Investment Programs of the Israel Innovation Authority

Background

One of the significant steps in a start-up company is finding a source of funding for the company, both in its initial stages (the ‘seed’ stage) and in its more advanced stages. There are a number of common sources of financing for start-up companies, such as private investors (angels), venture capital funds (VCs), accelerators, technology incubators, and more. Of course, every source of financing has its advantages and disadvantages, and the choice is made based on various considerations taken by the company and its entrepreneurs, including the stage in which it currently is and its field of business.

As part of the process of encouraging and supporting technology companies, the Israel Innovation Authority offers a number of investment programs and grants to start-ups at the various stages of the company, as well as various specialty programs based on the company’s field of business, such as fintech, biotech, etc. Moreover, the geographical location of the company may impact the amount of a grant or funding offered to the company (in general, companies located in peripheral areas will enjoy better conditions).

In this article, we will briefly review some of the various programs offered by the Israel Innovation Authority.

Seed Program

This program is intended for start-ups that are in the early stages, i.e. companies that are in a relatively high risk phase, by encouraging investments from venture capital funds. That is, the grant given to the company under this program is not given to the company independently, but as part of a company investment round with an additional investor.

Terms of the grant:

– The company has not yet raised more than NIS 5 million.

– The Investor is a venture capital fund experienced in capital investments (the “Investor”).

– The company signed a Term Sheet with the Investor.

– The program offers a grant of up to 40% of the investment round, provided that it does not exceed NIS 3.5 million.

– The Israel Innovation Authority will not receive share capital and/or any other right in the company in return for the investment.

– Repayment of the grant will be made solely from proceeds from the venture itself.

– The Investor will be given a 3 year option to exercise the grant that was given to the company, with the grant bearing an interest rate of 5% per annum. When the option is exercised, the Investor will receive shares at a pre-determined value. If the option is not exercised, then the grant will be paid back from the proceeds as stated above.

One of the significant advantage of this program is the option given to the Investor to exercise the grant that was provided by the Israel Innovation Authority. If the Investor chooses to exercise the option and pay back the grant, then the Israel Innovation Authority will no longer have any right in the company. In such a case, the company will have no restriction regarding commercialization of its intellectual property or the transfer of intellectual property out of the country, for example in the event of an exit. The restrictions on the transfer of intellectual property are an obstacle for many start-ups aiming for the long-awaited exit (see and compare with the technological incubator program, below).

Technological Incubator Program

The technology incubator program enables eligible ventures to receive significant financial support for venture development.

The technological incubators are operated by a concession granted to a concessionaire (such as a local or international venture capital fund) that enters into a contract with the Israel Innovation Authority and operates an incubator complex. The Authority defines and determines the size of the budget for the various projects, with financial support being provided both by the Israel Innovation Authority and by the concessionaire as a complementary investment.

Terms of investment

– The investment amount ranges from NIS 1.5 million to NIS 2.5 million (depending on the company’s business) for an initial period of two years, which constitutes 85% of the approved budget. In return for funding, the State is entitled to proceeds from income from the venture, without receiving any ownership rights in the company.

– In addition to the investment by the Israel Innovation Authority, the Incubator completes the remaining 15% of the approved budget, in consideration for receiving shares in the company. Furthermore, the Incubator undertakes to provide each venture that is eligible for funding with comprehensive assistance that includes, among other things: a physical workplace and infrastructure, administrative services, technological and business guidance, legal and marketing assistance, business adaptation to the venture’s world of content and more.

– The company and/or the entrepreneur are not required to make any additional investment in the company (as opposed to the Seed Program referred to above).

The is a wide range of considerations to be taken by a company before reaching the decision to place the venture in a technology incubator, with one of the main considerations being the use of intellectual property (IP) and its transfer abroad.

As part of regulations enacted under the Research and Development Law in 2012[1], the maximum amounts to be paid to the State in cases of intellectual property commercialization were set, and it was stipulated that (1) in a case of the transfer knowledge outside of Israel but with the research and development activity remaining in Israel, the company will be required to pay up to three times the grant received by the Israel Innovation Authority; and (2) In the event of closing down all activity in Israel, the company will be required to pay an amount of up to six times the total grant received by the Israel Innovation Authority.

Dedicated Program

As mentioned in the introduction, the Israel Innovation Authority has dedicated programs that are suited to companies operating in particular fields and at different stages of the company’s life. An example of such a program is the supporting pilots in the field of fintech program. This program is intended for technology companies in the field of fintech that are in an advanced stage, when the product is mostly developed and is ready for a pilot to be conducted in Israel and/or abroad.

The program provides a number of significant benefits to suitable companies, such as: regulatory support, support in gaining access to relevant databases (historical trading data), and more.

Terms of financing

– There is no cap on the amount for a pilot.

– It is possible to conduct a pilot on a site in Israel and, at the same time, on a site abroad.

– A company can submit a number of pilots (in several rounds). The examination of the application also includes: examining the contribution of the pilot sites; whether the project is at a stage suitable for a pilot; using the pilots to advance the company to commercialization; and the expected impact of the program on streamlining and improving of the capital markets and the financial services sector in Israel.

– Financing is at a rate of 20% – 50% of approved expenditure.

– Financing can be at a rate of 60% of the approved expenditure for a program with the potential for an extraordinary impact on the optimization and improvement of the capital markets or the financial services sector in Israel.

– The repayment of the financing will be from out of proceeds received by the company. It is clarified that the Israel Innovation Authority will not receive capital in the company or any other right, other than the right to a repayment of the financing from out of the proceeds.

Summary

The Israel Innovation Authority offers different and varied programs tailored to technology companies. Choosing the right program for a given company depends on many and varied considerations. For example, in the Seed Program, the company must consider whether raising capital at such an early stage from a venture capital fund is indeed preferable to a private investor.

The Technological Incubator Program also raises issues that need to be considered: is it worthwhile for an entrepreneur to give up a significant part of his shares in return for an investment and a range of services? There are various technical issues such as the location of the venture and the balance between geographical location and budget, and of course bureaucratic difficulties in being accepted to the program and making the IP accessible to investors from abroad.

The range of issues to be assessed is broad and requires serious consideration in order to balance between the various advantages and disadvantages before applying for any particular investment program of those offered by the Israel Innovation Authority.

[1] Encouragement of Research and Development in Industry Regulations (Royalty Rate and Rules for their Payment), 5776 – 1996.

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