The document summarizes the success of Israel's Yozma program in establishing a venture capital industry. It discusses factors that contributed to Israel's startup ecosystem like high human capital. The Yozma program enticed private funds to invest in Israeli startups by partnering with them and guaranteeing investments. This helped grow Israel's venture capital industry from $20M to billions. Other countries emulated Yozma's model to spur high-tech growth. The program succeeded in catalyzing long-term private sector involvement in venture capital after the government's predetermined exit.

1. The Yozma Program Success Factors & Policy
Presented by:
Yigal Erlich
the Yozma Group
Tel Aviv, Israel

2. THE ISRAELI OPPORTUNITY
The Right Ingredients
Wealth of Human Capital
Israel
USA
Japan
Germany
Mass Immigration
•
140
82
80
60
# of Engineers/
Scientists per
10,000 people
•
•
1 Million people
(mostly within 3 years)
Quantity: 20% of Israeli Population
Quality: 40% with Academic Degree
Entrepreneurial Spirit
• 2-3 New Startups every day
• Highest Concentration of High-Tech Startups after Silicon Valley
• 3rd in the world in IP (following US & Japan)

3. Why Foreign Investors Choose to Invest in Israel
•Entrepreneurial Spirit
•Human Resources
•Reputable Academic Institutes
•Government Commitment to R&D
•Strong Infrastructure for Entrepreneurs (CS, VCs, Incubators...)
•International Activity (R&D centers, VCs, Corporations,
Investment Banks)
•Deal Flow Sources (Immigrants, Defense, Repatriate Israelis,
Spin-offs, etc.)
© Yozma Proprietary

4. Deal Flow Sources
Repatriate
Israelis
Defense
Corporations
Deal Flow
Sources
Spin-offs
R&D centers
Universities
New
Immigrants
© Yozma Proprietary

5. Israeli Venture Capital Before 1993
•Lack of investment capital for start-ups ($20 Million)
•Lack of professional venture capital management
•Successes in R&D vs. failures in marketing
•Number of start-ups tripled from 1988 to 1992
© Yozma Proprietary

6. Government Support for the High-Tech Industry- Pros and Cons
•
•
•
•
Chief Scientist
Tech. Incubators
Gov’t Guarantees
Venture Capital
© Yozma Proprietary




Only R&D
Only Seed
No Risk Lowering
Equity-Based

7. Venture Capital –
an Engine for Growth for High-Tech Companies
•
•
•
•
•
Equity-based finance  VC
Need to go international quickly  VC
Short product life  Higher R&D spending  VC
Larger investment per Company Deep pockets  VC
Need for management and marketing assistance  VC
© Yozma Proprietary

8. Government’s Entry Into Business – Preconditions
•
•
•
•
•
•
•
Government as a Catalyst
Lowered Risk
Market Failure Conditions
Predetermined Exit Conditions
Timed Entry and Exit
No Government Control
Indirect Investments (Funds)
© Yozma Proprietary

9. (Yozma Venture Capital (1
Mission: To create the venture capital market in Israel
Method: To entice the private sector and foreign investors
to set up new VC funds
To participate as a partner in the new VC funds
To secure an obligation of the new VC funds to
invest in start-up companies in Israel
Accomplished through: Establishment of a $100M
investment company
Use of proceeds: Establishment of 10 drop down funds
together with strategic partners.
15 Direct investments
© Yozma Proprietary

10. ( Yozma Venture Capital (2
Basic principles:
•
Investment of $8M in each drop-down fund
(minority position)
•
A 5 year option to Yozma’s partners to buy out the
Government’s share at predetermined conditions
Results:
•
8 out of the 15 companies Yozma Venture Capital has
invested in directly, went public or have been acquired
•
•
9 out of the 10 drop-down funds have exercised
their option and bought out the Government
The Israel Venture Capital industry has been
© Yozma Proprietary
established

11. ( Yozma Drop-Down Funds (1
FUND
PARTNERS
•Eurofund
•Gemini
•Inventech
•JPV
•Medica
•Nitzanim-Concord
•Polaris
•Star
•VERTEX
•Walden
Daimler-Benz, DEG (Germany)
Advent (USA)
Van Leer Group (NL)
Oxton (US/Far East)
MVP (USA)
AVX, Kyocera (Japan)
CMS (USA)
TVM (Germany) & Singapore Tech
Vertex International Funds (Singapore)
Walden (US)
© Yozma Proprietary

12. ( Yozma Drop-Down Funds (2
FUND
CAPITAL MANAGED ($MM)
Original size
•Eurofund
•Gemini
•Inventech
•JPV
•Medica
•Nitzanim-Concord
•Polaris
•Star
•VERTEX
•Walden
Today
90
350
40
580
70
280
645
400
250
175
210
© Yozma Proprietary
20
25
20
20
20
20
20
20
20
25
2,880

13. The Government as a Catalyst
Government
Intervention
Market
Failure
$100M
I
nvestm
ent
Establishment
of Yozma
1993
1997
Return>$100M
© Yozma Proprietary
Government
Exits
Yozma Privatized
Problem
Solved

14. Countries Following the Yozma Example
Czechoslovakia
Taiwan
Australia
Denmark
New Zealand
Korea
South Africa
© Yozma Proprietary

15. Venture Capital Raised
4000
3rd Wave
3500
3000
1st Wave:
2000
Establishment
1500
$M
2500
of Yozma
2nd Wave:
Yozma Funds
Raise
Continuation
Funds
1000
500
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: IVC Research Center

16. Total Amount Raised by Israeli
High-Tech Companies ($M)
3,500
3,092
3,000
2,500
1,985
1,822
2,000
1,012
1,500
600
430
1,000
576
500
0
190
240
1997
1,173
1,270
260
812
340
436
1998
1999
Israeli VC Fund
Source: IVC Research Center
2000
Other Entities
2001

17. Capital Raised by Technological Sector –
2001 and 2000
9%
Internet
Life Sciences
30%
16%
8%
Other Technology
13%
6%
Software
20%
16%
42%
40%
Communications
0%
5%
10%
15%
20%
2000
Source: IVC Research Center
25%
2001
30%
35%
40%
45%

18. Israel's high Tech Cluster of the 90s
00
Number of SUs:
Number of VC Companies:
Accumulated No of IPOs (hi tech):
Accumulated VC-backed IPOs:
% Foreign Sources in SU funding
% IT Exports in Manufacturing Exports
90
80
~3000
~300
~150
~100
2
0
~130
9
1
~70
3
1
67%
NA
NA
45.7%
~33%
~20%

19. Capital Raised in US Public Offerings
of Israeli Companies (94’-01’)
3500
3000
2500
$M
Venture Backed
2000
All
1500
1000
500
0
1994
1995
1996
1997
1998
1999
2000
2001
In total: during the past 8 years more than 100 Israeli companies raised ~$9B ;
~50% of them were venture-backed
Source: IVC Research Center

20. M&As of Israeli Technology Companies
and Foreign Strategic Partners:
1996
$0.6B
1997
$0.8B
1998
$1.8B
1999
$2.9B
2000
$10.5B
2001
$0.6B
Source: IVC Research Center

21. Israeli VC Activity in 2001
•
Total Amount Invested ($m) : 812
•
No. of Deals : 656
•
No. of Companies : 438
•
Average Amount Invested ($m) : 1.2
Source: IVC Research Center

22. Israel VC Industry - Trends & Challenges
• Co-opetition
• Volatile Capital Markets
• Decrease in International Investments
• Maintaining Existing Portfolios
• Difficulties in Raising Capital
• Focus on Future Technologies
• Government Involvement

23. Thank You
© Yozma Proprietary

24. VC firms development over the years
1993-5
1996-8
1999-01
Average Leading VC Size ($M)
20
80
100-200
No. of Venture Firms
15
40
60

25. Share of Capital Invested by Israeli VCs
(Financing rounds in which at Least One Israeli VC Participated)
Other Entities
55% 55%
56%
59%
66%
54%
64%
50%
42%
58%
58%
45% 45%
44%
Israeli VCs
Q1/99 Q2/99 Q3/99
41%
50%
46%
34%
36%
Q4/99 Q1/00 Q2/00 Q3/00 Q4/00 Q1/01
Source: IVC Research Center
42%
46%
60%
54%
40%
Q2/01 Q3/01 Q4/01

26. First and Follow-on Investments by Quarter
100%
90%
80%
46%
42%
36%
32%
44%
44%
42%
34%
46%
48%
70%
72%
60%
73%
50%
40%
30%
54%
58%
64%
68%
56%
56%
58%
54%
66%
52%
20%
28%
10%
27%
0%
Q1/99 Q2/99 Q3/99 Q4/99 Q1/00 Q2/00 Q3/00 Q4/00 Q1/01 Q2/01 Q3/01 Q4/01
First
Source: IVC Research Center
Follow-On

27. Venture Capitalists – the Truth Revealed (part 1)
SEED
Hard & Fascinating
First & Second Rounds
Proof of Concept/Prototype/Beta
(Good Chance)
Third Round
Product/Initial Sales
(Attractive)
Pre-IPO
Profitability, Expansion
(Love it)
© Yozma Proprietary

28. Venture Capitalists – the Truth Revealed (part 2)
• Hate Risk
• Management more than Technology
• High return on investment (IRR>50%, X10 in 5 years)
• Innovation, not revolution
• Don’t want to control or micro-manage the company
• No time, but always open for new ideas
• As much details as possible
• Usually long and tired investment process
© Yozma Proprietary

29. Korea Venture Fund
Korean Government
© Yozma Proprietary