in the entire Israeli VC industry during 1993-2000 is 27%; and the exit rate of the entire population of Israeli startup is 14% compared with exit rate of the Yozma funds funds in the same period was 48%). These very high rates of return of the Yozma funds4 suggest both the very supportive environment that existed when the program was implemented and the successful design and application of the program. Table C3: Yozma Initial Funds and Follow-up Funds 1993-2000 Name Eurofund Gemini Inventech** JVP Medica Funds 2 3 2 3 2 Total Capital $72M $346M $40M $278M $70M Portfolio 25 83 33 43 23 Active 7 (28%) 15 (18%) 3 (9%) 6 (14%) 6 (26%) Exits 11 (44%) 45 (54%) 17 (52%) 25 (58%) 11 (48%) Closed 7 (28%) 23 (28%) 13 (39%) 12 (28%) 6 (26%) Nitzanim (Infinity, Concord) 3 $191M 62 12 (19%) 31 (50%) 19 (31%) Polaris (Pitango) Star Vertex Walden Yozma 5 14 3 3 3 $655M $987M $246M $184M $100M 109 113 73 47 45 41 (38%) 40 (35%) 22 (30%) 14 (30%) 8 (18%) 49 (45%) 55 (48%) 33 (45%) 17 (36%) 22 (49%) 19 (17%) 19 (17%) 18 (25%) 16 (34%) 15 (33%) Average 3.9 $288M 59.6 15.8 (27%) 28.7 (48%) 15.2 (25%) Entire IL VC-backed Entire IL SU 104 $5,919M 779 2,672 209 (27%) 890 (33%) 212 (27%) 357 (14%) 358 (46%) 1,425 (53%) Table C4 visualizes the emergence of the Israeli VC industry during 1993-2000, in which period the private-VC fundraising average annual growth rate was 85%. At the same time, the other PE agents experienced moderate growth rates. The time trends of VC/PE fundraising growth rates within sub-phases during 1991-2000 suggest that while capital market trends (mostly NASDAQ) influences both VC and PE, Yozma program, which triggered VC emergence, crowd out PE activity for a while. The big jump in Israeli VC activity occurred in 1993 when Yozma and Private 3 4 The VC literature (such as Gompars & Lerner, 1999) usually suggests an average exit rate of 20%-40%. Out of the 10 Yozma funds 6 had over 100% IRR.
  11. 11. VCs raised 162M$ compared to 27M$ the year before5. Thereafter, there was a rapid growth of the Israeli VC industry both in terms of capital raised and in terms of number of funds. Total capital raised per year by Israeli VCs grew rapidly during the 1990s. During the second half of the 1990’s, the Israeli VC industry became a significant industry. It was then that the first foreign VC companies began to invest directly in Israeli startups. Later on, a few of them (e.g. Benchmark, Sequoia, Intel Capital and others) established Israeli offices. To sum up, the Yozma funds initiated a dynamic, cumulative process involving: learning by doing and learning from foreigners. It was a collective learning process, which also contributed to exploitation of economies of scale and specialization. Table C4: Capital raised by PE organization in Israel 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Private VCs 40 49 27 33 82 93 287 595 653 1,160 2,712 Yozma VC 0 0 0 149 40 15 30 19 0 0 0 Inbal VC 0 0 54 22 0 0 0 0 0 0 0 Other PE 5 9 79 168 262 25 620 134 33 258 66 Total PE 45 58 160 372 384 133 937 777 686 1,418 2,778 These observations sustain our presumption that Yozma’s 250M$ raised in 19931996 (the remaining 13M$ were raised after 1996 only from the private investors) significantly contributed to create a critical mass which triggered a cumulative process of growth in the VC industry during the second half of the 1990s, and that the Inbal Program did not directly generate a cumulative process of growth (although it did have some important indirect learning effects). This and the insights received during our interviews are the basis for our inference that Yozma triggered VC emergence. Another indication of Yozma Funds’ success in triggering growth of the industry is their expansion, which took the form of Yozma ‘follow up’ funds (see table C5). Most Yozma funds were followed by three or more additional funds managed by an expanding core of managers. The total sums managed by this group was 3.2B$ at the end of 2000 - 54% of the total capital raised by the entire VC industry during the years 1993-2000 (the total sums managed by this group is currently 5.9B$ - 48% of the total capital raised by the entire VC industry). Table C6, shows that 4-5 former Yozma funds are among the top-10 VC companies in Israel during the years 1996-2008. 5 Note that during 1992 publicly traded VCs and PE funds played a dominant role in total capital raised—133M$ compared to 27M$ capital raised by LP VCs. This in part reflects the Inbal incentives on Public VC; but capital were also raised by the other two categories of financial institutions-PE Funds, and Investment Companies.
  12. 12. Table C5 Yozma Initial Funds and Follow-up Funds 1993-2008 Name Eurofund Gemini Inventech** JVP Medica Funds 2 5 2** 4 3 T. Capital $72M $686M $40M $783M $195M Portfolio 25 105 33 85 33 Active 6 (24%) 38 (36%) 3 (9%) 34 (44%) 14 (43%) Exits 12 (48%) 41 (39%) 17 (52%) 33 (38%) 13 (39%) Closed 7 (28%) 26 (25%) 13 (39%) 18 (20%) 6 (18%) Nitzanim (Infinity, Concord) 3+5 $896M 132 44 (33%) 52 (40%) 36 (27%) Polaris (Pitango) Star Vertex Walden Yozma Average 5 14 6 3 3 5 $1,342M $987M $640M $184M $150M $543M 140 113 94 47 55 78 62 (44%) 36 (32%) 42 (45%) 12 (26%) 14 (25%) 28 (36%) 57 (41%) 55 (49%) 34 (36%) 19 (40%) 24 (44%) 31 (40%) 21 (15%) 20 (19%) 18 (22%) 16 (34%) 17 (31%) 19 (24%) Entire IL VC-backed Entire IL SU 171 $12,243M 1,193 6,107 520 (44%) 3272 (53%) 244 (20%) 477 (8%) 429 (36%) 2358 (39%) Table C6: Top-10 VC Management Companies in Israel 1996-2008 Top10 - 1996 Capital Top10 - 2000 Star 172 Star Evergreen 112 Pitango Etgar 80 Genesis SFK 64 Evergreen Denali 50 Gemini Vertex 47 Giza Giza 46 ISP Gemini 36 Concord Walden 33 JVP Star 26 EVP 5 Yozma Funds 5 Yozma Funds Capital 650 625 362 361 310 271 262 260 258 205 Top10 - 2004 Pitango Star JVP Evergreen Gemini Giza Genesis Vertex Benchmark ISP 5 Yozma Funds Capital 800 630 588 478 400 361 262 260 240 200 Top10 - 2008 Pitango Infinity Carmel Gemini Evergreen Giza Benchmark Neurone Sequoia Vertex 4 Yozma Funds Capital 630 450 407 340 335 270 250 200 200 175 * The Capital row present the total capital (M$) raised by the management company in the last 5 years. 5.1 Indirect Impact The VC ‘emergence state’ materialized during the second sub-phase of the cluster emergence (1996-1998). This phase was characterized by accelerated growth of VC activity; by entry of large numbers of players both on the supply side (VCs) and on the demand side (startups); and by ‘selection/reproduction’ of critical features of the industry. Table C8 shows figures on VC fundraising and investment, on startup creation, VC-backed startups and exits (IPOs and tradesales). The number of new startups created in the three years prior to the implementation of Yozma is approximately 200 companies. Significant increases during 1993-1995 (approximately 440 companies) and sharp increases year by year after that (up to 2000). This reflects the impact of implementation of the Yozma Program and the increased availability of VC. While the direct impact of Yozma is reflected in 164 backed companies, the indirect impact also includes the acceleration of startup formation in the cluster.
  13. 13. Another indirect impact is the rapid entry of non-Yozma related funds, something triggered by the handsome profits obtained by Yozma Funds (see table C7). In 1993, eight new VC management companies were created (six of them were Yozma funds) and in 1997 a new wave of VC management companies creation began as a result of the early successful exits of Yozma funds. Thus, while during 1990-1992 VC-backed startups represented only 10% of startup creation, during 1993-1996, VC-backed startups represented 55% of startup creation. Table C7: The Development of the Israeli VC Industry Year New MC Closed MC* T. Active MC New Funds Closed Funds T. Active Funds 0 1990 1 0 2 1 2 1991 2 0 4 2 0 4 1992 3 0 7 4 0 8 0 1993 8 0 15 11 19 1994 3 0 18 4 0 23 1995 3 0 21 5 0 28 0 1996 4 0 25 9 37 1 1997 7 0 32 14 50 1 1998 7 0 39 15 64 2 1999 9 0 48 19 81 2000 14 0 62 27 4 104 2001 7 4 65 18 13 109 2002 3 8 60 6 7 108 2003 1 0 61 1 5 104 2004 2 0 63 5 8 101 2005 1 3 61 7 15 93 2006 3 9 55 10 15 88 2007 6 11 50 12 18 82 2008 2 6 46 8 22 68 * We define a closed management company either one that was actually closed or one that did not raised a new fund at least 7 years. An active fund is a fund raised at the last 7 years (the investment period of a fund). VC Exits :IPOs and M&As Only small numbers of Israeli companies undertook an IPO in NASDAQ (or in other markets) till the late 80s. Today Israeli (or Israeli-related) companies traded in the U.S. are the third largest group behind only the U.S. and Canada. Moreover, many Israeli (or Israeli-related) high tech companies are also traded European stock market such as the London-based AIM stock market. The number of Israeli high tech companies IPOs jumped in 1993 and then again in 1996 with the first exits of firms backed by Yozma funds. This led to the indirect impact of Yozma program, which was expressed by acceleration of startups formation and exits (IPOs and M&As) and other networking and reputation effects. The picture, which emerges, is one of increasing maturity of Israel’s ICT cluster and VC industry (due to learning), a process that is accompanied by the increase in the NASDAQ
  14. 14. index6. The number of IPOs increased considerably during 1995-2000 compared to 1990-1994, as well as the share of VC-backed issues. Moreover, Yozma funds exits had a significant effect during the years 1998-2001 with over 50% of the Israeli IPOs in Nasdaq (see table C8). The picture which emerges is one of increasing maturity of Israel’s ICT cluster on the one hand (due to learning and other cluster effects such as the creation of the VC industry itself), a process which accompanied the increase in the Nasdaq index (which by itself would also induce an increase in IPOs). There is no doubt that within this process Yozma funds had a significant role. We cannot avoid noting also that prior to 1993, there was already a non-insignificant number of IPOs (12 during 1991-2 alone) all of whom excepting one being non VC-backed issues. This in part reflects the fact that very good; high quality startup began populating the scene in the early 1990s. Table C8: VC invested and high tech startups foundation, IPOs* and M&As** Year VC Raised (VC Invested) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 5 (NA) 49 (NA) 81 (NA) 204 (NA) 122 (NA) 108 (NA) 317 (293) 643 (440) 653 (589) 1,160 (1,011) 2,712 (3,233) 1,319 (1,985) 497 (1,138) 6 (1,011) 589 (1,465) 1,644 (1,337) 903 (1,620) 1,096 (1,759) 967 (2,076) IL Startups Foundation (VC Backed) 53 (4) 51 (5) 94 (12) 124 (73) 140 (85) 175 (87) 231 (117) 263 (119) 332 (152) 587 (208) 665 (372) 371 (159) 355 (76) 410 (113) 580 (141) 511 (117) 521 (121) 596 (119) 580 (177) IL IPOs in The U.S. (VC back) 1 (1) 4 (1) 9 (1) 11 (4) 8 (4) 9 (4) 16 (10) 12 (3) 7 (4) 12 (9) 19 (12) 2 (1) 1 (0) 0 (0) 6 (2) 4 (2) 2 (2) 6 (4) 0 (0) IL IPOs in Europe (VC back) 0 (0) 0 (0) 0 (0) 0 (0) 1 (0) 2 (0) 3 (1) 0 (0) 6 (1) 6 (1) 13 (3) 0 (0) 0 (0) 0 (0) 1 (0) 11 (1) 4 (2) 1 (0) 0 (0) IL IPOs in Israel (VC back) 1 (0) 7 (0) 7 (0) 9 (0) 7 (0) 3 (0) 0 (0) 2 (1) 2 (0) 4 (0) 10 (3) 0 (0) 0 (0) 0 (0) 3 (2) 4 (3) 10 (3) 20 (5) 0 (0) Significant IL M&As (VC back) 1 (0) 0 (0) 1 (0) 1 (0) 2 (2) 7 (3) 11 (3) 7 (3) 16 (6) 15 (9) 32 (11) 8 (6) 5 (3) 9 (8) 15 (7) 16 (9) 28 (23) 26 (16) 21 (15) Source: IVC (2008), OCS (2007), VentureOne (1997) and authors calculations. * Only of high tech startups; ** not including fire sales (at least $20M or at least $5M with annual ROI above 25%). The picture about the emerging ICT cluster will not be complete without considering the phenomenon of M&A—one of the main mechanisms of exit for VC investors and for startup entrepreneurs. There is no clear ‘market place’ where M&A transactions (which are ‘private’ capital market transactions) are negotiated and implemented. It follows that the conditions for an emerging cluster to facilitate M&A activity on a continuous basis differ from those required to provide access to public 6 Both factors were at work here - NASDAQ index growth, it did not induce other countries’ firms to float more
  15. 15. capital markets. Clear reputation effects are required in order to trigger MNEs to undertake a costly search for technological opportunities in a specific cluster. The Israeli case suggests that a critical mass of IPOs might play a crucial role in creating the conditions for cluster emergence and that M&A only come in increasingly large numbers later on, probably starting in 1994 (became significant in only since 1996 – see table C7). The link could be as follows: public capital market links early in the game generate conditions for the emergence (given a suitable Government program like Yozma) of a distinctive VC industry. The new industry develops a capability for M&A and in fact, many VCs become oriented towards the M&A form of exiting rather than to the IPO strategy7 (see table C8). With the onset of cluster maturity and with enhanced cluster reputation, MNEs start coming and this creates a very strong wave of new M&A. Table C7 show that during 1996-7 the number of significant VC backed M&A was still 20% lower than IPO numbers for the period; but that the former exceeded the latter by about the same percentage during 1998-2000. Table C9: Yozma Funds Exits by Years Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total IPOs in the U.S. (% of Total) 0 0 1 (11%) 5 (31%) 2 (17%) 4 (57%) 6 (50%) 8 (42%) 1 (50%) 0 0 1 (17%) 1 (25%) 1 (50%) 0 0 IPOs in Europe (% of Total) 0 0 0 1 (33%) 0 0 3 (50%) 3 (23%) 0 0 0 0 0 0 0 0 IPOs in Israel (% of Total) 0 1 (14%) 0 0 0 0 0 1 (10%) 0 0 0 1 (33%) 0 0 0 0 Acquired firms (% of Total) 1 (100%) 1 (50%) 3 (43%) 3 (27%) 3 (43%) 3 (19%) 6 (40%) 10 (31%) 3 (38%) 5 (100%) 1 (11%) 2 (13%) 2 (13%) 6 (21%) 2 (8%) 6 (30%) Total Successful Exits 1 (4%) 2 (16%) 4 (21%) 8 (29%) 6 (26%) 7 (21%) 15 (34%) 22 (30%) 4 (36%) 5 (63%) 1 (11%) 4 (14%) 3 (5%) 7 (16%) 2 (4%) 6 (29%) 29 (25%) 7 (15%) 3 (4%) 51 (26%) 97* Source: IVC (2009), OCS (2008), VentureOne (1997) and authors calculations. * Excluding Firesales and an exit backed by few Yozma funds is count only once – this explains the gap with table C2. 6. Cumulativeness and VC Emergence VC emergence in Israel is closely related to the onset of a cumulative process where VC activity and profits led, at least till the end of the decade to more VC activity and profits. Cumulativeness involves four main sub-processes, which interact; and a 7 The ‘simple’ types of M&A seem to be easier to learn during early phase of the VC industry development compared to ‘preparing a company for IPO’. The latter requires paying attention to management, financial and marketing capabilities since, for floating, a company needs a selling product (although it need not be profitable). In contrast, most M&A are based on the technology and technological excellence of SU and of its staff.
  16. 16. fifth (VC-startup Co-evolution), which integrates some of these and comprises a central part of the overall process. The four component sub-processes are: Entry, Collective Learning, Exploitation of Economies of Scale, and Reputation and Networks Effects. Strong collective learning took place during five years of Yozma operation (19931998) and beyond, triggered by Yozma, who contributed to attain the critical mass of activity for an effective and self-sustaining process. Learning pertained to screening deal flow, due diligence, investing in startups, monitoring startups, providing value added, and in the exiting. Collective learning of VCs together with some very good ‘early exits’ (through demonstration, networking and reputation effects) stimulated entry of new VC companies, and accelerated creation of second/third funds by the existing Yozma management companies. Yozma, by creating a quantum jump in VC activity accelerated individual and collective learning8 by VC and startups, and interactive VC-startup learning. Moreover the learning process involved a significant component of learning from foreign agents in particular from the foreign ‘limited’ partners of Yozma Funds9. The enhanced VC and high tech activity enabled a better Exploitation of Economies of Scale in the domestic generation of non-traded (or partially non-traded) inputs to high tech e.g. accountants, lawyers, investment bankers, consultants, providers of knowledge inputs, and independent suppliers of production inputs. This factor, together with the existence of networks of personal links, presumably contributed to reductions in Transactions Costs and through this, facilitated deal making in the VC industry. Through time after 1993 Israel’s high tech cluster became better integrated and increasingly capable of providing effective services to new startups, both through VC and through a gamma of other input and service suppliers. The cumulative process was also fueled by favorable changes in the External and internal Environment (which were mentioned in section 3). 6.1 VC-startup Co-evolution VC-startup co-evolution is a central axes in the cumulative process leading to VC emergence and beyond. The interaction between the two types of agents of the business sector is both direct and indirect. Direct interactions parallel supply-demand effects and 8 Yozma Funds were connected in a network by the fact of a common OCS board member. Yozma was instrumental in bringing to Israel important financial institutions (see table C2). These companies became a source of know-how, networking and reputation for the young VC industry. They presumably were instrumental in triggering new elementary dynamic processes, which directly and indirectly contributed to the overall high tech momentum of the period. 9
  17. 17. user-producer links in young markets e.g. VC and startup entry; and interactive learning. Indirect links also occur through the wider cluster via one or more subprocesses of cumulativeness10. In Israel the starting point of VC-startup co-evolution can be found in the early 1980s when new opportunities in Software induced the foundation of a group of startups and emergence of the startup business models. These were linked to new forms of finance including the financing of startups by investment companies; and the first formal VC—Atena (created in 1985). A more rapid process of startups creation began in the early 1990s fueled by the ongoing ICT revolution, by the globalization of capital markets for technology companies, and by the growth of the NASDAQ index. By 1993 more than 300 startups were operating in the country and seeking for capital. Thus, prior to Yozma, an excess demand for VC services arose. However, this excess demand and the other background conditions probably could not by themselves trigger VC emergence without the help of a program like Yozma. System failures prevented the un-aided emergence of a domestic VC industry. These included lack of market-tested VC reputation and a critical mass of VC activities that would enable partnering with foreign VCs; and coordination problems between startups, VC firms and risk capital (see Gilson, 2003). Yozma program assured a highly dynamic response to the excess demand for VC services generated during the pre-emergence11. This led to very high profits of early VC entrance and high expectations regarding future VC performances, which stimulated VC entry and expansion. The new VC supply was directed to existing startups and to a new wave of startups, which expressed the entrepreneurial response to the increase in VC activity. The number of startup creation vs. VC-backed startups for the years 1989-1992 reflected the excess demand for VC financing (only 10% of startups were financed by 10 There were three steps in the VC-SU co-evolution: Pre-Emergence: the numbers of startups operating and the small share of those, which were VC-backed, suggests the existence of ‘unsatisfied demand for VC services’; Emergence: The rapid policy response (through Yozma) to such a deficit led to a quantum jump in VC raised and, due to the availability of a pool of skilled potential VC entrepreneurs, to a corresponding increase in VC activity. This in turn led to a ‘temporary excess supply of VC services’. As a result we observe not only an increased share of startups that were VC-backed but also significant increases in gross additions to startups during 1995-1996. These were either a reaction to the ‘excess supply of VC services’ or to the expectation that new startup foundations would easily find new VC sources of finance if required. Increasingly Synchronous Growth: Starting in 1996 startup demand for VC services and VC ‘supply’ become increasingly synchronous i.e. rapid mutual adjustment. During the rest of the decade, the share of startup which are VC-backed increases. 11 The rapid VC supply response would seem to contradict the assertion that there is supply inelasticity in the VC industry (Gompers & Lerner 1999). However, we argue that the real bottleneck to expansion is not risk capital but experienced VC managers. This inelasticity was not present in Israel during VC emergence, due to the accumulation of VC-related experience in the pre-emergence phase, and due to returnee of experience Israelis from Silicon Valley and elsewhere. Thus, Yozma's addition to capital translated immediately into sharp increases in VC activity-although a strong process of individual and collective learning was still required for the VC industry to become efficient.
  18. 18. VC) prior to Yozma, the figures for the years 1993-1994 reflect the impact of implementation of the Yozma Program and the increased availability of VC (60% of startups were financed by VCs), and the figure for the years 1995-2000 (49% of the startups were financed by VCs) and the years 2001-2006 (33% of the startups were financed by VCs) represents the entry of new type of financing agents. Box C4: Sub-processes operating during VC emergence 1. Yozma Funds and other VCs founded prior to 1996 created follow-up funds. 2. Entry of non-Yozma VCs during 1996-1998 and follow-up funds of these organizations. 3. Successful Exits of these early entrants enhanced their reputation and led to more VC fundraising both by the successful VCs themselves and by other new Israeli VCs. During the process, foreign investment banks set up offices in Israel. This further facilitates the creation and growth of high tech startups. 4. Since 1996 strategic partners e.g. IBM, Cisco, Intel, etc. became limited partners of Israeli VCs. This in turn led to further reputation and networking of portfolio companies, which strengthened their activity and performance. It also led to enhance direct investments by such partners and to enhance reputation and networking benefiting the high tech cluster as a whole. Collective learning of the VC industry and interactive learning involving Israeli VCs, Israeli startups, and foreign strategic partners. 5. “Cluster Effects” from the higher scale of activity which enhanced the local production of inputs and services for the high tech sector (e.g. accounting, consulting, legal, patents offices, etc) 6. Increase in the M&A activities of multinational companies in Israel. Leading both to a new significant exit channel for Israeli startups and to an increase in R&D activity of multinational companies in Israel 7. Significant direct foreign VC activity in Israel, starting in 1997 (represent 50-60% of the VC investments in Israel). Some foreign VCs established domestic offices is Israel, starting in 1999 8. A comprehensive cluster - the structural hole in the innovation process in Israel’s ICT cluster was closed and the VC industry became one of its central coordinating agents. Cumulative self-reinforcing process of growth The infusion of VC supply by Yozma program triggered a cumulative process with positive feedback in which more profitable VC activity at present spurred even more profitable VC activity in the future12. At the center of this process was VC-startup co-evolution. The sub-processes mentioned in Box C4 have both direct and indirect effects on startup and VC development. For example, the ‘cluster effects’ mentioned in Box C4 would enhance the efficiency of startups and thereby also indirectly affect the growth of VC activity. Similarly, the reputation resulting from successful exits would both enhance foreign resources invested in Israeli VCs and the possibility that startups would gain access to the global product and capital markets. Overall, each new sub- 12 Because of these cumulative effects and the growth of NASDAQ index during the relevant period – Government VC equity did not ‘crowd out’ private VC investments. In fact the opposite was the case: by triggering a cumulative process of growth, it led to the creation of new business opportunities, which the private VC sector exploited.
  19. 19. process increased the set already in operation thereby reinforcing the cumulativeness of VC emergence. Interactive learning and creation of strong user-producer links In young markets users learn from producers and vice versa - a phenomenon called interactive learning (Lundvall 1988). The reason why interactive learning is relevant for the dynamics of VC emergence is that it involved creation of a new industry/market. Interactive learning represents one component in the process of creation of user-producer networks—a widespread phenomenon in clusters and also very relevant for VC. In the VC industry, these networks enable VCs to have access to deal flow, to a wide variety of ‘added value services’, and to global capital markets. The high impact of these networks is also related to other events and processes such as: startup entrepreneurs becoming VC partners; VC strategic investors becoming direct investors in startups; VCs sponsoring “home entrepreneurs” or founding startups, and VC partners becoming entrepreneurs. Class A market forces Yozma’s success also derived from the strength of the market forces operating in the area prior to implementation of the program or who entered the industry shortly after its implementation. This factor seemed to have contributed to spark a selfsustained cumulative process of VC emergence. The high quality and strong capabilities of ‘early entrants’ to the VC industry were ascertained through a microeconomic analysis of 40 leading VC companies (Avnimelech & Teubal, 2004b). We found that those companies indeed possessed strong capabilities, were eventually highly profitable and had a significant indirect impact on the subsequent growth and development both of VC and of the high tech cluster as a whole. Prevalence of such conditions explains both the rapid process of growth during VC emergence and the high impact of the targeted policy implemented for this purpose. Class A Market Forces and Industry Emergence We argue that under the uncertain and harsh global selection environment, existence of sophisticated and even profitable domestic market forces operating prior to industry emergence may actually enhance, rather than diminish, both the justification for implementing targeted policies and the probability that such policies will lead to
  20. 20. industry emergence. Our empirical work has demonstrated this link between the Class A market conditions that prevailed in the Israeli VC industry in the early 1990s and the strength of the subsequent policy-enhanced VC emergence process. Under Class A market conditions and with the enhancement of targeted policy we should anticipate a faster emergence process with a stronger economic impact. While, the unaided operation of (even) Class A market forces, might generate a cumulative process which is ‘too little and too late’. This is due to our observation that in order to efficiently translate private firm success into positive externalities and cluster emergence, a certain critical mass should be reached. We argue that there are a number of reasons for believing that despite the presence of Class A market conditions during the early 1990s, Yozma was critical for Israel’s successful VC emergence13. The previous chapters suggest that in addition to Class A market conditions, VC emergence required: (1) accessing reputable foreign partners14; (2) a complex coordination process linking the reputable foreign agents with highly skilled domestic VC entrants; (3) assuring that a significant part of the domestic VC agents adopt an early stage investment strategy, the LP form of organization and of other aspects of VC activities (this would enable the exploitation of increasing returns to scale in VC activities); (4) assuring that a cumulative process with positive feedback would be initiated and completed within a short period of time; and (5) ‘country/government signaling’ (the substitute for lack of VC market-tested reputation). In our opinion most of the above were system failures that unaided market forces by themselves (even if they were Class A) could not overcome. This is even more so once we recognize the relatively narrow window of opportunity for high tech transformation (i.e. both VC emergence and a significant economic impact could not have taken place prior to the next downturn in the global VC industry without the trigger and acceleration induced by Yozma). It meant that even if unaided market forces could have led to VC emergence by themselves it would have been a much slower process (with the risk of not attaining sustainability) and presumably one with a much lower economic impact. There is also sufficient evidence to support our view that the design and mode of implementation of Yozma succeeded in overcoming each one of the specific system failures causes mentioned above (see chapter 6). 13 The failure of the Inbal Program, which began operating only one year before Yozma strengthens our argument that Yozma was critical for the emergence of Israel's VC industry. The requirements below and the associated system failures should be dated at 1993. For additional details of Yozma and Inbal Programs see chapter 6. 14 This was difficult without Yozma due to the lack of market-tested reputation at the level of the VC industry.
  21. 21. The upshot is that within a certain range, an increase in the sophistication of local VC capabilities could enhance the justification and the expected impact from implementing a targeted policy15. However, beyond a certain level of capabilities, policy would not be justified since a high impact VC emergence would occur without government intervention. Similarly, when conditions are not Class A, policy may not be justified since even the best policy design might not trigger VC emergence. The role of government could be different in such Class B conditions (early entrants to an infant VC industry have low private profitability levels and/or low Pp-Ps correlation). Rather than targeting the industry itself the role of government under these conditions could be directed to stimulate favorable pre-emergence conditions such as fostering high tech startups, supporting business experiments, or ascertaining other ‘functional requirements’. The upshot is that targeting should be withheld, at least for the time being, or should focus on other industries where Class A conditions prevail. We argue that Class A market forces should be considered as pre-condition for the implementation of targeted policy due to the fact that a necessary condition for the first VC funds created to trigger entry of subsequent funds is that the former be highly profitable. Such a performance would generate what we termed market-tested reputation, which would considerably facilitate the raising of additional capital and the participation of a wider set of foreign partners. In Israel, the strong early profitability was due to very good exits (during 96-97) from early investments (during 1993-1994); and this led immediately to venture capitalists worldwide to consider investing in Israeli VCs and startups, hence the onset of cumulativeness16. The Israeli experience shows that, once several Yozma funds had high returns, the individual reputation effects spilled-over to the VC industry and high tech cluster as a whole; and that this led not only to expansion of existing VCs but also to entry of new VCs. By the same token, early funds and early investments, which are not highly profitable, risk truncating the subsequent process of industry emergence17. This pattern of “early success leads to initial reputation that leads to additional capital and added value networks” may lead to a self-sustained cumulative process of growth. In addition, the early reputation enhanced new high potential entrepreneurs to establish startups, which 15 This contradicts both the theory of infant industries support where the prior existence of strong market forces would seem to pre-empt the need for policy (Stoneman, 1987; Bell at el., 1984) and the underpinnings of a simple ‘market failure’ justification for policy according to the neoclassical perspective (Arrow, 1962). 16 This effect has been analyzed by Gompers (1996) who focuses on how early ‘exit’ successes of young, unknown VCs enhanced the flow of capital to follow up funds of these organizations. 17 A weak Reputation effect could lock–in VC into a low-level 'equilibrium' trap.
  22. 22. increase the potential deal flow and therefore lead to additional increase in potential future success. 7. Imitation of Yozma Program in Other Countries Since 1999, as the tremendous success of the Israeli VC industry and the related Yozma program became famous around the world many countries tried to adopt the model of Yozma. Some countries had a formal process of learning from the Yozam program (meetings with policy makers in Israel and with Israeli researchers that analyzed the Yozma experience) these include: New Zealand, Latvia, and Russia. Other countries started some formal or informal processes of learning from the Yozam program, but did not implement a similar program eventually. It is still too early to assess the success of these policies. However, the significant imitation of the program is by itself a signal for it high reputation. 8. Conclusions We now summarize and complete our argument concerning the role of Yozma. First, Class A Market Forces in the VC area were necessary but probably not sufficient for industry emergence - additional capabilities and other elements were also required; Second, these would not automatically be generated to the extent and the speed required without Yozma; Third, either Yozma caused emergence, or it only accelerated emergence, our assessment is that Yozma was a successful policy with a significant impact. Due to the narrow window of opportunity even if Yozma only accelerated emergence its economic value was significant i.e. unaided market forces would have created a smaller VC sector and a slower growth of high tech cluster as a whole18. It is important to mention that the Israeli experience cannot be easily repeated in other countries. However there still may be valuable lessons, which could be learned from that experience. Also a dynamic interpretation of that experience which also integrates others’ experiences could contribute, through an evolutionary process, to a broader framework for analyzing VC policies in a variety of countries/contexts. The analysis of Yozma also suggests that in some cases of clear system failure in the market a targeted temporal government intervention could have significant value. 18 David (1985, 2001) has emphasized that effective policies implemented under conditions of strong ‘path dependence’ enjoy only a narrow window of opportunity a statement which fits our view of the impact of Yozma.
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