Innovation Authority switching support to growth companies

Ami Appelbaum Photo: Eyal Yitzhar
Ami Appelbaum Photo: Eyal Yitzhar

With a reduced budget, the Israel Innovation Authority is prioritizing higher risk growth companies at the expense of large high-tech companies.

The Israel Innovation Authority is changing its investment policy and diverting its budget to companies in the growth stages with greater potential for remaining independent and well-established companies. The change is within budgets for growth companies; the threshold will be set according to sales and financing rounds. As part of the change in the Innovation Authority's policy, it will give greater priority to breakthrough innovation and risk-taking companies - a decision that also means diverting support from larger veteran high-tech companies to younger companies in the process of breaking through to the global market. The budget for growth companies and grants to international companies is NIS 800 million a year.

The Israel Innovation Authority was formerly the Office of the Chief Scientist. Dr. Aharon Appelbaum is currently Chairman of the Israel Innovation Authority and Chief Scientist at the Ministry of Economy and Industry.   

The Innovation Authority says that the changes are in response to the character of the high-tech sector in Israel, in which startups are making an effort to grow and reach global markets, instead of being sold in the early stages to international companies. This requires larger investments. Government support budgets for civilian high-tech, which previously accounted for 25% of all investments, were reduced to 4% of investments in recent years. The new policy therefore seeks to concentrate the government's effort on growth companies with daring technologies through support budgets and other tools, such as pilot programs, providing debt guarantees, hiring personnel, and so forth.

"We see a maturing industry that has passed the stage of a collection of startups merely waiting to be acquired for $50 million. Today, they want to develop into large companies," says Innovation Authority chief strategy officer Uri Gabai. "Look at Wix, WalkMe, Taboola, and ironSource. The entrepreneurs are more experienced, the investors are more experienced, and this is a very correct and healthy stage for the industry. It's not that we're leading the market; we reflect what's happening in the market and provide backing for it," he adds.

At the recent conference conducted by the Innovation Authority, it reported a change in the balance between the budgets provided for its two main theaters: the startup arena and the growth companies arena. The threshold requirements for obtaining support from an R&D fund in the growth arena are that a company asking for support must have over $100 million in annual sales or show that it has raised over $10 million.

Innovation Authority growth division head Sagi Dagan says that the Innovation Authority wants to give them wholehearted support: "Companies burn a lot of money in order to grow quickly. We support them with the amount of money they need. We aren't petty or miserly. We see what the company needs and give it our support percentage. In some cases, the grants are large. But these are good companies that we all see succeeding after several years." 1,100 projects in over 600 companies are involved now, receiving an average of NIS 1.3 million per project. The financing is designed to support R&D expenses, which are mostly salary expenses. The state grants 40-50% of a project's R&D expenses; the company brings the rest from its own resources.

Smaller Innovation Authority budget

The change in the Innovation Authority's policy is also reflected in a more rigorous examination of the proposals submitted for financing. In the past, a medium-sized company could get financing easily. Today, companies are required to make a bigger effort. Dagan: "We carefully check the team and the market potential, whether the company has innovation that can be bypassed by anyone from China, and whether the company is aiming at a market it can enter and attain $100 million in annual sales. Without that, it can't be called a global company."

He says that there is a significant difference between government support and the capital given by the private market. "We want to see high risk. For example, if a company is headed for a market with significant upheaval and is liable to collapse because it arrives too late or too soon, this is a plus for us. It's a risk that's harder for a private investor to take. The same is true with complex development involving many technological, clinical, and operating challenges. For us, this is a positive thing; it's a reason to provide support. This is a place in which government money can lower the risk for the private market and enable companies to still receive private backing when the private market sees a lower risk," Dagan explains.

As a result of this policy, veteran high-tech companies with lower innovation and risk profiles find their requests being rejects more often than in the past. Gabai says, "The innovation criterion will always be important. Companies that take greater risks get more. This is our function - to encourage companies to take technological risks and enter innovative realms. What we see is that there is an industry running ahead to take more risks, while another part, and this is natural and logical, is better established and takes fewer risks. Our budget is limited, so it's very competitive."

Behind these comments lies a painful truth. In the startup nation that Israel boasts of being, the budget for supporting innovation is declining. One of the main problems facing the Innovation Authority is the scaled down budget for supporting high tech, which formerly was NIS 1.8 billion a year, and has fallen to NIS 1.6 billion in recent years, despite the growth in Israel's high-tech industry and its needs. Most of the budget goes to supporting the rising salaries of research and development personnel.

As of now, the number of requests for financing is rising, but the budget is standing still. The result is that the Innovation Authority funds only the best companies and the most promising technologies. Gabai says, "If it's the same budget, once we covered 90% of the activity, and now we cover only 70%. Meanwhile, we have enhanced the focus on new spheres, all with the same budget. Keep in mind that in the end, it's a small blanket, and if I try to cover one side, I expose the other side. We're not happy that support for some of the companies that we supported in the past has been cut, but that's the situation. It breaks my heart sometimes to see people with a dream and a good project who would have gotten support three or four years ago, while today I have to tell them no, because in competition for money now, there are projects that are a little bit better. We have to refuse to give these startups money."

The solution: Indirect support

In this situation, the Innovation Authority has adopted other ways of supporting startups: "creative solutions" that are not expressed only through monetary support. One of the new ways of assisting growth companies is by approving pilots, as revealed by "Globes" in May. A few months ago, the Innovation Authority launched a NIS 100 million joint project with government ministries, and plans to expand it next year. In the coming weeks, the competing companies will reach the finish line. It will be decided this week which transportation startups will divide a NIS 20 million budget for Ministry of Transport pilots. Later, environmental, agricultural, cyber, and energy budgets will be distributed. The government will inject a total of NIS 60 million for promoting pilots in the immediate future.

Dagan says, "We operated six pilot programs this year with seven government ministries in the thought that growth companies are reaching more advanced stages of trial and adoption of technologies. Over the past six months, we got almost 200 projects with dozens of pilot sites on which these pilots are running. Over 20 health organizations are included in the program, in addition to dozens of public and private infrastructure facilities in local government agencies and government companies. Next year, we are continuing and expanding the projects on a larger scale and with 10 government ministries."

According to Dagan, the Innovation Authority is also helping growth companies raise debt. "At the beginning of the growth stages, getting access to debt is more difficult, so we are increasing the use of tools for guaranteeing loans, which are part of the European framework program. We see increased utilization of the guarantees. In a company's growth stage, it has to switch to a financing composition of capital and debt. Strengthening the debt market enables a company to raise financing more correctly, and the earlier in the stage that it begins, the stronger it is for later growth," he explains. Dagan says that Bank Leumi (TASE: LUMI) has already entered a financing deal for a high-tech company through the program, and other banking concerns are now in various negotiation stages in this matter. 

Published by Globes, Israel business news - en.globes.co.il - on November 13, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Ami Appelbaum Photo: Eyal Yitzhar
Ami Appelbaum Photo: Eyal Yitzhar
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