Transcript The Israeli VC Industry: Emergance, Operation and Impact

The Israeli VC Industry:
Emergence, Operation and
Impact
Gil Avnimelech & Morris Teubal
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Main Objectives
• Analyze the emergence of the Israeli VC industry in the 90’s:
background, triggers, operation and growth.
• Analyze the emergence of Israel’s Hi-Tech cluster of the 90s
(‘Silicon Valley’ Model)
• Analyze the role in High Tech emergence of R&D support &
Innovation Technology Policy(ITP) more generally speaking
(e.g Yozma Program)
• Policy implications for Italy VC industry
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Our Approach
1. Our research focus on co-evolution as a factor in Emergence of the
industry; and through a better understanding of the contribution of
the VC industry
2. For this purpose our analysis takes place at two levels-a VC
industry level (meso-economic); and VC company/fund level
(micro-economic).
3. At the meso level we emphasize the importance of background
conditions for the successful emergence of the VC industry; and the
crucial role of Yozma as a trigger to the process
4. At the micro level we distinguish between private and social
performance/impact of VC companies/funds; we build indicators
for each of these; and correlate private performance and social
impact across a sample of 17 VC companies.
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Contents of Presentation
• Part A: Background- Phases in the Israeli High Tech
Industry and Innovation Technology Policy
• Part B: Phases in the Emergence and growth of the Israeli
VC Industry
• Part C: Micro-economic Statistics of a Sample of 20 VC
Companies: Private Preformance and Social Impact
• Part D: Building Initial Hypotheses of VC Company
Performance and Empirical Analysis
• Part E: Policy Implications for Italy
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Part A: Background- Phases in
the Israeli High Tech Industry
and Innovation Technology
Policy
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Background: R&D Penetration
Period (1970-89)
•
High Tech Industry and R&D
•
Innovation and Technology Policy:
1. The Backbone ‘Industrial R&D Fund’
2. First Phase-Learning
3. Second Phase- Policy Restructuring
4. Impact of ITP
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High Tech Industry and R&D
• During the 70’s and 80’s: Military R&D cooperation with US,
Germany and France; Dominance of strong military industry; First
foreign multinational companies establish R&D centers in Israel.
• High Rate of Growth of industrial Civilian R&D -from 26 M$ real to
347 M$ real between 1969 and 1987.
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Innovation & Technology Policy
•1969: Establishment of the Office of the Chief Scientist (OCS)
and creation of the “R&D Industrial Fund” program. This
program directly supported R&D projects of individual
companies, is the backbone of Israel Innovation Strategy. The
OCS budget grew from $2.5M in 1969 to almost $400M in 1999.
• Implementation in 1977 of BIRDF which promoted joint R&D
projects between Israeli and US companies.
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Silicon Valley Phase (1990-2000)
Background conditions & Events –
Internal/External
• Specific
• New programs
• The new High Tech Cluster
• Impact
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Specific Background
Conditions & Events-External
• Beginnings of Globalization of US capital markets with
respect to SU e.g under certain conditions foreign SU could
undertake an IPO in NASDAQ
• The global growth of the IT industry in the 80’s and 90’s; &
de-Regulation in the telecommunication market in the 90’s.
• The rapid growth of global capital markets (Nasdaq effect).
• Globalization of US investment banks & Private Equity
Companies; and attempts at searching for new investment
opportunities in Israel
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Table 1: Israel's high Tech Cluster of the 90s
99/00
90
80
Number of SU
~3000
~300
~150
Number of VC Companies
~100
2
0
Funds Raised by VCs: M$
3400
~49
0
Capital Invested by VCs: M$
1270
~45
0
Accumulated No of IPOs (hi tech):
~130
9
1
Accumulated VC-backed IPOs:
~70
3
1
% Foreign Sources in SU funding
67%
NA
NA
45.7%
~33%
~20%
~10
NA
NA
% IT Exports in Manufacturing Exports
Mergers and Acquisitions : B$
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Part B: Phases in the
Emergence and Growth of the
Israeli VC Industry
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Yozma Program – Objectives
• Generating a critical mass of VC funding/activity. This was
estimated as being around 200-250 M$.
• Achieving a balance between Government’s contribution and that
of the Private Sector; & ensuring minimum government
intervention in Management of the VC companies
• Promotion of domestic VC industry capabilities through learning
from foreign partners & through the creation of networks and links.
• Creation of stable VC industry which will survive after
termination of Government Support.
• Fast learning of local VCs and creating added value to SUs.
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Yozma Program-Final Design
• Total government investment of $100M- in the 1+10 Yozma
funds.
• In each of Yozma funds the government invested 40% of the
capital raised by the fund up to 8 M$.
• Each fund had a 5 years option to buy the government share
at initial value plus interest.
• All management companies were Israeli entities which
included partners from both Israeli and foreign financial
institutions.
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Yozma Program – Growth
• Most Yozma funds management companies has at least 2
additional funds.
• All but 2 of Yozma funds bought back the government share.
• The total sum managed recently by Yozma funds
management companies is approximately $6B.
• At least 7 out of 11 Yozma funds management companies are
among the top 20 management companies in Israel.
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Table 4: Capital Raised by the Israeli VC industry
Total VC Capital Raised
E
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Table 5: Capital invested in Israeli startups by
Israeli and foreign VCs
Total
By foreign Entities
E
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Table 6: Foundation of SU companies
First time VC Backed Startups
All new Startups
First time OCS financed
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E
Table 7: Number of offerings of Israeli companies in US
and EU stock exchanges
Number of Offerings
Number of IPOs
Number of VC backed Offerings
Number of VC backed IPOs
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Table 8: Israeli high Tech companies which were
Targets in M&A deals 1994-2000 (M$)
High Tech M&A deals
VC backed M&A deals
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Stages of Evolution of the
Israeli VC Industry
Pre-Phase1 (before 1993) – Pre VC age.
Phase1 (1993-1995) – Creation and Learning.
Phase2 (1996-1998) – Rapid growth and fast maturation
process.
Phase3 (1999-2000) – Mature Industry; and bubble years.
Phase4 (2001-) – Confronting with the global slowdown
and the global high tech crisis.
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Table 9: foundation of management companies
investing in Israeli SU
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CONCLUSIONS PART 1
ISRAEL'S VC INDUSTRY & HIGH TECH CLUSTER
OF THE 90S
• Is an outgrowth of High Tech as it developed during 70s/80s
• influenced by additional Background Conditions/Events, both
Internal & External
• Was Indirectly stimulated by existing Policies; & Directly
triggered by a Targeted Policy --Yozma (since 1993)
THE VC INDUSTRY DID NOT GROW IN A VACUUM, BUT IN
A CONTEXT IN WHICH A HIGH TECH INDUSTRY
ALREADY EXISTED
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CONCLUSIONS PART 1
THE ISRAELI EXPERIENCE SUGGESTS THAT
Critical Design & Timing Elements of Targeted Policies:
• Assurance of 'demand' for VC 'services’
• Strong 'supply' incentives, especially to the upside
• Active participation of reputable foreign Financial
Institutions
• ’Critical mass' of effort and Government role declining
through time ('catalytic policies')
• Attention to organizational design (LP form of
organization)
• Simultaneous implementation of other policies
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AT THE HEART OF EMERGENCE OF THE NEW HIGH
TECH CLUSTER IS A STRONG VC-SU EVOLUTIONARY
PROCESS INVOLVING THREE PHASES
• Pre-emergence phase (1990-2): Very favorable. Market
Forces already operating in the field
•Emergence phase (1993-5): The first phase of the VC industry,
induced by Yozma. It generated a 'critical mass' of activity
which, together with Government R&D support, strongly
stimulated SU formation.
• Mature Phase (1996-2000): Steady growth assured by a
'cumulative process' e.g. early successes lead to imitation,
entry & learning( 2nd and 3rd phase of VC industry).
•Shifting Structure of Exits: Crucial role of IPOs initially,
M&A gradually becoming important, both very important at
the end of the decade.
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Part C: Microeconomic
Analysis
Of A Sample of 17
Israeli VC Companies
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Patterns Identified
• Less co-investments in phase 3 than in phases 1&2 – Fits
our prior assumption.
•
More co-investment in successful companies – this may
have several reasons e.g 1) ‘good’ SUs have more sources
& more rounds of finance; & more value added needs; 2)
Top Tier VCs are invited to invest in good SU.
•
Exit valuation grew with the number of prior exits for a
specific VC and for the industry in general.
• Gradual movement to ‘Seed Investments’ (Phase 3) due to:
stronger competition, larger fund sizes and greater
capabilities.
• Increased specialization of VC companies.
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Direct & Indirect Indicators of VC-performance
• Average number of portfolio companies is 50 & average
number of Exits is 10. This gives a Success Ratio of 20%(11%
IPO and 9% M&A)
• The Success Ratio of Phase 1 is 30%.(20% IPO & 10%
M&A).
• 7 VCs had at least 1 Very Successful Exit, and another 3 VCs
had at least 1 Successful Exit.
• 8 VCs had leading strategic investors and 11 VCs had
financial institutions as investors(leading private equity
companies or investment banks)
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Part D: Exploring
Characteristics associated with
VC Value Added and VC
Success
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Linking Characteristics With the
Model of a Successful VC Company
success is a function of four basic operations:
Deal flow- good SU who apply to the VC;
Scanning Abilities- Identifying a subset for Due Diligence;
efficient due diligence process; and successful selection of SU;
Value added "operational' activities- ability to help
companies during startup and early growth phase;
Value added during Exit- networks with Investment Bankers
or with Strategic Partners; timing of exits, preparing the
company for the exit, etc.
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Linking VC Characteristics to
Performance-some Hypothesis
• Hypothesis I: prior Management Experience is a necessary
condition for VC entry
• Hypothesis 2: Important Role of Founder
Technology/Science Education combined with R&D Work
Position --absence of the above is strongly associated with
relatively weak performance.
• Hypothesis 3: Belonging to a Global Network is Strongly
Associated with VC success.
•Hypothesis 4: Existence of Strategic Investor or Reputable
Financial Institution is correlated with high performance
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Analysis of ‘Top Tier’ VCs
Sample and methodology
• Top Tier VCs are defined as having a) prior Management experience;
b) Technology Background; and c) either belonging to Global VC
network & having a Reputable Financial Institution; or having a
Strategic Investor
• 16 out of Universe of 128 VC or VC-related organizations were
classified as ‘Top Tier’.
• Sample of SU companies: all Israeli high tech companies that had IPO
in US or EU since 1971(156); and all Israeli high tech companies that
were the target side in an M&A deal since 1993(103).
•
SU where classified into three groups – none VC backed companies,
VC backed companies and ‘Top Tier VC’ backed companies.
• Variables compared according to: Sector, year of exit, age at the exit
date and valuation at the exit.
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Table 12: Number of Israeli high tech IPOs according to
technologies sectors and according to finance source
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Table 13: Average age of Israeli high tech IPOs
according to finance source
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Table 14: Average valuation of Israeli high tech IPOs
according to finance source
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Table 15: Number of M&A deals involved Israeli SUs
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Table 16: Average valuation of M&A deals
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Table 17: Exit Ratios of Israeli Startup Companies (% of success)
Pre Phase1
Phase1
Phase2
~200
~250
~1050
31 (15%)
37 (15%)
44 (4.5%)
Companies that were acquired
NA
27 (11%)
77 (7.3%)
# HT SUs backed by VCs
~25
~185
~740
12 (48%)
28 (15%)
40 (5.4%)
VC backed companies that were acquired
NA
17 (9.2%)
40 (5.4%)
# HT SUs backed by TT_VCs
~10
~65
~195
6 (60%)
14 (22%)
28 (14.5%)
NA
11 (17%)
30 (15.5%)
Phase of SU foundation
# HT SUs established in Israel
Companies that had an IPO
VC backed companies that had an IPO
TT_VC backed companies that had an IPO
TT_VC backed companies that were acquired
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Conclusions Part C and D
• There is strong evidence that the investment organizations in Israel are
not homogenous – there are significant differences in their value added
abilities and success.
•
Most value added of the Israeli VC industry is focused on a group of
10%-20% of the Israeli investment organizations.
•
There are two critical elements of VCs’ value added abilities: 1)
Reputable & value added investors; 2) science & technology education
and work experience.
•
VCs have different affects on SUs success in different
sectors(Semiconductor-high; Software & Internet-low).
•
While in the early phases of the Israeli VC industry most VCs created
added value to their portfolio companies- as the Israeli high tech
industry matured the added value of weak VCs diminished.
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Implications For Italy
Suggestions From the Israeli
Experience
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Availability of VC resources - Italy
• Italy’s VC industry is not a young industry –it formally exists
since 1986. However it grew slowly after the 1987-8 crisis
and re-focused toward LBO investments afterwards.
• Growth re-started in 1996 with a significant growth in capital
raised and in investments, with early phase high tech SU
investments growing very fast in 1999-2000.
• Still only a small percentage of total VC resources is devoted
to high tech and to the early phase Start Ups.
• Hypothesis: There is no problem of availability of capital to the
Italian VC industry.However there are constraints to the growth of
Start Ups including insufficient ‘intelligent’ capital which
specializes in investing in such companies.
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VC Maturity - Italy
• Hypothesis: The Italian VC Industry is an outgrowth of that
country’s financial sector, and most managers do not have prior
high tech and R&D experience – this explains the late stage&
non-high tech bias.
• Hypothesis: only a small number of VC companies are fully
specialized in early phase high tech Start Up investments.
• The Italian VC industry accumulated experience in early phase
high tech investments during 1999-2000(especially in Internet
and Communications Services).
• Hypothesis: Global VC players (mostly European) came quite
late in the evolution of the industry; also little cooperation
between local and foreign VCs.
• Hypothesis: the high tech world crisis since late 2000 truncated
what could have become a healthy growth of that segment.
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Specific Policies
Stimulate VC investments in early stage high tech Start Ups
• Government Fund which co-invests with private VC in
early phase of high tech Start Up companies
• Tax Benefits to VC companies specialized in early phase
high tech Start Up investments
• Government R&D support/subsidies of early stage Start Up
companies
• Government support of Technological Incubators
Note: Some these may require a specialized Government Agency with
abilities to identify & distinguish early high tech activities of SU
from non-high tech and non-early high tech activities
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High Tech Start Up Culture - Italy
• It seems that the main problem of the Italian VC industry is
the demand side – few SU companies i.e. few
opportunities for VC investments
•
Risk aversion culture
• Institutional constraints to the development of University
SUs relationships e.g. incentives to professors to found SU
companies
• Hypothesis: as a result young engineering graduates and
other potential SU entrepreneurs seek employment in large
high tech companies or in the universities
• There are also few incentives to leave these organizations
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Specific Policies
The objective is to encourage SU foundation through
entrepreneurship
• Simplify the process of personnel spin-off from large
companies to Start-Ups e.g assuring pension rights;labor
laws and regulations;
• Simplification of process of creation of new
Start Up companies
• Government underwriting of costs of establishing Start Up
companies by Universities
• Simplification of University bylaws concerning foundation
of Start Ups by Professors
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Exit Mechanisms - Italy
• The dominate exit mode is accumulated earning. This is
not adequate for early stage high tech investments.
• Absence of links with global capital markets- Nasdaq and
European markets.
• Small numbers of IPOs in those markets.
• Few M&A deals with global IT industry players.
• Main implication: Weak incentives to establish SU
companies.
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Specific Policies
Stimulation of IPOs
• Since Italy is not a leading High tech country it is
important for-- visibility, reputation, networking,
attracting partners, experienced investors, etc- that
Italian SU companies float at Nasdaq and to a lesser
extent in leading European new enterprise, high tech
markets
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Possible means to stimulate IPOs
• Tax Exemptions a) for a number of years to individual
companies, b) for a period time of growth of the industry
• Government participation in Underwriting Costs: a
percentage of costs; or covering the excess cost over the
underwriting cost of US companies ( 7%)
• Capital gain exemptions to companies floating in Nasdaq
 Profit tax & corporate tax exemptions
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Stimulating Foreign Investors in VC and in
SU(especially from the US; and with experience in
early stage high tech)
Since Italian VC companies have few links with the US and
are not devoted to high tech early stage, then participation
of US investors in VC companies is desirable.
For this purpose we propose.
 Tax exemption to foreign investors in domestic VC
companies.
 Government investments in domestic VCs on a dollar per
dollar basis together with foreign investors; and an option
to the latter to purchase its share at cost (plus interest).
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