Accelerate - June 2014

Can New Zealand follow in Israel's hi-tech footsteps?

open this image in new window: Chris Somogyi

Chris Somogyi, General Manager of Accelerator Services at Callaghan Innovation, shares the reasons why Callaghan Innovation wants to replicate the Israeli technology incubator model in New Zealand.

Over the past 20 years, Israel has built an incubator system that generates around 100 new start-ups each year. Size hasn’t been a hindrance. If anything, it has helped the Israelis to channel resources and talent in the right direction and build up a knowledge base that matches, if not betters, the best in the world.

When it comes to innovation and research and development (R&D), Israel is a world leader. No country is ever exactly the same but we can learn a lot from their example.

The core model we’re focused on learning from is Israel’s technology incubators. The programme was first established in 1991, when it was completely owned and operated by the government. In 2002, the incubators were put out for tender and have been managed by the private sector ever since, improving their success, commercial focus and capability.

In practice, they are designed so the government takes the bulk of the risk when investing in the development of new technology – risk the private sector may not be prepared to take. In Israel, funding is split, with the government putting up a large proportion of the initial capital and the private sector contributing the rest.

Businesses that succeed repay their government funding through royalties, which is then recycled into the system for the next start-up to access.

Over the past 20 years, the Israeli government has invested around $US600 million into the programme, with start-ups going on to secure $US3.6 billion in foreign investment during the same period as they grew and sought new capital to expand.

New Zealand’s total R&D expenditure is about 1.27% of GDP, of which 0.58% comes from business; Israel’s is 4.5%. Only a fraction of their total expenditure, some 3%, is government funding, with 47% attributed to foreign investment and the other half spent by domestic businesses.

The benefits these incubators have delivered to Israel’s economy are clear-cut. They are an R&D hub. Selling intellectual property and fully-functioning businesses is a significant chunk of Israel’s GDP.

Roughly 60% of start-ups graduate from the incubator process, leading global corporates to flock to Israel to set up R&D operations to make sure they don’t miss out on the next big thing.

Google, Apple and Hewlett-Packard are all there, spending their money in Israel. Paying wages. Buying services. Investing in knowledge.

In practice, they are designed so the government takes the bulk of the risk when investing in the development of new technology – risk the private sector may not be prepared to take.

We can replicate that success here. The New Zealand model will start with up to four new private-sector-led technology incubators. Each incubator could feasibly oversee the development of four to six start-ups each year, on a two-year cycle.

In practice, that means in the second year of operation they could each have eight to 12 businesses on their books. In the years ahead, they would also likely have ongoing relationships with those who graduate from the system.

The operators will be tasked with raising roughly a quarter of the funding each of their start-ups will need, with the rest provided in the form of repayable government grants of up to $450,000 per company. Like Israel, start-ups that succeed will pay back the grant, and the inclusion of private sector investment ensures they are motivated to succeed.

It might require a mind-set change for many Kiwis, but we will be churning out companies as products. Because, inevitably, successful New Zealand start-ups are going to quickly attract the attention of international suitors.

They will be sold to foreign buyers. And this is good for New Zealand, creating wealth, jobs and improving our capabilities. Technology incubators produce companies that are born, effectively, in an international airport lounge. They’re global from birth. Their IP is routinely snapped up and absorbed into bigger global machines in the mould of WhatsApp and Facebook.

What we’ve seen in Israel, and what will be possible here, is that at the end of the incubator process, in some cases, IP will be the product up for sale.

Technology incubators produce companies that are born, effectively, in an international airport lounge. They’re global from birth. Their IP is routinely snapped up and absorbed into bigger global machines in the mould of WhatsApp and Facebook.

It gets bought, but the knowledge and training imparted on those during the process stays right here, ready for the next idea. The profit is reinvested in New Zealand, adding to our export receipts and future-proofing our skillset. It’s important not to underestimate the value of growing our knowledge bank. Oren Gershtein, chief executive of Israel’s leading technology incubator for nine years, believes that had Israel not implemented its programme, it would have been exporting scientists and researchers, instead of their products and ideas.

We aim to keep the people, by helping to ensure New Zealand is a place where talent wants to live.

Originally published in National Business Review, 21 March 2014

Updated: 4 September 2015