The person who kickstarted Israel's high-tech industry is ill at ease. "I'm not worried that our relative advantage as the startup nation is at risk in the short term, but I'm not sure that we'll succeed in building large companies here," says former Chief Scientist Yigal Erlich, who started the Yozma funds group in the early 1990s. "Unfortunately, right now we're headed more in the direction of Finland, which relied on one Nokia and a lot of startups, and less in the direction of Switzerland, which is small, but has taken a leading position in several strong industries."
Erlich compliments Israel for having several "Nokias," not just one: Check Point Software Technologies Ltd. (Nasdaq: CHKP), Amdocs Ltd. (NYSE: DOX), Mellanox Technologies Ltd. (Nasdaq:MLNX) and also Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA). As he sees it, however, even if these companies' situation is better than that of Nokia, it is still not enough - neither the number of companies, their size, nor their rate of expansion.
Yozma occupies a seat of honor in the written and oral history of Israeli high tech. These funds, which the government created together with private concerns simultaneously with the Israeli incubators program, provided $100 million in support for startups. They also helped companies that began prospering at that time to make progress and boosted the ecosystem around them.
There is no way of knowing what would have happened to Israeli high tech in the 1990s without Yozma. It was a period of flowering for technology worldwide, and it is possible that the trend would in any case not skipped over Israel. Yozma founded leading venture capital funds in Israel, such as Jerusalem Venture Partners (JVP), Vertex Ventures, and Pitango Venture Capital, and led to the founding of nearly 200 Israeli companies. The survival rate of these companies shows fairly good success in selecting and nurturing them, and this model was celebrated in the book "Start-Up Nation" by Dan Senor and Saul Singer.
Now it is Erlich's turn to publish a book. "Yozma: Daring, Innovation, and Venture Capital in Israel," recently published by the Danny Books Publishing House, seeks to document the growth of the Israeli technology industry with an emphasis on the government's role in it. This is not a boring theoretical book; it is replete with interesting, surprising, and sometimes odd anecdotes about several of the leading figures in the high-tech industry and politics in recent decades. This is the method employed by Erlich, who in recent years has focused on replicating the Yozma model in various countries around the world, to continue exerting his influence in his home base - the Israeli high-tech market.
Nanotech and quantum research? Not enough
If we want to see large companies grow, Erlich says, there is no need to look at Silicon Valley; it is enough to consider the Swiss model. "Switzerland began early with a number of industrial niches, such as drugs, chemicals, and banking, and grew with these niches. The successful Israeli companies, such as Check Point, Comverse, and even Teva, also grew this way - not by competing in an existing niche, but by growing with a new niche without broad development and without being acquired at any point," he says.
"Globes": In which niches is it worthwhile getting a foothold now?
Erlich: "I think that an opportunity has been created in the auto sector. Israel has never been active in it, and now we've become a leading player. Major auto manufacturers will probably not arise here, but in auto software, we have a chance of leading, not being just a passing footnote. Another area in which we have an opportunity to specialize is digital health. On the other hand, with all the investment in cyber over the past decade and all of those startups, which is obviously a very good thing, no other Check Points have arisen here."
What should the state do about it?
"The state supports future technologies, but not a specific industry. There is support for nanotech, but that's not exactly an industry; it's a field of applied research. There are nanotech capabilities in a number of industries. Quantum research, which the state has decided to support, seems important to me, but I don't think that there will be a quantum computing industry here. It's possible to also support slightly more mature industries simultaneously and strengthen large companies and those that are starting to grow. They have to be given priority."
What do large companies need from the state? Grants?
"Not just that. There are bureaucratic problems here, marketing problems, problems with customs duties. It is necessary to listen to them and understand where it hurts."
"I went from one person to another and explained myself"
Erlich was born in Tel Aviv in 1940. He studied chemistry at the university and began his career as a researcher in the Soreq nuclear center. In his book, he writes that he wanted to serve in management positions in the private market and completed an MBA for that purpose, but he was then given a serious opportunity in the public sector: overseeing the drug industry in the chemical division of the Ministry of Industry and Trade.
From that position of someone in government activity who is also oriented to the business sector, he got the job of Chief Scientist. The job had been created only a decade before that. He was the third Chief Scientist and unquestionably changed the role by founding the Yozma funds and the incubators program. Up until then, the ministry mostly gave grants directly to existing companies for new R&D projects. The approach of Erlich, who was Chief Scientist for nine years (the longest term in the job to date) set the tune for the ministry's activity even after he left.
Even though Erlich always supported the Chief Scientist being connected to industry, he did not like the initiative to make the Chief Scientist's office an independent authority - the Israel Innovation Authority. "I was against the idea when it first arose and I said it openly," he remembers. "I thought that it was unnecessary. Today, I'm neither in favor nor against. The result appears to be good, but from my experience, I thought that the right thing was to be a science professional within the government, so that they listen to you. When an entire agency with authority spread among several people is involved, it's less effective. The Innovation Authority CEO comes from the industry with no experience in a public agency and does not sit in the cabinet now, so it's unclear to what extent he can understand just exactly how everything works there. The Innovative Authority chairperson, on the other hand, who sits within the cabinet, doesn't actively manage it on a day-to-day basis."
How did they explain the decision to you?
"They said then that the Chief Scientist didn't have enough flexibility. I'm not sure that was right, but meanwhile, what the Innovation Authority is doing is definitely good and it's working well, but I see no dramatic changes. In principle, it's the same activity."
Erlich demonstrates how important it is to understand how the cabinet works in his story about the founding of Yozma. "Yitzhak Shamir, who was prime minister, didn't know what it was about, but he got a recommendation about the plan from two ministers whom he trusted, so he passed it. It didn't get through the Knesset at first, just because the opposition wanted to thwart the coalition. A situation like that can drive you to despair, but I went from one person to another and explained what he'd get out of it.
"The generous budget eventually came because we portrayed Yozma as an immigrant absorption activity. They got guarantees then from the US to pay for immigrant absorption and that's how the government's pocket opened for Yozma and the incubators program. We founded 24 incubators in two years. In truth, one of the things driving me was the desire to absorb a specific group of immigrants who came with a lot of know-how and no ability to apply it."
So the immigration from Russia is again revealed as a basis for the startup nation
"Yes, there was a big contribution there, both directly and indirectly. We absorbed one million people into a population of 5-6 million. That won't happen again."
Teva cast a shadow on the medical field
Although Erlich has hopes for a government digital health program in which a billion shekels will be invested in order to promote cooperation between high-tech companies and the health system, he is worried about the bureaucracy around it. "A lot of ministries are involved in it, and sometimes this is a way of ruining the whole thing. I wonder why the Innovation Authority isn't leading the way in digital health. The Innovation Authority is involved, but it's not calling the short. It's important for it to take charge."
Erlich is also pessimistic about the possibility of building independent drug companies in Israel now. "It's very tough today, also for non-Israeli companies. Even Kite Pharma was sold. Nevertheless, I believe that with the right support throughout, especially in the later stages and identification of specific niches in which the support can be concentrated, it is possible to go very far."
What caused this?
"Teva was established as a generics company. When it wanted to build an innovative arm, its efforts were too dispersed and it invested in dozens of Israeli companies. These investments were good for the companies, but Teva cast a bit of a shadow. Its presence didn't allow enough room for another big drug company to develop next to it, and when it focused on the brain and cancer, it got it of its investment in a number of companies all at once, and I'm not sure it was good for them or for the Israeli medical market as a whole."
Erlich remarks that he would have liked to have seen another tender for funds in the medical sector. This venture, which originally got going in the previous decade, tried to be a kind of Yozma 2 with an even larger investment for each fund. Eventually, however, only one concern, Orbimed, won a tender and founded a fund with government support in 2010, and one more large fund since. "Orbimed would have come to Israel in any case," Erlich says. "The tender should have brought at least one more fund. A startup isn't in a good position if it says, 'I need Orbimed, and without it, I have no international support." Another such tender has to be held in order to bring another important foreign fund."
Knowing when to make the dream flexible
Ever since Yozma was successful, Erlich has been advising other countries how to replicate the model. "There was an interesting story in New Zealand. The program there was implemented with a lower budget, and justifiably so, because they didn't have as many young companies as arose in Israel. Nevertheless, I asked them, 'Why do you need it? Your economy is built on other foundations and your standard of living is good.' Their answer was, 'We have to challenge our young people; otherwise, they'll leave here.' Then I realized that when they talk about high tech as a solution for unemployment among young people, even in other countries, they're also talking about the desire to give young people a feeling that they're living in a place in which new and interesting things are taking place. That's also how it is in Eastern Europe and even in Western Europe."
Yozma's model was also applied in one way or another with Erlich's help in Greece, Russia, and South Korea. "In Russia, they put over $1 billion in to a fund that invests in other funds in the Yozma style," he says. This activity took place around 2010, and has not been a great success thus far as a fund, although it has meanwhile been extended to other areas, such as education and investment in outlying areas.
"In South Korea, the goal was to close the gap between someone hired in companies such as Samsung and LG, whose future was assured, and someone who was not hired there and was therefore an untouchable. So they founded an array of funds there with state support, which exists to this day, in contrast to the situation in Israel, where the state supports funds only as a catalyzer for the private market, and then withdraws from it. They invested huge amounts of money in it."
What happened?
"As of now, their funds are not so successful in comparison with the investment, although I believe that it will eventually happen. Their problem is cultural: they have a fear of failure and closing down in full view of the world. That's not a good basis for an entrepreneurial culture. They're struggling to find an intermediate way of innovating without losing their traditional approach. If it succeeds, they will become a considerable power, because they also have their home market, the support of giant companies, and experience and insights about founding large industries. They also believe in consistency and perseverance. An exit isn't their ambition."
Published by Globes [online], Israel business news - www.globes-online.com - on August 16, 2018
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