Israel's $155M fund to support 18 institutions in VC investments

The Israel Innovation Authority and the Ministry of Finance have launched an initiative to encourage investments by institutional bodies in Israeli high-tech through local venture capital funds. The program aims to replicate the success of a similar initiative from the 1990s that helped establish the Israeli venture capital industry. As part of the program, 18 institutional entities will receive $155 million in funding from the state for investments in Israeli venture capital funds. The initiative was created to address the investment gap in Israeli startups, particularly early-stage ones, due to the global economic slowdown and Israel's complex geopolitical environment.

The initiative was oversubscribed by approximately $474 million, with nearly all institutional Investment entities in Israel choosing to participate. To address this over-demand, a second phase of the fund is planned for the 2025 budget year.

The following entities were selected to participate: Altshuler Shaham Provident and Pension Ltd., Israel Aircraft Industry Provident Fund Ltd., Analyst, The Phoenix Insurance Company Ltd., Harel Insurance Investments and Financial Services Ltd., Engineers and Technicians Provident Fund Management Company Ltd., Yahav Education Fund & Savings for Nurses Ltd., Reut Insurance Agents and Consultants Ltd., Menora Mivtachim Insurance Ltd., Meitav Provident Funds and Pension Ltd., Mivtahim Social Insurance Institute of The Workers Ltd., More Provident Funds and Pension Ltd., Migdal Insurance Company Ltd., Continuing Education Fund for Teachers Ltd., Makefet Fund Pension and Benefits Center Cooperative Society Ltd., and The Central Pension Fund of Histadrut Workers Ltd.

The Innovation Authority's plan is intended to provide a safety cushion for the local industry by involving institutional bodies' savers' money. The Innovation Authority will provide matching capital for institutional investment in Israeli venture capital funds and will forgo, in full or in part, its share of the returns, thereby increasing the returns for the institutional investors. It is estimated that the program will increase the capital available to Israeli startups by about $1 billion per year.

Dror Bin, CEO of the Israel Innovation Authority: "We are embarking on a new path in the relationship between institutional Investors and the Israeli high-tech. The Yozma Fund will incentivize the investment commitments of institutional entities in Israeli funds over the next 18 months, aiming to prevent a scenario of stagnation in early-stage investments in Israel. The fund will strengthen the partnership and accelerate collaborations between institutional entities and Israeli venture capital funds, thereby mitigating future crises in the venture capital market. This is a strategic move by the Authority, where the new Startup Fund provides direct investments in startups, and the Yozma Fund, that supports venture capital funds, complement each other, ensuring early-stage Israeli high-tech companies, especially deep-tech companies, and creating an optimal financing environment for the coming years. The state's funding for the program at this time is another testament to the confidence in the Israeli high-tech industry and the recognition of its importance to the economy and society in Israel."

The fund's goal is to support Israeli high-tech companies, expand the ties between institutional entities and local venture capital funds as is customary in leading markets worldwide, and increase the stability of the local venture capital market against shocks and macroeconomic fluctuations. As a result of the program, the scope of institutional investments in Israeli venture capital funds is expected to grow, thereby increasing the availability of capital for Israeli high-tech companies.

The fund is intended for institutional Investors such as insurance companies, pension funds, and provident funds, offering a unique yield enhancement mechanism for their investments in Israeli venture capital funds over the next 18 months. The program is a “green lane” with no intervention by the Authority in the investment considerations of the institutions or the venture capital fund managers, who will be able to invest the money according to their investment policy.

At the chosen time, the institutional entity can "buy out" the Authority. In the first four years from the day of the fund's investment, the institutional entity can buy the state's share at an annual compound interest rate of 1%, after the first four years, the institutional entity can buy out the Authority at a yearly compound interest rate of 5% (retroactively from the first day of the fund's investment). If the fund is loss-making, the Authority will bear the loss along with the institutional entity in proportion to its share of the investment. Additional incentives will be given to institutional entities investing in a venture capital fund that is primarily investing in deep-tech companies.

The key question now is the extent to which Israeli venture capital funds will collaborate with institutions, which are subject to strict regulation. Institutions often prefer to join the pension funds for the industry during crises, while institutions typically prefer to invest during good times when they see significant exits but don't always benefit from them. Despite efforts to integrate Israeli savers' money into the high-tech industry, previous attempts have not been particularly successful. Institutional entities tend to favor the well-known returns of real estate investments over the less familiar risks of venture capital, especially after some were burned by investments at the peak of the bubble in 2021. On the other hand, the funds themselves are also inexperienced in working with institutions subject to strict regulation, and their desire to connect with pension funds often arises during crises, while institutions are more interested during periods of strong performance.