Italian Israeli Conference – regarding Technology Transfer

The workshop taking place last week 23-24 of November 2010 was a most interesting event.
The conference opened (following the usual political speeches) with a discussion regarding the transfer from the lab to the industry of research results. The panel composition was most interesting. While the Israeli part was represented by Technology Transfer Companies managers and CEOs (Bar-Ilan R&D, BGN Technologies, Ramot at Tel Aviv University, Yeda etc.), the Italian part was represented by managers and Presidents of National Research Institutes (CNR, ISS, ISA ENEA etc.).
There were other very significant differences between the two country models. It seemed that the Israeli companies represented smaller organizations in comparison to the Italian organizations represented in the panels, the numbers of invention disclosed; patent applied for and approved, were larger for the Israeli firms. It would also seem that in most cases the Israeli Technology Transfer firms have been active for a longer period than the Italian counter parts.

Another interesting difference was regarding the performance data of the organizations. The Israeli Technology Transfer Companies, are private organizations, and their financial and therefore performance reports are confidential. The workshop served as an opportunity to discover some of the performance data. The Italian National Institutes are public organizations and their information is therefore public.

The Italian organization cited proudly the number of spin-offs they accumulated over the years, and lamented the scarcity of venture capital, which was, according to them, a barrier to further increasing the number of spin-offs. The Israeli technology Transfer companies while citing similar data mentioned (Yeda) preference to licensing over spin-offs.
That point was not discussed (I had asked the question, but Dr. Naiberg from Yeda was not given the chance to answer), but what is the difference between the two venues?
The biggest difference is in the overall employment impact. A spin-off creates measurable new employment positions. Licensing to a large organization, while it may add employment opportunities is harder to measure as a result of the TT effort. Thus governments and government organizations prefer this option. For commercial organizations, licensing has less risk embedded and can generate a cash flow more rapidly than spin-offs.

The Israeli VC market – a change?

Calcalist published on November 1st the results of a survey performed by DeLoitte in Israel. The survey checked the attitudes of Israeli VCs towards the finance ministry intention to guaranty institutional investors investments in VCs. The finance ministry intends to assure insurance companies, and pensions funds against losses up to 200 million NIS of their investments in the Israeli VCs.
The article emphasizes the fact that while 70% of the VCs asked were for the move, 15% were against it. And that when the VC sector's plight is well known.
While this step may seem radical and even innovative, this was in fact one of the steps taken in the early 1990's in order to allow the sector, just newly formed to grow. The government than guaranteed the investments of private investors and allowed the new VCs to raise funds from the general public (so called Inbal funds). After two decades of impressive growth into a diversified and mature market the move back to such measures is an indication of the sectors difficult position.
Would that be enough to put it right?
The reasons for the sector's weakened position stem from different sources – the first is exogenous, relating to the general world financial situation, the reduction in available funds, and reduced tendency for risk. The Israeli VC market has been from inception involved in the world market and is affected in two ways. Difficulties in raising funds, and reduced return on selling the firms it invested in. Another reason is endogenous and relates to the performance of the sector compared to other investment possibilities. The VCs have not performed spectacularly. There are some successes but the sector failed to produce the vast riches it promised.
What may happen?
The sector may downsize in two main ways, it may reduce the number of VCs, while keeping their size more or less the same. This will create a mature and stable sector. However, another possibility is that the reduction in number will be small, but the size of the VCs will be smaller. Small VCs enter the trap of not being able to count on the large numbers averages. That is to say that they will need to focus on investing more funds, but in a smaller number of firms, trying to reduce risk. This will of course reduce their profitability, and may lead to further reduction in size and the creation of a downsizing spiral.
Will the measures the ministry offers suffice?
If by chance they measures coincide with an improvement in world economics, increased return of sales of firms, more funds available for VCs – it may work. But if the measures stand alone, without solving the investment issues of the VCs, we may find ourselves at the same spot in two to three years, only without the institutional investors in the wings.

Bibliography:

1) Calcalist article - Delloitte survey (November 1st 2010)
2) Calcalist article - VCs fund raising (October 13th 2010)

Employees receive company control

Calcalist published that Advasense venture capital owners have transferred their holdings for free to the 30 employees of the company. As the newspaper quotes, this is a rare case in the High-Tech sector. Since than the employees managed to raise funds to continue the R&D of their chip, from a major potential customer (with no equity transfer).
While the rare occurrence may seem logical closer scrutiny raises some questions as to the rate of occurrence of such an action.
The high-tech industry prides itself on being based on human capital. It no longer refers to the workers as such, but as human resources. The source of pride and the basis for economic growth. It promotes the managers from the ranks of employees, as they understand the technology, the market, and the needs of the customers. But it rarely gives them ownership. The human resources are not trusted to be able to guide the companies on behalf of the capital owners. It is the capital owners, normally by definition with less understanding of the market and the technologies then their Human resources who retain control of the companies, and ownership.
The importance of the loyalty and devotion to the company have been analyzed without end in managerial literature. Every educated manager knows that employee loyalty is important. High-tech managers know that, as they know that they need to demand from their workers 24/7 availability, long hours and constant performance. The pay is high, but is based more and more on issues of offer and demand than on companionship of the road.
The option plans for stock sharing with employees are part of a financial incentive, they are not meant to give them control. Even if that control could bring more economic gains than other possibilities.
So, while in other sectors managers and stockholders have understood that involving the workers (not all are human resources) in the control of the company increases commitment to the firms actions, enthusiasm and loyalty, and therefore increase the chances of success, venture capital funds have not absorbed that lesson, in spite of slowdowns and losses.
Will the realize that a change is needed? That they stand to gain more, by relinquishing control? Time will tell.

Regional Development - inter region cooperation

Yesterday I had the honor to participate in the signatory ceremony of twin regions between the region of Emeq-Hefer (where I am a council member) and the Heilongjiang province in China. The agreement is the first step towards increased cooperation between the two regions.
All that is very nice, and creates a lot of good will - especially if there are mission exchanged between the regions and people get to travel. But in the practical world we live in what does it really mean?
In the regional level there is little significance, there are donations, links between institutes and some missions, political, educational and others. But what more can you expect when the regional level of government is limited in scope of action, budget and legal powers to act?
Can there really be a significant advantage created by cooperation between regions?
The EU seems to think so, but seems to think that such cooperation needs encouragement - and it does so financially. The EU concept is based on the fact that beyond trading between regions, there are practical lessons regions can learn from each other and that the cooperation can lead to improvement, economically in both participating regions.
The basis is to find the means for cooperation that will allow the relatively small and entrepreneurial region on one side to learn and teach from the larger bigger region, which operates on a different scale. The key would seem to be intensive and continuous communication between the two regions - a committee to identify the areas for cooperation, allocate the means and plan ahead. Topics for cooperation change with time therefore only lasting communication can provide for real cooperation with time.Although distance may seem as a problem - once personal acquaintance has been established the daily communication can be done electronically.

After the age of VC

Recent developments in the VC sector in general and in Israel in particular are not encouraging. The sector in Israel that once boasted its ability to raise funds and to have enough start-up companies in Israel to invest the funds in is suffering from difficulties in both areas.
The slow-down and other factors have contributed to reducing IPOs and mergers, or otherwise capitalizing on the investments for VCs, and in most cases required longer to reach the capitalizing moment. That in time reduce the rate of return on investment for the VC investors.
The lack of success in showing high enough returns on investments combined with reduced numbers of start-ups, and at the same time, global slowdown in economy, reducing available funds, have hurt the VC sector in the US some and in Israel much more. And Israel is the focus here in this blog.
The open questions is: What will happen to start-ups next?
Some funds will probably survive and continue to invest and raise funds. These will probably be the more successful funds with an impressive track record. For the most start-ups the options will probably be one of the following two:
1- Start-ups requiring small investments to reach the market would continue to find such investments locally, and would probably find the government aid tools very supportive.
2 - Start-ups requiring large investments would face greater problems. Angels would find it difficult to invest in such firms knowing they would be ousted and could probably show very little for their investment. It is probable that ideas requiring large investments would emigrate to places where they could find such investment, resulting in lost employment opportunities for the Israeli market, as well as brain drain to such places.
Another potential solution would be the re-occurrence or raise in fame of the Bootstrap. That option, of a new firm living of its revenues and growing slower than start-ups, but better fitted for the market, would probably become more popular. These firms could probably raise funds for growth based on debt and market performance and show good return on investment. They would be able to substantiate their presence in the local market and increase employment possibilities locally.
When will all that happen? As we say here, after the holidays.. but which holidays?

Which came first Technology or market demand?

Before you rush forward with the answer, or get annoyed, this is more than just a philosophical question. When you start learning marketing or economics you learn about demand and supply, you learn to draw the curves and to fix a price. Of course for marketing, once there is a demand in the market, the rest is a long solved problem on how to respond. So if your answer if that the demand came before the supply, than at least in the classical world of marketing, you know how to proceed.
But, I can hear some of you asking, about those few cases in which the technology preceded the demand, the internet and its environment are such cases, there were many services / products that did not exist before and demand did not exist.
So it would seem that the right answer to the question above would be "YES". While you think about that I would like to mention a small joke that anyone learning marketing in Israel must have heard at one point at least (could be just an Urban legend): in the 1950's a shoe factory in a kibbutz sent two salesmen to Africa one to east Africa and one to the western parts, to assess the marketing potential of the factory. The first evening the first salesman calls the factory and says:"There is nothing here for us, everybody is walking barefoot, I return tomorrow". Before they can get their balance back, the other one calls and says:" start working in three shifts, the market is enormous, everyone here is barefoot". The story as I know it stops here.
The first salesman is the case of missing demand, even if the technology / product exists. It requires educating the market into creating the demand. This can often be lengthy and expensive, and as a result of that - risky.
While the risk may be acceptable to a large firm, for an SME, or a start-up it could be dangerous. The firm may spend its limited resources and die before the market is created, or may create the market just to have a larger firm exploit it.
In Israel where many of the start-ups are technology based, this is a very risky point. There are many firms starting with a wonderful technology, but with little market demand, and what is "obviously a great idea" to the technology people is often not so clear to the customers in the market. These are the great technologies that fail, not due to lack of ideas, or capabilities, but due to better understanding the technology than the market.
If one recalls the High-Tech crisis that occurred when the 3rd generation of communication failed to be accepted by customers, not because it was not good, or not impressive, it was just that the market was not used to such rapid technology changes. It was necessary to make people understand that they wanted / needed the new capabilities before they were ready to make the change.
Great technology is not all - a great market can be.

Technology Incubators - a Sad Story

The Israeli Technology Incubator program which started in the early 1990 (first one was owned by the Technion - started in 1989) as a program initially intended to assist in absorbing the new immigrants from the former USSR, is considered a raw model, worthy of study and copying attempts by different countries. As mentioned in an earlier post there was a Finnish delegation here last month which was interested in checking and adapting the model for their needs. Together with the development of the VC market here the two formed two of the founding stones of the myth of Israel the entrepreneurial state, the homeland of innovation.
Recent set-backs to the VC market in Israel have exposed that founding stone of the myth, as a myth by itself. The fact that the VC in Israel could find investment was true enough, that they could make these investments pay-back enough to sustain the industry was not. More than that, it would seem that the damage the VC's and their strategy have done to the Israel economy could be fully understood only at a much later date. Their policy of sale to large multi-nationals that moved the core out side the country and negated the formation of an employment center has had a negative impact on the employment rate and growth, that only with time could be accurately estimated. The damage from VC and their capitalization or return on investment strategy can be seen in Prof. Maital's Lecture.
Recent publication regarding the Technology Incubators and their loan from the Ministry of Finance in 2003, seem to start peeling the myth from that founding stone as well.
In 2003, as it was decided that the incubators should be set to be financially independent. New agreements were made, the incubators' ownership changed hands in many cases and a new era began. Based on the change and a part of the agreement, was that Ministry of Finance fronted as a loan to the incubators over 80 million NIS. They were supposed to return the loan from the proceeds on the sales of their shares in the firms. These shares were the collateral for the loans. Now as according to publication less than 15 Million NIS have been returned so far, MoF which according to the agreement owns the shares, is considering its next move.
The original concept was, that in the post high-tech crisis the incubators would be set on a footing similar to that of VC's and that they could sustain their own operations based on the sale of their holdings. The market was estimated to be ready for such action. If the program worked, the government would be free from supporting the incubators, and could focus on supporting just the firms, and later on release more funds due to their income for investment in firms and projects.
While some may say that the market is at fault as it could not allow the sale of the firms held by the incubators generate enough income to sustain the incubators and more than that make them profitable enough to return the loans and become independent. My personal view is that the model is at fault. If the government is no longer looking at Technology Incubators as a means for absorbing technologically enhance immigration, but as a growth engine than the out look should change completely.
When I was CEO of a company in a Technology Incubator in the 1990's we managed to complete the development of a first generation of products and do some sample sales. While the sales were commencing only, we received from the Incubator's authority in the Chief Scientist a caution that if we start sales they would reduce our loan by the amount we raise by sales. So we labeled the sales we did as experimental sales and stopped, moving instead to the development of the second generation of products.
In the current state of affairs I think that firms in incubators should be encouraged to become economically independent asap, this should differentiate them from firms outside the incubator. It would allow them to generate income for the incubator, and perhaps also if sales are expected allow them to get better prices. It would also increase the chances of sustaining here the employment center.
While is seems that other countries envy us for our "achievements" in innovation, which seem to vanish with time, we could learn from our experience and try and make the legend come true.