Influence of economic crisis on the performance of incubated companies: the Israeli case

ABSTRACT

During financial crises, entrepreneurs find difficulties in raising investment especially from Venture Capital funds (VCs) which are more sensitive to economic changes in the private sector than governmental programmes, such as the Israeli Technological Incubator Programme. Since VC investment does decrease, we expect an increased deal flow of companies to incubators, permitting them to select better companies. By comparing the performance of incubator companies, incubated during financial crises, to the performance of graduates, incubated during the non-crises time, we found that unexpectedly the performance of companies being accepted to incubators during crises time is decreased. A possible explanation for these findings is that start-ups that fail to raise VC investments during financial crises blame the ‘economic situation’, even though some of them would have failed to obtain VC investments due to their low technological level. These start-ups prefer to postpone their business launch until the economic environment stabilizes instead of approaching incubators as alternative investors. This leads to a decreased deal flow faced by incubators and causes their managers to select an even lower level of companies.

KEYWORDS:

• Entrepreneurship
• financial crisis
• venture capital
• technological incubators
• innovation finance
• Israel

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The added value of venture capital funds – earning them the name ‘smart money’ – is composed of often non-quantifiable, non-economic advantages; these include a network of contacts in the relevant industry, experience in the branch, accumulated experience in developing young companies, etc.

2 The researchers point out that investor’s willingness to invest in funds is affected by economic growth rate, changes in GNP, interest rates, variance in return on security investments and growth/decline in R&D expenditures.

3 Researchers offer several explanations for the fact that syndicated investment, a tool for risk distribution, pertinent for coping with the crisis, has been found to drop particularly during financial crises.

4 MoneyTree Q3 2012 Report From the website: http://www.pwc.com/il/en/venture-capital-israel/moneytree-home.jhtml

5 Government budget appropriations or outlays for research and development.

6 According to a survey that included 26 OECD nations, with the exception of Italy and Romania.

7 In the 2002 budget, there was a decline in real terms of about 5.5%; about 13% in 2003 and about 5% in 2005. In effect, the 2002 budget was nearly identical to the 2000 budget in real terms, while the 2003 and 2004 budget was even lower than that of 2000 and 2001, respectively. The 2009 budget grew negligibly in real terms, by about 1.6%, while in 2010 there was a dramatic drop of about 17%.

8 Companies that were not active beyond the two years of incubation d.

9 Seed, R&D, earliest revenues, growth.

10 Seed, extended seed, first, extended first, second, extended second, third, extended third, fourth, extended fourth, fifth, IPO/PIPE.

11 Merger and/or acquisition, intellectual property sale, public offering (IPO) or private investment in public equity (PIPE).