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With only 8 million people, Israel has more companies listed on the Nasdaq than any country in the world, with the exception of the United States and China. Known as the startup nation, Israel also boasts the highest number of startups per capita.

Consequently, the country has become a source of inspiration for Taiwan. With a population around 23 million, doubling that of Israel, Taiwan nevertheless shares a a degree of similarity with Israel: both are situated in geopolitical hotspots, and both saw increasing economic liberalisations from the 1980s on, after securing their economic foundations in the early 1950s. Likewise, in both countries, the state retains a prominent role in the economy.

In this sense, Israel’s industrial policies to promote a vibrant startup landscape have also provided valuable lessons for Taiwan. As Yan Lee, a founding partner of the venture capital firm Hive Ventures, observed, the startup funding landscape in Taiwan had been uneven, with capital channeling into either seed-stage or late-stage startups. As a result, there has been a significant funding gap for Taiwanese early-stage startups, eventually leading to doubts toward Taiwan’s potential as a startup hub. Moreover, Taiwan’s startup scene has produced too few unicorns, namely startups valued above US$1 billion, with 91APP, Appier, and Gogoro being among the few unicorns that Taiwan possesses.

Government takes on the riskiest investments 

One of the key contributors to Israel’s successful startup scene has been the Israel Innovation Authority (IIA). Founded as the Office of Chief Scientist under Israel’s Ministry of Economy in 1965, the government agency built the backbone of Israel’s VC industry. Between 1993 and 1998, as a part of the governmental drive to open up the private sector and address what was deemed to be a market failure, the Office of Chief Scientist launched the Yozma initiative under which a total of US$100 million was allocated to support the creation of Israeli VCs. By taking a maximum 40% share in the funds co-created with leading Israeli financial institutions and experienced foreign VCs, the Yozma initiative eventually raised US$210 million, and created 10 VCs in the process. These became the first generations of Israeli VCs, and some of them are still operational, such as Jerusalem Venture Partners (JVP) and Israel’s largest VC, Pitango.

Allowed to invest directly in startups, the Office of Chief Scientist also made 15 direct investments under Yozma, but allowed the VCs to buy the government’s shares.

Even today, the Israel Innovation Authority still perceives the necessity to provide risk capital to spur innovation. For the IIA, R&D activities characteristically result in lower financial benefits for business investors, and thus government interventions are needed to mitigate the inherent risks. As Avi Hasson, the IIA’s founding chairman, explained: it’s key that the government takes on the riskiest investments, paving the way for private capital to follow. Also thanks to the mitigated risks, researchers and entrepreneurs are encouraged to pursue ideas even if they might fail.

A ‘seismic change’ common to Israel and Taiwan

Currently, the IIA  engages with a wide range of players, from early-stage entrepreneurs, academics seeking to commercialize their innovations, to mature companies developing new products. To address the diverse demands, the IIA operates six divisions, each equipped with customized policy toolkits and incentive programs. Lately, the IIA also noted a new set of challenges: the number of new startups being established in Israel had steadily decreased. There were approximately 1,400 startups in 2014, compared to 520 in 2020. Simultaneously, as the IIA noticed, there had been an increase in late-stage funding rounds, while seed-stage investments had been stagnating.

The phenomenon is only hastened by the post-pandemic measures to stimulate the economy, leading to a surge of unicorns worldwide, including in Israel. “Israel accounts for some 8% of global unicorns, but for just 0.1% of the global population,” said Aharon Aharon, the former CEO of Israel Innovation Authority. “We are punching 100 times our weight in the world.”

In fact, Israeli unicorns are growing at an unprecedented rate. In the first half of 2021 alone, 24 new Israeli unicorns have surfaced, surpassing China in the same period, and coming after the United States. In 2013, there was only one unicorn in Israel, but by September 2021, 71 unicorns have been recorded. Sagi Dagan, the head of the IIA’s Growth, Finance and Strategy Division, even called this surge in valuations a “seismic change” of Israel’s economy.

Continuing the Yozma spirit 

Facing a similar set of challenges, Taiwan is perhaps more vulnerable than Israel. “It is the best time to fundraise for startups, but not necessarily for launching them,” observed Lee-Feng Chien, Google Taiwan’s former chairman and now a mentor for many prominent Taiwanese startups. While “super-unicorns” valued above US10 billion might take shape, it will divert investments away from early-stage startups.

Responding to the latest challenges, the IIA has meanwhile introduced the Hybrid Seed Incentive Program, inheriting the same philosophy from the early days of the Yozma program. As the current chairman of IIA, Ami Appelbaum, put it, new startups are the future of Israel’s innovation  ecosystem, and their decline in number would damage such ecosystem in the long term. Consequently, the US$25 million Hybrid Seed Incentive Program tackles the lack of seed-stage funding head on by providing grants worth 40% of an investment round of up to US$1.1 million, and 50% of an investment round for startups located in Israel’s geographical periphery.

 

 

References: 2021 Innovation Report, Israel Innovation Authority