Entrepreneurial High-tech Cluster Development: Israel's Experience with Venture Capital and Technological Incubators

ABSTRACT

This study deals with policy instruments supporting high-tech start-up activity. It is based on the Israeli experience with two specific government programmes: Yozma, which triggered the emergence of the venture capital industry, and the technological incubators programme. These programmes had significant impact on the development of the high-tech cluster in Israel. While venture capital has positive impact on the growth and strength of high-tech clusters, it has also significant drawbacks, such as narrow geographical distribution of high-tech activities and narrow technological diversification. In this study we will analyse whether the interaction between Yozma programme and the technological incubators programme, reduced these drawbacks. We will examine whether the technological incubators in peripheral areas in Israel succeeded in attracting high-tech start-up activity as well as venture capital investments, and whether the incubators were supporting more diversified technological fields than the venture capital industry. In addition, we will try to determine whether cooperation between venture capitals and incubators led to more balanced investments patterns in terms of geographical distribution and technological diversification. Our empirical work is based on a population of 3747 Israeli high-tech firms, established between 1991 and 2004. In analysing this data we will attempt to determine whether venture capitals and incubators have dissimilar effectiveness in supporting start-ups and different technological and geographical preferences. The findings suggest that while venture capital-backed firms have higher success rates, their activities are more concentrated in central areas. In contrast, the technological incubators proved successful in attracting activity to peripheral areas and to less popular technologies, but their success rates are very low. Finally, the findings suggest that incubator graduates that received venture capital financing had significantly improved results.

Notes

1. Israel's high tech cluster could be analyzed due to its small size as a regional innovation system (Cooke, 2001).

2. According to the Organization for Economic Cooperation and Development (OECD, 2004), between 1999 and 2002 VC investments as percentage in Israel were higher than any other OECD country, including the US.

3. In almost all cases in Israel, successful technological start-ups will have an IPO or become a target of significant acquisition.

4. There is a general consensus, that innovation networks are important to business success and to the economic performance of a region. Innovation networks (Cooke, 1996) provide firms with accessibility to external resources.

5. Six Yozma Funds were created in 1993 (Gemini, Star, Concord, Pitango, Walden and Inventec); one in 1994 (JVP); two in 1995 (Medica and Eurofund); and one in 1996 (Vertex).

6. There were two Yozma Funds with $35 million and nine with $20 million (including Yozma Venture Fund).

7. The grant to the incubator itself is $175,000 per year. Initial ownership in a tenant is as follows: at least 50% for the entrepreneur, at least 10% for other key staff members, up to 20% for the provider of supplementary financing for project implementation, and up to 20% for the incubator itself.

8. A start-up can be included in more than one of these subgroups or not included in any of the subgroups.

9. Communication, software, Internet, medical devices, other—miscellaneous technologies, all other technological fields, e.g. life science, bio, agro, nanotech, hardware, industrial, energy, environment and others.

10. These unique regional policies should be analysed and discussed in depth in another study.