Israel and Entrepreneurial Policy
Yozma is the Hebrew word for initiative. It is also the name of the program launched in the 1990s by the government to invest $100 million to create 10 new venture capital funds in Israel. This program was launched as a result of the lack of experience and inability of Israeli companies to successfully market, or “sell” their product on a global scale and the need for adequate funding.
During the late 1980s to early 1990s, the Israeli startup scene was still in its infancy. There were no major connections with foreign companies. Moreover, to many foreign investors, Israel was far more synonymous with archaeological digs and modern Middle East conflicts than high-tech innovations. While Israel excelled in developing technologies, it had a problem making the transition from product development to corporate management and global marketing.
In order to do that, the companies needed funding, and prior to the introduction of venture capital into Israel, there were only two possible sources. The first option was the Office of Chief Scientist, which could provide only paltry sums for startups. The second option was called BIRD (Bi-national Industrial Research and Development) grants. These grants, consisting of $500,000 to $1 million, came from a fund created by the Israeli and United States governments to support joint U.S.-Israeli ventures.
The BIRD program gave a big push for the industry, and BIRD has invested more than $250 million into 750 projects – totaling $8 billion in direct and indirect sales. In addition to immediate funding, the BIRD program taught Israeli companies much-needed know-how of doing business in the U.S., which the local companies sorely lacked.
Another factor that helped boost the Israeli high-tech industry was the large wave of Jewish immigration in the early ’90s: more than one million Soviet immigrants began to arrive and helped create jobs for the many scientists among the new immigrants. The Israeli government created technological incubators where these Russian scientists could access resources and financing for research and development. However, very little success stories grew out of these experiments.
This is when the Yozma program materialized, courtesy of several enterprising individuals from the Israeli Ministry of Finance. The idea behind Yozma was as follows:
The government would invest $100 million in 10 new venture capital funds. Each fund had to be represented by Israeli venture capitalists in training, a foreign venture capital firm, and an Israeli bank or investment firm. In addition, one Yozma fund of $20 million was set aside to be invested directly in technology companies. This program enticed investors with an offer difficult to refuse: buy out the government’s 40 percent equity stake for cheap after five years, if the fund was successful. Essentially, the government would handle the risk, and the investors would reap the rewards.
Between 1992 and 1997, the 10 Yozma funds raised more than $200 million. Bought out or privatized within five years, Yozma manages today nearly $3 billion capital and supports dozens of new Israeli companies.
The Yozma program was a catalyst for other funding programs to follow: the 1993 launch of the Advent-sponsored Gemini Israel Funds, and Israel Seed Partners in 1994. As of 2009, there are 45 Israeli venture capital funds. Soon, governments from other countries noticed and visited Israel to take notes from the success of the Yozma program.
While Israel doubled its share of the global venture capital pie, other sectors, such as the finance sector, had virtually no support, thanks to cumbersome tax laws and draconian regulations. Because it was illegal to charge performance fees in Israel, the financial industry was essentially dead in the water.
However, in 2003, then-finance minister Benjamin Netanyahu began a series of reforms to scale back the government’s involvement in the economy and loosen the shackles off the finance industry, including phasing out of government bonds, releasing a huge pool of cash looking for investors, as well as legalizing the performance-charge fees.