The announcement said it all. The announcement, placed last week by the Government Companies Authority, sums up one of Israel’s more interesting experiments in government involvement in high-tech ventures. The government is offering to sell all shares in Yozma Venture Capital and is looking for an appropriate buyer. The list of potential customers will close on November 24th, after which the selection process will begin. The Government Companies Authority hopes to conclude the deal within under four months, allowing the government to present another achievement in the privatization process.
Were Yozma to have stayed with its original goals and continued to operate as a fund for the encouragement of other funds, it would have entered the economic textbooks as an example of government intervention at the right time and place: specific activity towards specific goals, allowing for market expansion for the good of industry.
However, at a certain stage someone at Yozma’s management level apparently took a look at fund run on a purely business basis and decided to make direct investments as well, buying shares in fledgling companies. Within a short time, Yozma changed from being a investment fund for venture capital funds to a VC fund in its own right.
The venture capital funds operating in Israel did not like the new initiative. Many wondered what was the logic in putting government investment (with a funding pipeline) in competition with other organizations in which it was also a partner. They cited the problem it created on the professional management level in terms of partnership. It turns out the Ministry of Finance also understood the exercise was pointless and is now trying to get rid of shares by offering them to the public.
Yozma was set up 1993 in order to create a venture capital industry that might contribute to the growth of high-tech industry, which was dormant, to say the least. In search of venture capital, usually from abroad, then Minister of Finance Avraham Shohat and then Minster of Industry and Trade Micha Harish offered an unprecedented plan to new funds: an up to 40% partnership in equity via a Yozma investment plus options to majority shareholders to acquire the Yozma-held shares within five years at their original price plus minimal interest.
Then Chief Scientist of the Minstry of Industry and Trade Yigal Erlich was chosen president of the new company, on order to take advantage of his contacts in field.
The result was a sweeping success. Within a short time ten venture capital funds were formed as limited partnerships, with Yozma’s active assistance. But this assistance should be measured not only in terms of direct capital yield but also, and perhaps primarily, in terms of the momentum created in 1993. The original small volume funds developed within three years into a real industry.
Some in the field say that the minute the venture capital wagon started rolling there was no reason for direct government investment via instruments such as Yozma. These days, for example, Yozma partner Gemini, which was the first fund to take advantage of the Yozma framework, is now working without Yozma’s assistance towards setting up the Gemini 2 fund which will be at a much larger volume than its predecessor. But, those same sources say, if the government wants to contribute to industry it should deal with the matter of heavy taxation which slows down those funds based partially on foreign investor partnerships.
Because together with the Yozma shares now up for sale, Yozma’s holdings in the Star fund may also go up on the auction block. The Star fund operates as a corporation and not as a limited partner, whose holdings may be sold only to other partners.
Yozma’s portfolio, now up for sale, is a varied one. It includes shares in companies such as handwriting recognition technology developer Ligature, manufacturing software developer Emultek, educational systems developer TED and Alsapak which manufactures automatic control systems for power supply.
The people who created this portfolio put special emphasis on the medical fields, therefore there are investments in companies such as Biosense which deals in computer imaging of blood flow to the heart, Medsim which has developed a training system for ultra-sound technicians, Influence which deals in urology-related products, Medco which develops EKG systems and cell imaging developer ASI.
Via Yozma, the State holds between 2-7% in each of these companies but remains uninvolved in ongoing management activity. All in all, $6 million has been invested in these enterprises.
The question of the present value of the shares is the central question that potential buyers and the Government Companies Authority will have to confront. Some companies have raised additional funds at company values higher than the rates at which Yozma purchased shares. In other cases, its clear the investment is a gamble for an unknown length of time. Just as in the private fund market, the real test for Yozma’s managers will be the return on their investment.
The best case scenario for the Companies Authority would be if a foreign entity, presently not active in the Israeli venture capital scene, would buy the Yozma shares to build the foundations of a new fund. The problem with the portfolio now on offer, industry sources say, is that it has no clear specialization or direction, and there is no proven logic to its investment policy.
Another problem relates to taxation: while direct investment in research and development may entitle investors to tax benefits in certain cases, it is not yet clear what the status of Yozma’s shares will be. The government, in the meantime, is asking potential buyers to prove their "management, development and investment abilities in Yozma’s areas of activity" and requests proof of "the existence of business plans to advance and expand its business."