Israeli Government Reveals High Tech “Bail Out” Plan to Boost the Technology Sector

The proposal will enable investors in startups to receive tax write-offs on investments for high-tech companies who spend at least 70% of their salaries in Israel. The new law is part of broader reforms to boost the high-tech sector, led by Dr. Yuval Steinitz, Israel’s minister of finance and his ministry’s director general, Haim Shani

The birth of the Israeli venture capital industry was supported by government programs like Yozma. While the intention was to fully privatize the venture capital industry, the drought of funds in Israel spurred the need a ‘bail out’ of the high-tech sector, in the form of by public sector programs to resuscitate investments in high-tech companies and retain innovative start ups in the country. One of the initiatives in the plan, the “Angels Law” has received the support of the Knesset and passed its first hurdle today.

The proposal will enable investors in startups to receive tax write-offs on investments for high-tech companies who spend at least 70% of their salaries in Israel. The new law is part of broader reforms to boost the high-tech sector, led by Dr. Yuval Steinitz, Israel’s minister of finance and his ministry’s director general, Haim Shani

During the 2010 High Tech Industry Association Annual Conference held yesterday in Jerusalem , Steinitz discussed the details of the plan:

“This is the first time in history that the government is presenting a comprehensive integrated plan for the Israeli high-tech sector,” Steinitz told the gathering. “It is not a targeted plan designed to deal with a particular subject. It deals with the entire high-tech field in all its facets, phases and aspects. We are putting our emphasis on blue and white [meaning Israeli industry] from the standpoint of both caring for the companies’ needs and encouraging their growth, and regarding capital financing expected to flow to Israeli high-tech. Another point emphasized in the plan is higher education and academia, because we can’t do without human capital.”

The Israeli High-Tech Support Plan

In broad strokes, the high-tech support plan consists of the following pieces:

  • Renewing the flow of capital to the high-tech industry – primarily by encouraging Israeli institutional investors to invest in Israeli venture capital funds. Today, most of the LPs for Israeli funds are foreign investors. To that end, the state will bear a portion of the risk, by allocating NIS 200 million (approximately USD 50 million) as part of the state budget.
    • Similar schemes are already operating in the UK, where the government allocates a budget for investment in technology companies, but the due diligence and investment decision criteria are implemented by the VC funds, who also put their own ‘skin in the game’
    • NESTA, for example, is the the National Endowment for Science, Technology and the Arts – an independent body with a mission to make the UK more innovative. Nesta co-invests its public funds with other State Aid funding.
    • The ‘Chief scientist’ schemes in Israel have similar aims to some extent, but the grants are usually too small to take the startups global fast enough.
  • Tax incentives for investors in early stage Israeli high-tech companies. Currently a Californian pensioner would invest in a startup while the Israeli pensioner would probably invest in real-estate out of Israel. The
    • In the UK, the EIS provides similar benefits: “The Enterprise Investment Scheme (“EIS”) is a government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies.”
  • Tap into the potential of Technology for Financial Services – According to Mr. Shani Israel is barely present in the $200 billion financial services IT market, and it should leverage its position as a global leader in information, technology and innovation.
    • The Israeli government will offer incentives to international financial-services companies that want to establish R&D centers in Israel to encourage R&D in the space
  • Expand the employment of minorities in the high-tech sector in the periphery – the idea is to train the Orthodox Jews and Israeli Arabs in high-tech professions by training teacher in science and technology and encouraging industry professionals to teach five hours a week.
    • Steinitz said in the press conference: “There are good examples of haredi work participation in Modi’in and other places, but the haredim and Arab populations still are underrepresented in the technology industry. We want to expand work participation of these populations to the periphery – that is, to the Negev, Galilee and Jerusalem.”

On the other hand, for a successful eco-system of investors and startups to exist, investors need to be compensated for the level of risk they are willing to take and in the case of an early stage startup, the risk is huge. There’s an urgent need for exits, and big ones while at it. While Israel has seen a few small to medium size trade sales in recent months (Guardium to IBM, LabPixies to Google etc), both local and foreign venture capital funds struggle to find Israeli startups that would return 10x on their investments with exit figures over $300 million. There’s also concerns that Israeli entrepreneurs don’t really understand consumer Internet for example, since they haven’t had much experience creating companies that scale (such as Google, eBay, Paypal). The Globe’s article title sums it best: “Treasury wants to see more Tevas and Check Points”.

In my opinion, this program may be an important step in ensuring that some of  the potentially big ideas get grassroots funding early on.

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Co Founder and Managing Partner at Remagine Ventures
Eze is managing partner of Remagine Ventures, a seed fund investing in ambitious founders at the intersection of tech, entertainment, gaming and commerce with a spotlight on Israel.

I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.

I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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As every month, VC Cafe is re-posting the “Invest in Israel” Newsletter, published by the investment promotion center of Israel’s Ministry of Industry, Trade and Labor, which offers many helpful tools for prospecting investors. See the March 2011 edition after the jump. Check the archive for previous editions.
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