Israel's Yozma an Example for Canada
"Israel's Yozma an Example for Canada"
By Olav Sorenson
Published August 1, 2012. in the Financial Post.
Read the article in its original context on the Financial Post website.
In 1991, Israel had almost nothing in the way of venture capital. Today, it has a host of local VC funds that together invest nearly twice as much per capita as those in the United States.
That blooming of investment in the desert has undoubtedly benefited the Israeli people. In recently published research comparing regions across the United States, Sampsa Samila and I have estimated that, on average, each company funded by venture capital led to the creation of an additional two to six startups and more than 300 local jobs—good jobs at that, with nearly six-figure salaries.
That may seem surprising. After all, each investment only funds one company and usually amounts to no more than a few million dollars. But venture capital can generate a number of "multiplier" effects: The startups that they fund need suppliers. The ideas and technologies developed by these startups may enable follow-on innovations. Their employees may learn how to become entrepreneurs themselves and strike out on their own. And seeing one startup succeed can inspire others to try as well.
The recently proposed $400 million federal initiative to reinvigorate venture capital in Canada therefore has much to recommend it. It also seems sensible that the Canadian Advanced Technology Alliance's Venture Capital Blueprint would draw inspiration from a program widely credited with creating the Israeli VC community, Yozma. Yozma is one of the few cases—many would claim the only case—of successful government intervention in venture capital.
But what would a Yozma program mean for Canada? What did it do right? In 1992, Yozma set aside $100 million to attract experienced international venture capitalists to Israel. To qualify for the program, they had to raise roughly $12 million in private capital and had to team up with a local Israeli who would become a partner in the VC fund. Yozma would then provide $8 million in matching investments to those who qualified (with a capped upside to attract venture capitalists and private investors).
The program had at least three features that seem to have contributed to its success. First and foremost, it supported many small funds. (Even in 1992, $20 million represented a small VC fund.) Second, it did not try to pick winners. Third, it fostered relationships between Israeli and international venture capitalists.
Spreading the money across as many funds as possible made sense for a number of reasons: Research has found that it is the number of companies funded by venture capital that matters in job creation and GDP growth rather than the amount invested in each of those companies. More VC funds mean that more investing professionals have an opportunity to learn the trade.
In terms of picking winners, governments and even venture capitalists themselves have a poor record of trying to guess which industries will grow the fastest over a 10-year horizon. The most successful investors in startups have therefore been those that remain flexible, able to adapt to unexpected innovations and the changing economic environment.
Finally, venture capital has been and remains a relationship-based business. Early-stage investing operates locally because only those embedded in the community have the information needed to place wise bets on unproven managers. But as companies grow and mature, later-stage investments increasingly play out on a global stage. Israeli VC firms could therefore leverage their international contacts to fund promising companies that needed more capital.
So what then might a modern Canadian Yozma look like? It would not, as has been suggested, create four huge funds targeted toward specific industries that may or may not take off in Canada over the next decade. Rather, it would use the $400 million to create as many new funds as possible that would compete against one another for the best ideas and the best talent, and would train the next generation of Canadian venture capitalists, just as the original Yozma did in Israel.
Olav Sorenson, the Frederick Frank '54 and Mary C. Tanner professor of management at the Yale School of Management, is an advisor to a Toronto-based startup, Cdling Capital Services Inc.