Building a VC industry, the Israel example

I recently participated in a conversation with one of the original architects of the Yozma initiative, which helped build the VC industry in Israel.

Here are some bullet points from that conversation:
• In the early 1990s, Israel’s government committed $100M as an LP across 10 venture funds
• The goal was to entice foreign VC funds to Israel to invest in companies and train local VC managers (funds were from US, Europe and Asia)
• The funds had the option to buy out the Israeli share within 5 years at a low rate (there was a pre-set formula, it turned out to be ~7%)
• 8 of the 10 funds were doing so well, they exercised the option
• The foreign funds had to have a local partner; the Yozma administrators had a veto over the who would be the local partner
• In only one instance did Yozma reject a candidate; in all other instances Yozma supported whichever local partner the foreign fund found
• Low taxes on foreign investors, no capital gains tax

The result was:
• Foreign funds came in with expertise to train and mentor the next generation of VC managers (this is by far the most important result)
• With the buy-out option, funds had the potential for additional upside at low risk (there were no guarantees for downside)
• In five years, the government got back $140M from their $100M investment
• Spawned about 70 new VC companies in Israel (which has since been pared down to about 35)

What also made Yozma a success was that there was a steady pipeline of companies ready to be funded, mostly coming out of the defense industry. Also, because Israel is such a small market and has hostile neighbors, companies have to think global from day one (as opposed to regional or local). This “global from day one” is also part of the philosophy that made Indian ITS companies so successful.