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Enabling Environment: the Government’s Role in facilitating Innovation

Presentation by Yigal Erlich

June 2012

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Introduction

Yigal Erlich

• Former Chief Scientist of Israel’s Ministry of Industry, Trade and

Labor

• Established the Technological Incubators Industry in Israel

• Founder & Manager of Israel’s anchor VC, Yozma

• Seed investor & active board member in technological

startups such as Biosense (acquired by J&J for $430M), Conduit

(current value: $1.35B) and Radiancy (traded in Nasdaq with market cap

of $200M)

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15 Years of Israeli Venture Capital Activity at a Glance

• More than 5,000 startups established

• NASDAQ: 100 Israeli high-tech companies are listed

• Main contributor to the economy: GDP, export and employment growth

• Human capital emerged as Israel’s main resource

• M&A: $28 billion, IPO: $6 billion

• $14 billion raised by Israeli VC funds

4Source: IVC Research Center

Foreign & Other

VC Investments in Startup companies10 Years Total: $15b

From Israeli Funds: $6b

From Foreign and Other: $9b

5Source: IVC Research Center

VC Investments by Stage as % of Yearly Total 2002-2011

2011 compared to 2008Seed/Early: 31% vs 41%, decrease of 32%Mid/Late Stage: 69% vs 59%, increase of 17%

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Yozma Venture Capital (1)

Mission: •To create a venture capital market in Israel

Policy: •Establish a $100M Government investment company.•Create professionally managed Funds.•Entice VC investments in Israeli early stage companies: (i) create and invest in new VC funds together with experienced

partners(ii) make direct investments in startup companies together with professional investors.

© Yozma Proprietary

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Yozma Venture Capital (2)

Investment method in Funds:

• Investment of $8M in each drop-down fund (minority position)• A 5 year option to buy out Yozma’s share at predetermined conditions.• Yozma’s CEO / VP will be a voting member on each Fund’s investment

committee.• Same terms for all VC Funds

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Yozma Venture Capital (3)

Results:

•Establishment of 10 drop down funds together with strategic partners (8 in the first two years).

•15 Direct investments

• 8 out of the 10 drop-down funds have exercised their option and bought out the Government

• 9 out of the 15 companies Yozma Venture Capital has invested in directly, went public or have been acquired

• The Israel Venture Capital industry has been established

© Yozma Proprietary

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Yozma Drop-Down Funds

© Yozma Proprietary

FUND CAPITAL MANAGED ($MM)

Original size 10 years later

• Eurofund 20 90• Gemini 25 550• Inventech 20 40• JPV 20 675• Medica 20 130• Nitzanim-Concord 20 280• Polaris 20 945• Star 20 900• VERTEX 20 250• Walden 25 175

210 4,035

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Government Support Ministry of Industry - Chief Scientist support of industrial R&D

$400m annually - grants, MAGNET, Incubators, other programs R&D cooperation with countries and large companies employees – grants for up skilling and training programs

Favorable tax regime and grants for investors and companies

tax exemption for foreign investors in VC funds tax benefits and grants for export-oriented industries, R&D centers

Science and education, reverse brain drain programs supporting excellence – Talpiot, research projects and centers establishing 35 academic Excellence Centers, $400m annual budget

Civilian commercial benefits of defense R&D exposure to cutting edge multidiscipline large technology projects special intelligence technology units: 8200, 8100, Air Force developed military industry – RAFAEL, IAI, Elbit Systems

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Building Blocks of Israel’s

Innovative Technology Sector

Academia, Universities, Engineers,

Postgraduates

Skilled Educated Man Power, Immigration,

Reverse Brain Drain

Executives, Veterans from Global Firms

Innovative & Entrepreneurial Culture, serial Entrepreneurs

Venture Capital, Exit Avenues: M&As, IPOs

Modern Infrastructure, Government

Support

Academic Science and

Research Centers,

Researchers

Defense R&D

Multinationals: R&D Centers,

Strategic Investors

Technological Incubators

Technology Clusters, Startups,

Large Companies

Technology Infrastructure

Human Capital

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Professional VC funds

Capable to raise funds Choosing the right investments Managing the investments Building value for exit

Government vs. VC role

Government Involvement

Market failure conditions Government as a catalyst Predetermined exit conditions No government control Indirect investments (funds) Risk sharing

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Thank You

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Additional slides

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• Board level

• Assist/support management with strategic partners

& customers

• Assist/support in recruitment of senior management

• Build/Approve Business Plan

• Help raise additional capital (Equity/Debt)

• Entice EXIT

• Step-in at crises.

The Role of VC in early stage companies

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Yozma - Direct Investments

Basic investment principles: • Yozma is a for profit company • Open the way to new industries, where risk is too high

for other VCs• Lead rounds• Attract strategic investors

Examples:• Instent, Medsim (new investors)• BioSense (new entrepreneurs)• Ubiqe (new industry- the Internet)• Telegate (spin-off)

© Yozma Proprietary

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Seeking Technology Innovation and DevelopmentIncreased Multinational Presence in Israel

Source: IVC Research CenterPartial list

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Multinationals - Success Stories

Source: IVC Research CenterSelected list

7,700 employees, first R&D center outside the US, 4 R&D centers, 2 manufacturing centers Developed: Pentuim, Centrino, Core 2 Duo, acquisitions – more than $2b, investment in Israel $7.3b

500 employees, R&D strategic centers, acquisitions over $700m in 2007-2011, support center for startups, first R&D center outside US

400 employees, 2 R&D centers, support center for startups

2011 - first R&D center outside US, first acquisition: $390m, Anobit

400 employees, 4 R&D centers, support center for startups, acquisitions: $900m

1,000 employees, 2 R&D Centers, acquisitions – more than $400m

1,200 employees, R&D center, manufacturing facility, acquisitions –$2.7b - Galileo

3,600 employees, 2 R&D centers, HP's largest software development site in the world

500 employees, 6 R&D sites, acquisitions – over $750m