New government program to incentivize institutional investment in Israeli high-tech
New government program to incentivize institutional investment in Israeli high-tech
The Israel Innovation Authority and the Ministry of Finance are promoting a program, which will be implemented by the end of 2024, that will incentivize pension funds to invest in local high-tech
The Israel Innovation Authority and the Ministry of Finance are initiating a program to incentivize investments by institutional bodies in Israeli venture capital funds, Calcalist has learned. The plan has been rapidly advancing in recent weeks, with meetings being held between representatives of the Innovation Authority and institutional bodies. According to the emerging plan, institutional investors which manage pension funds, and provident and training funds, will invest directly in local venture capital funds.
At the same time, the government will also invest in these funds to encourage institutional participation and to instill confidence. The government will guarantee a positive return on investment. The final mechanism is still under discussion, but the plan is for the government to give up all or part of its positive return in favor of the institutional firms and to provide a safety net in case of negative returns. This is similar to what was done during the COVID-19 crisis, which ensured partial protection for institutions from losses.
The developing plan resembles Yozma, the original program that laid the foundation for Israel’s venture capital industry in the 1990s. However, despite the desire to do so for many years, the state has not succeeded in directing pension savings towards investment in high-tech until now. The current format does not require institutions to make investment decisions in specific companies and track them, nor does it require the establishment of dedicated funds, as was the case with the program launched following the 2008 financial crisis. This investment program will be made and managed by venture capital funds, which is their specialty.
According to the emerging plan, criteria will be established to encourage institutions to invest in venture capital funds specializing in early-stage investment, with an emphasis on deep tech sectors (health, agriculture, climate, and manufacturing). This is instead of the natural inclination of most Israeli funds to invest in software, cybersecurity, or gaming companies. Each institutional body will be able to invest in several venture capital funds, which will establish new funds for the program, but the investment will also be open to their existing investors (LP).
The program is expected to start operating towards the end of 2024, as the final mechanism still needs to be finalized, and further discussions need to be held, especially with the institutions. The money will likely not reach the funds, and the first investment will likely not be made, until the last quarter of the year. The government hopes that promoting the process itself will signal to Israeli venture capital funds not to sit on their money in the coming months but to invest in startups.
Since the outbreak of the war, the Innovation Authority and the Ministry of Finance announced a NIS 400 million ($106 million) emergency fund, intended for startups that have funds remaining for at least six months of operations. Dozens of applications have already been submitted and will continue to be until the first committee of the Innovation Authority convenes in about two weeks to decide who will receive the funding. The Innovation Authority wants to avoid a situation where state funds replace Israeli venture capital funds, which are reluctant to invest in startups due to the war. This is part of the motivation behind advancing the current program.
This is not the first time the government has aimed to direct public pensions, estimated at NIS 2 trillion ($533 billion), to support the high-tech sector. In the months before the war, they were already working on a plan to encourage institutional investment in high-tech. However, the current program is better designed, as the investments won’t be directly managed by any institutional body but by venture capital funds with expertise and experience in the field. Venture capital funds don’t always rush to promote Israeli institutional investments, due to the high regulation imposed on them. However, these days, with the Israeli tech sector already experiencing turmoil following the government’s judicial overhaul, Israeli VCs will be happy for any support they can get.
