One subject that can jerk Israeli high-tech entrepreneurs from their equanimity is the notion that the Israeli government does not properly recognize their contribution. This is also the explanation for the hysteria - deliberate or not - which resulted from reports earlier in May that the Chief Scientist's budget would be cut from NIS 1.6 billion in 2012 to NIS 1 billion in 2013. Before the government passed the budget last week, the budget cut was reduced and the Chief Scientist's budget was set at NIS 1.3 billion.
The budget cut means that the Chief Scientist will not have money for some of the applications for funding by companies. This could be a death sentence for some companies, while others will have to find alternative financing sources. Interestingly, during the 48-hour saga, which included some very militant statements by companies and organizations, no one has asked whether Israeli high tech in 2013 needs the Chief Scientist at all.
The answer is that while the industry needs the Chief Scientist, the time has come to realize that how it works has to change. In this context, there are major flaws and a painful budget cut may be what is needed for all the parties to consider a more updated and innovative operating model for the Chief Scientist to meet the technological and business changes of the past 20 years in Israel and the world.
The Chief Scientist is linked to Israel's thriving high-tech industry of the early 1990s. Back then, through the Yozma Program, the Chief Scientist provided government support for several venture capital funds. The money that flowed into high tech launched the surge in Israeli start-ups which now number in the thousands. This is the source of the feelings and fears that without the Chief Scientist's support, who knows Israeli high tech will end up.
Historically, the link between the Chief Scientist and Israel's thriving high tech is coincidental. In the mid-1990s, venture capital funds and companies mainly benefited from good timing. The surge in technology from the Internet revolutionary emergence as a commercial force inflated company values and turned high-tech entrepreneurs, investors, and these companies' employees into new millionaires. On the tails of this success, the Chief Scientist became the industry's ultimate moneyman.
Every year over the past decade, before the budget was approved, the campaign to increase the Chief Scientist's budget was renewed, on the grounds that, otherwise, high tech would be jeopardized. But the question is whether the budget will change anything. Are there any data or statistics indicating added value to the economy for each shekel of the Chief Scientist's budget? Periodic studies on this question, which present basic economic calculations, fail to provide answers, to put it mildly.
Paralleling the battle over the Chief Scientist's budget this month, were reports of negotiations between Waze Ltd. and Facebook Inc. (Nasdaq: FB). Some people were quick to connect the two stories. After all, Waze was once a beneficiary of Chief Scientist funding, and the government will make back its investment from the sale and royalties, and maybe an Israeli development center will be established. But in fact, there is no connection between the stories. Waze would have gotten along without government financing, but the company may be an interesting example of the real potential profits for the Israeli economy, and indirectly to the job that the Chief Scientist is supposed to fulfill.
Two foreign funds invested $30 million in Waze's last financing round in late 2011 to acquire stakes in the company at a value of $200 million. Theoretically, funds in the Israeli capital market could have participated through a private placement or IPO on the Tel Aviv Stock Exchange (TASE), and own 15% of Waze, which provided a phenomenal return within a short time. But this debate is academic, both because Facebook has not yet acquired Waze, and because the idea never occurred to Waze's shareholders.
Why not? In early 2011, Scailex Corporation (TASE: SCIX; Pink Sheets:SCIXF), controlled by Ilan Ben-Dov, raised NIS 400 million from Israeli investment institutions, and the company fell into financial difficulty shortly thereafter. Investment in a promising start-up seemed like a gamble at the time. But, the way to the heart of the Israeli capital market remains one of the challenges for the country's high tech, and there is where the Chief Scientist can help.
There is a window of opportunity in the balance of forces in the Israeli capital market and high tech where it may be possible to change the attitude of financing high-tech ventures. The TASE has dried up, the losses on the big bond offerings in recent years and the resulting image problems for investment institutions, as well the problems high-tech companies face in raising capital could be the trigger for creating a new mechanism for bringing in investment institutions as part of the high-tech ecology.
Measures such as helping find a way to Israeli investment institutions' resources and support for the ecology of companies' growth, quality collaborations, will prioritize fields which provide higher value for the economy, and creating solutions for complicated issues in the technology business world are as critical for Israeli high tech to develop as increasing the Chief Scientist's budget, and maybe more so.
Published by Globes [online], Israel business news - www.globes-online.com - on May 26, 2013
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