opposition: “Don’t waste your time and money on new, small companies. They’re a losing proposition,” detractors told him.11 Instead, government economists called for increased funding and partnerships between Israel and the big multinational companies, which at this point were employing thousands of Israelis.
There was also another challenge bearing down on Israel at the time: how to deal with the nearly one million Soviet Jewish immigrants beginning to flood the country. The government believed that to absorb these immigrants, the Israeli economy would have to create half a million new jobs. With one out of every three Soviet immigrants a scientist, engineer, or technician, Israel’s high-tech sector seemed to be the best solution. But existing R&D centers alone would never be able to handle that many new employees.
In 1991, the government created technology incubators—twenty-four of them. These incubators gave most Russian scientists the resources and financing they needed in the early stage of R&D for their innovations. The goal was not only to develop the technology but to determine whether or not that product could be commercialized and sold. The government funded hundreds of companies through payments of up to $300,000. This got many of the new Russian immigrants working at their craft, but those doling out the money had little, if any, experience with start-up ventures. The government financiers were unable to give these entrepreneurs the support and management they needed to turn these R&D successes into commercially viable products.
“Every year when I tried to review the success of these small companies, it was disappointing,” said Erlich. “While they may have succeeded in R&D, we didn’t see them succeed in growing companies.”12 He became convinced that a private venture capital industry was the only antidote. But he also knew that in order to succeed, an Israeli VC industry would need strong ties with foreign financial markets. The international connections were not just about raising funds; aspiring Israeli VCs needed to be mentored in the art of business mentoring. There were thousands of venture capital firms in the United States that were involved in the nuts and bolts of successful tech start-ups in Silicon Valley. They had experience building companies, understood the technology and the funding process, and could guide first-time entrepreneurs. That’s what Erlich wanted to bring to Israel.
That’s when a band of young bureaucrats at the Ministry of Finance came up with the idea for a program they called Yozma, which in Hebrew means “initiative.”
As Orna Berry told us, “John Lennon once said about the early years of rock and roll, ‘Before Elvis, there was nothing.’ On the success of venture capital and high-tech entrepreneurship in Israel, to paraphrase Lennon, before Yozma, there was nothing.”13
The idea was for the government to invest $100 million to create ten new venture capital funds. Each fund had to be represented by three parties: Israeli venture capitalists in training, a foreign venture capital firm, and an Israeli investment company or bank. There was also one Yozma fund of $20 million that would invest directly in technology companies.
The Yozma program initially offered an almost one-and-a-half-to-one match. If the Israeli partners could raise $12 million to invest in new Israeli technologies, the government would give the fund $8 million. There was a line around the corner. So the government raised the bar. It required VC firms to raise $16 million in order to get the government’s $8 million.
The real allure for foreign VCs, however, was the potential upside built into this program. The government would retain a 40 percent equity stake in the new fund but would offer the partners the option to cheaply buy out that equity stake—plus annual interest—after five years, if the fund was successful. This meant that while the government shared the risk, it offered investors all of the reward. From an investor’s perspective, it was an unusually good deal.
“This was a rare government program that had a built-in get in and get out,” said Jon Medved. “This was key to its success.” And it was also rare for a government program to actually disappear once it had served its initial purpose, rather than continue indefinitely.
At the time, most business-savvy Diaspora Jews were not investing in Israel. They viewed philanthropy and business as two distinct activities. While they would make huge donations to not-for-profit organizations that benefited Israel, for the most part they were reluctant to invest in Israel’s high-tech endeavors.
There were exceptions, of course.
Stanley Chais, a money manager in California, helped raise money for the first round of Yozma funds by setting up parlor meetings in California with wealthy Jews. He raised millions of dollars for the funds. Erel Margalit, who left the Jerusalem Development Authority to manage one of the first funds, said that most of the first round of funding was raised from people who had a “warm place in their heart for Jerusalem or Israel.” Margalit’s first institutional investor was the French insurance giant GAN, whose chairman was a French Jew Margalit met by chance on a flight to Paris.
“The government was used as the catalyst,” said Erlich. The first Yozma fund was created in partnership with
