An Innovative Way of Funding Startups: Israel's Chief Scientist

The Office of the Chief Scientist (OCS) is part of the Ministry of Industry, Trade & Labor of the State of Israel. Several other ministries also have a Chief Scientist - such as the Ministry of Defence and the Ministry of Public Security (MOPS) – who might be of the interest to security start-ups. However, it is really the Chief Scientist of the Trade Ministry who is the main player for startup funds as he holds a significant budget of ca. $300 Million and runs several programs to support entrepreneurs in Israel. Israel’s current Chief Scientist is Dr. Eli Opper, who combines a career in venture capital (Tel Aviv’s Giza Ventures) with long experiences in industry at RAFAEL, a quasi government company that develops military technology.

"Through grants and loans, the OCS has been delivering critical seed funds to select Israeli R&D companies; allocating more than NIS 1.2 billion [$300m] in 2006 alone", as reported by JPost.com. However, the budget has been under pressure in the last few years and lowered to $279 million in 2006 from its highest level of $440 million in 2000. (see graph below)


As pointed out by David Anthony, a member of Israel’s VC community, the OCS grants to not only provide financial help to the entrepreneurs, they act also as “a source of validation for new technologies. Governments conduct rigorous due diligence and other criteria tests prior to handing over any money. Investors understand this fact and naturally prefer a technology that a local government body has committed to financially.“

A novelty in the area of governmental funding of innovation is that the OCS can actually make profits with its grants (of “The R&D Fund”) as they receive royalties on sales if a startup becomes a commercial success. These royalties received are then used to fund future grants. In other words, the OCS uses the proceeds of its investments to fund its own programs, not just relying on governmental finances.

Overview of The Main OCS Programs

1. The R&D Fund:

• open to all Israeli registered firms wishing to engage in technological research and development
• annual budget of $250 million is spent on about 800 projects being undertaken by 500 companies
• grants are provided as a percentage (up to 50%) of the total approved R&D expenditures
• grants are a 'conditional loan' – in case of a technological and commercial success, it is subject to royalties (3% – 5% of the sales); in case of non-commercialization no repayment is required.

2. Technological Incubators:

• to enable novice entrepreneurs with innovative concepts to translate those ideas into commercial products and to establish their own company
• there are 24 technological incubators in Israel with approximately 200 R&D projects being carried out at any given moment
• program has an annual budget of $30 million
• grants provide 85% of the approved R&D expenditures (budget of $350,000 to $600,000 for two years), with the remainder to be invested by the incubator itself.
• grants are soft loans to be given back by the incubators, in case of commercial success only.

3. Pre-seed Fund – the TNUFA Program:

• encourages and supports technological entrepreneurship and innovation by assisting individual inventors and start-up companies during the pre-seed stage.
• support includes assistance in evaluating the concept's technological and economic potential, patent proposal preparation, prototype construction, business plan preparation, establishing contact with the appropriate industry representative, and attracting investors
• Grants are up to 85% of approved expenses are available to a maximum of $50,000 for each project.

Additional Programs for Generic R&D
The OCS also runs several programs that support basic and applied research in generic technologies. These programs, such as MAGNET, MAGNETON and NOFAR, are normally conducted together with academia and research institutes and industrial players.

The above information is taken from the 2007 report “The Intellectual Capital of the State of Israel“