Israel is a nation and country in the Middle East, with a very different culture and history. It is striking how small it is geographically speaking, both its population that does not exceed nine million inhabitants and its area that is similar to that of the state of New Jersey in the US. The above contrasts with some statistical data and concrete facts about what this country has achieved only in terms of innovation and development of new ventures.
As a country there is none like it in this matter. It is surpassed only by a US region of the state of California, Silicon Valley. Israel has 1 start-up for every 1,400 inhabitants. As a country they are number 1 in number of engineers per capita, it is second in proportion of investment in R&D / GDP and in number of researchers in businesses. Warren Buffet, the most prominent fundamental investor in history, has said that Israel has been shown to have a disproportionate amount of brains and energy.
Israel was a pioneer in creating a fund with public resources aimed at business development when it created the YOZMA group in 1993, which used public resources to leverage financing in the country from foreign institutions and corporations. The program included collateral, creating links between Israeli companies with Angel investors, and listing Israeli companies on foreign equity markets. YOZMA invested in start-ups and created several public-private funds. In 2000, it managed to get private financing to surpass the public, which meant the take-off without turning back of Venture Capital in the country. YOZMA's success is a model to be studied and followed in other countries interested in achieving this type of results.
With all these successes, history does not completely favor Israel. Despite being an unparalleled generator of technology-based companies and having attracted large corporations to develop R&D centers in the country, in addition to investing in new companies in this ecosystem, it seems that part of the success has attracted the negative part of this case.
The issue is that Israel has not been able to develop at scale and for the benefit of its own country practically none of the large number of technological ventures that it manages to produce. Only two companies have achieved this category, Teva Pharmaceuticals and Check Point Software Technologies. However, Israel is the third most represented country in the NASDAQ index when it comes to the number of companies listed. This lack of industrial maturity has become both a mystery and a challenge.
This modern private sector full of small and advanced technology-based companies that are absorbed by large corporations as well as the country's talented personnel may ultimately be generating a long-term economic problem for the national economy. Well, the country is exporting its know-how in the form of companies and people while punishing the development of large companies in the country. This affects the collection of taxes necessary to face challenges in education, health, infrastructure and security in the country; only benefiting a few.
Apparently, a good part of the solution to this problem can be derived from the way in which the financing of the sector is done. Today, much of this financing is oriented to the first phases of the development of start-ups and not to their growth and maturation until they are established as global corporations. This is reinforced by the need for short-term returns from Venture Capital firms. Israel needs multibillion-dollar funds to invest in a company that achieves commercial success of a product on a global scale into a large corporation with thousands of employees.
Again, as it happened with YOZMA, the mobilization of public resources not only in cash, but in regulations, could initiate this change. Pension funds could have this capacity if they can modernize their way of assessing risk and only direct a small fraction of their portfolio to this purpose. This would already be a breakthrough. Modify a little the action of the renowned Israel Innovation Authority for the Incubation Program, which manages to mobilize significant resources for the financing of early stages of the companies but leaves unsatisfactory results in long-term developments.
Specifically, 4 possible solutions have been proposed so that Israel can overcome all this challenge:
1-Promote an environment in which creative and innovative entrepreneurs do not find incentives to go to work with a multinational company or sell their idea to it. For that, public-private partnerships would be necessary to offer financial stability to entrepreneurs so that they take risks and persist in their efforts. Meanwhile, promote the environment where these companies collaborate or integrate with each other.
2-Encourage multinational corporations to invest money and knowledge in external R&D centers for the benefit of the local ecosystem and all its members, in which they support the growth and maturation of new companies.
3-Create opportunities that attract talents and experts that help develop the local ecosystem in the way it is now desired. An example of this would be the Venture Capital Funds with a long-term orientation in their return, as does the Moon Venture Fund, one of the few that today already does so in Israel.
4-Strengthen the Israeli stock market so that it increases its exposure to innovation. Mechanisms to achieve this have already been seen in other countries. It is necessary that large institutional investors play a more prominent role and for that some changes in the regulation would be necessary.
(The above is an appreciation made from the publication of the 2020 Innovation Report of the World Intellectual Property Organization "Israel's challenging transformation from start-up nation to scale-up nation" by Yaron Daniely)
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