The paper on Incubators in Israel is a contribution to a forthcoming book by the Swedish Office of Science and Technology. The book is divided in two parts. The first covers tendencies and trends in National Innovation Systems in terms of organisation and funding of R&D. The second part provides an analysis of alternative ways of collaboration between universities and industry. Furthermore a number of case studies are presented of which the case of incubators in Israel is one. The countries studied in the book are United States, UK, Germany, Italy, Japan, France, Malaysia and to some extent Singapore.
The mission of the Swedish Office of Science and Technology (STATT) is to provide public organisations and firms in Sweden with information and analyses concerning innovation and innovation policies. STATT also broker contacts between Swedish and foreign firms. Funding is received from the Ministry of Industry and Trade as well as Swedish industry. There are offices in Bonn, Paris, London, Milan, Washington, Silicon Valley, Los Angeles, Detroit and Tokyo and also a representative in Kuala Lumpur.

Arne Eriksson - STATT 


Technological incubators in Israel -Immigrants start up Hi-Tech companies

by Dr. David Nordfors and Orren Shalit

"Technological Incubators", the Israeli variant for nurturing and developing companies identifies and transforms individual innovators, often newly arrived immigrants from the former Soviet Union, into entrepreneurs. The innovators contact the incubators with an idea for a Hi-Tech export product. The incubator can then help them start a company and over a two year period supply them with all the administrative and logistical support they need. This includes help with marketing and business development. The transformation from innovator into entrepreneur takes place through a hybrid of education, training and apprenticeship.

55% of the innovators accepted by the incubators succeed in developing a product prototype and creating a company which develops, often through the participation of external investors. Results achieved are impressive, particularly as they often involve the transformation of immigrants from the former Soviet Union block - many innovators have never before been exposed to a market economy - into running their own businesses in Hi-Tech industries.

The successes achieved can be attributed to a number of explanatory factors - a judicious balance between the rules of the incubation process, a well-functioning culture built up around the programme, strong personal motivation on the part of new immigrant entrepreneurs, a risk capital market with a willingness to invest in addition to a number of other factors. Finding the key for success requires a deeper analysis of the system. Such a study will be carried out during the winter 1998/99, when the authors will take part in the work of a number of individual incubators and in the national management of the Israeli incubator system.

The national network comprising 26 incubators was created during the massive flows of immigrants around 1990 and 1991, when almost 200 000 immigrants arrived in the course of a few years, mainly from the former Soviet Union. Since 1993 approximately 75 000 immigrants have arrived each year. The total amounted to 847 000 over the period 1990 - 1996, which represents an increase in the Israeli population of 20% over six years. The majority of the immigrant labour force, some 58% have an academic background. By means of immigration, Israel has developed access to around 78 000 engineers, 12 600 researchers, 16 000 doctors and dentists, 16 000 artists and musicians, 17 500 nurses and nursing assistants as well as 36 300 teachers.

At the beginning there was a rule that at least 50% of the innovators accepted by the incubation programme should be new immigrants. This rule is now about to be withdrawn on the grounds that the wave of immigrants has now subsided. In the situation ruling today, the programme is still dominated by Russian immigrants.

A number of incubators have close co-operation with a university or research institute which provides important support, in terms of equipment, libraries, databases and expertise in relevant areas. The University of Tel Aviv and Haifa as well as the Weizman Institute in Rehovot, are all owners of incubators, in some cases in partnership with industry. The universities have highly active representatives on the boards of the incubators and are involved in their operations, according to Rina Pridor, Director General of the incubator system. She says that involvement of industry in the work of the board is due to long-term commercial motives. Although the incubators are not profit earning companies, they are able as owners and members of the incubator boards to influence their activities and gain a better insight into the companies set up in the incubator.

Incubators who do not have academic institutions as part owners nevertheless maintain close links with universities and research institutes, since most development projects either have or are in process of building up networks and co-operation together with the universities.

Each incubator receives annually $190 000 from the state to cover costs of premises and administration. For these activities to break even, they are dependent on further support from non-commercial organisations, regional organisations, research institutes and industry.

Newly established companies are always built up around a new Hi-Tech product. The innovators are mainly academics, usually with a background in research. The incubators have complete freedom to choose different product and marketing directions as there are no central directives. Many incubators themselves have chosen to follow a particular direction, especially those who are working close to a university or research institute. Some application areas have become much more dominant than others. A quarter of all companies formed in the incubators work with electronics, 30% with chemistry, 13% with software and 12% with medical instrumentation. The remaining 20% work in other areas.

One of the criteria for a product idea to be accepted by an incubator is that it should not only be commercially viable, but a product which can be made in Israel and exported.


Results of the Incubator Programme

In April 1997

The incubator project is today a flagship and most widely discussed project of the OCS, "Office of the Chief Scientist of the Ministry of Industry and Trade", who runs Israel's state support for industrial R&D. The OCS is working with a number of national programmes and international co-operation agreements, including amongst others the EU's fourth framework programme and Eureka. Bilateral co-operation agreements exist currently with Belgium, France, India, Ireland, Canada, the Netherlands, Portugal, Singapore, Spain, Germany and the USA.

The annual budget of the incubator programme has increased continuously since its inception - from a million dollars in 1991 to around 30 million dollars today. Around half of the two hundred start-up companies formed each year as a result of OCS investments come from the incubator programme.
 
 


Some facts on Israel and the economy

* Israel's area is 20770 km2 which corresponds to the Swedish county of Småland (The whole of Sweden: 449 964 km2)

* Population 5.6 millions (Sweden: 8.8 millions).

* In 1997 Israel's GNP per capita was USD 16 800, compared to Sweden's USD 20,800.

Israel has in the course of a few years been transformed from a country whose dominant export was agriculture, into a country that now mainly exports Hi-Tech products (70%) today. During the period 1990-1995, Israel enjoyed an average growth rate of 6%. Annual growth per capita was approximately half this. Essentially growth can be related to the following factors.

In 1996 the rate of growth in Israel dipped to 4.5% in 1996 and 2.1% in 1997. However, Israel's Hi-Tech companies are still increasing turnover, sales and exports.

Comments on the diagram

Population 1989: 4.518 millions

Unemployment 1989: 8.9 percent

GNP 1997: MUSD 97390

(GNP/capita 97: USD 16800 )

"Population" shows changes in total population"

"Population 1989 + immigration" shows changes in population from 1989 resulting from immigration. 


From innovator to entrepreneur

Innovators with good product ideas can apply to one of the 26 incubators to get help to develop their company. Each individual incubator makes an independent choice from the incoming proposals. So far the incubators have received around 9000 proposals and accepted around four hundred. Those accepted receive state financial support up to a maximum of $320 000 to be distributed over a two year period. During the build-up period, they benefit from the infrastructure and support of the incubator. State support for the incubator project should not cover more than 85% of the budget approved for the project. Innovators have to find the balance (15%) themselves. If the innovator is unable to secure the outstanding financing on his own, the incubator is free together with the innovator to find the remaining financing, which they often do. In this case, the commercial part-owners of the incubator have priority over other investors.

The heads of the incubators make the first screening of the applicants. The OCS has set up the following criteria for an incubator project which the head of the incubator has to follow:

- It must be an R&D project based on an innovative technology which aims at developing a product with export potential.

- The innovators should have no previous experience of entrepreneurship

- The project team consists of 3-6 persons

- At least half of the project participants should be new immigrants ( in process of being abolished )

- The product should be manufactured in Israel.

- State support to the newly established company is to be repaid through royalties from the company's income (three per cent a year)

Many of the incubator heads we talked to, say that their first selection criteria is a good personal relationship with the innovators submitting applications. If personal links aren't good, there are risks involved in starting longer co-operation involving daily contact.

One of the main difficulties in developing a company around a product idea is that creative innovators are easily distracted by new ideas rather than continuing to work on planned development. The heads of the incubator projects must have a sufficiently good personal relationship with the innovators to be able to persuade them to remain on track.

It is also important that there is a market for the product to be developed. Many incubators require a thorough market study be carried out before they are prepared to commit themselves fully to the project. It doesn't matter whether an invention scales magnificent technical heights if there is no market for it.

The incubator heads work in the same premises as the project, usually cheaper premises located in an industrial area. There is usually space for up to a maximum of a dozen projects. Of the 26 incubator projects under way today, there are around 200 projects i.e. an average of eight projects per incubator.

When the heads of the incubators have decided to recommend a project, this is then taken up by the incubator's project committee and the board. These are composed of decision-makers from research and business life providing their services on a voluntary basis. If the project gains their approval, the proposal is submitted to the OCS which makes a decision on project support within six weeks.

Experiences gained show that the management of the incubator, its heads and staff as well as the board are the keys to success. The incubators are not run on a profit basis, even though they may take a stake in newly created companies. A defined share may be given as a bonus to the incubator heads to link their success to that of the company. If the incubator chooses this model, the heads will get the same stake in all projects in order to pre-empt a situation where some projects are given preference over others.

According to the OCS, a skilful incubator head will be successful in all the projects for which he is responsible. Success is measured in terms of how many newly started companies succeed in attracting risk capital that will enable them to continue developing their prototype into a commercial product after incubation is over.

The projects accepted are moved into the premises of the incubator, where they have their own facilities. The incubator provides them with professional and administrative support, covering everything from secretarial to legal assistance. This gives the innovators guidance so that they benefit from being able to:

- decide how the project idea can be applied from a technical and business viewpoint, as well as from an R&D plan

- find financial support to continue development work

- set-up and organise an R&D Group

- find venture capital for further development of the product outside the incubator.

Since new immigrants often speak little Hebrew and/or English, the incubator can make sure that they receive proper instruction in these languages as well as an introduction to the culture of their new country.

Immigrants from the former Soviet Union arriving in Israel, didn't just face the normal difficulties an immigrant meets in terms of language, culture and networks, but also major difficulties in understanding how western market economies function. One of the main tasks of the incubator head was to provide assistance to these new entrepreneurs over learning the basics, by helping them to develop new ways of thinking with completely new playing rules. To manage this difficult task, the incubator head supervises the funds which the entrepreneur and project have been authorised. The incubator head makes sure the entrepreneurs use their funds in accordance with the budget drawn up. This means that entrepreneurs must take all decisions over investment, marketing, etc in agreement with the management of the incubator.

When the project is moved into the incubator, it is registered as a company. The newly formed company has full ownership rights in the innovation and its development ( referred to as IPR). Ownership is initially distributed so that the innovator receives at least 50%, co-workers at least 10%, external financiers (apart from the state) receive a maximum of 20% and the incubator a maximum of 20%. In almost virtually all cases, the aim is to broaden the ownership base over time so that the company will be able to continue its development.

At present, a number of those providing risk capital and several incubators are experimenting by creating closer contacts between large multinational companies and incubator projects already under way. The companies form a consortium which sponsors the incubator. In this way they get insight and influence over the work of the incubator. The incubator projects receive greater support and develop better links with large companies at an earlier phase, when they are developing their prototypes. Venture capitalists and incubators making these experiments are looking to build up links with companies willing to participate. A company pays $500 000 per year to participate in an incubator consortium.
 

Example of a newly started company

ELAM was formed in 1994 by two immigrants from the former Soviet Union Both were researchers in semi-conductor physics specialising in illuminating fibers. After their arrival in Israel, they started working as cleaners.

They put in an application to an incubator for the development of an electrically driven luminescent fibre and this was accepted in 1992 as an incubator project. At this time there was a primitive prototype and a draft for a business plan which was assessed by technical experts from companies linked to the incubator.

During incubation a better prototype was developed. The incubator has good contacts with, amongst others Intel and AVX, both of whom have offices in the same building complex. The inventors also ran the development work largely with equipment from Intel.

When one of the authors visited the incubator in 1995, the company was already moving out of the incubator. Two external investors found with the help of the incubator had invested a total of $500 000. ELAM had recruited a board of directors, and a person from Intel was seconded to help them in their development work. They were now an independent company. A managing director was appointed, a company structure created and manufacturing premises were planned. Two yeas later the investors put in another $3 000 000. As a result of the participation of the investors, ELAM was able to market and mass produce its first product, Ly-Tec.

Ly-Tec is an electroluminescent cable around 2 mm in dimension. It consists of a thin copper thread covered by films with electroluminiscent semi-conductors, a metal film and polymers. The cable's design can be varied to make different colours visible. The luminescent cable is highly efficient in terms of energy consumption. One kilometre of Ly-Tec uses 150 Watts, the same as a couple of ordinary lamps. Originally the intention was to sell Ly-Tec as Christmas decorations, but the product has turned out to have a large number of different target groups. Some examples that could be mentioned are emergency lighting in aeroplanes and tunnels to show exit directions in emergencies.

Over the period 1995-1997, ELAM was busy working on the development of a manufacturing process. Industrial manufacturing started in January 1997 with a capacity of 300 km of cable per month. In April the same year, order books accounted for the whole of annual production, corresponding to $3 000 000. Sales of $10 000 000 per year are estimated before the turn of the millennium when a new manufacturing process will be started. ELAM has located the manufacturing in 3100 m2 of premises located in the same area as the incubator. A representative from the incubator has a seat on the board of ELAM.

ELAM is of course very appreciative that the incubator programme gives immigrants the opportunity of quickly getting into business in their new country. They believe the programme gives innovators a genuine opportunity by legitimising and financing their company development and that the feasibility for a new immigrant to do the same on their own is very limited. On the question of shortcomings in the present system, they state that there is a very difficult phase just after the prototype has been developed, when the company has to transform this into sales and try to penetrate the market. Their view is that a special incubator to help in this process would be a good idea.

Summary and comments

Israel's network of "Technological Incubators" takes advantage of the high level education backgrounds of immigrants with a spirit of entrepreneurship. As a consequence of the Israeli model, immigrants get the opportunity to transform a good idea into a good company without being obstructed by the all too frequent problems of language, cultural differences and ineffective networks in society. Instead the specialist knowledge and expertise of new immigrants, with the perspective and knowledge for instance of different cultures can lead to the start-up of new companies which become more innovative than would otherwise have been the case.

The idea is that all parties should have explicit incentives to transform an incubator project into a flourishing company. Some Technological Incubators provide opportunities to the management of the Incubator to become a stakeholder in companies formed in the incubator. This could well be one reason that as many as 55% of all incubator projects succeed in surviving and developing after incubation. As many as three quarters of all successful companies attract external investors.

We consider the Israeli example to be of great interest for Sweden. Statistics on immigration show the proportion of highly educated immigrants to be as high as that amongst native born Swedes. The proportion with a postgraduate background is, in addition, higher amongst immigrants than native born Swedes. We believe that Swedish industry could get a welcome infusion of innovative companies through an incubator programme that aims to take advantage of the most entrepreneurial innovators as soon as possible after their arrival in Sweden.

We also believe that a mixture of new immigrants and Swedes in an incubator programme could be very beneficial, both for the newly arrived establishing themselves in Swedish society, and also because the meeting between different cultures usually leads to innovation.

During the winter 98/99, we will make an in-depth study of the Israeli incubator programme in order to determine the underlying reasons for its success. We will also participate in the daily activities of a number of successful incubators and in the national management of the incubation system. We expect the in-depth study to be ready by the summer of 1999 and that we will then be in a position to give a more detailed view of the opportunities it provides and how such an approach could be applied in Sweden.


About the authors:

David Nordfors is a Doctor in molecular quantum physics and Director for research at the Foundation for Knowledge and Competence Development. He will be on leave of absence during the winter to study the incubator system in Israel.

Orren Shalit, born in Israel, works at InnovationsPumpen AB on the development of innovatory companies. Earlier he worked at the Israeli Embassy on commercial issues.