Evolutionary Venture Capital Policies: Insights from a Product Life Cycle Analysis of Israells Venture Capital Industry

Abstract

The significance of VC as a component of the ‘Silicon Valley’ model of high tech has led many countries during the 80s and 90s to implement government policies aimed at stimulating this activity. This paper suggests that a major factor in the failure of many of these policies to create an early phase, high tech SU(Start Up) oriented VC industry was the simplistic attitude of policy makers who viewed VC as a ‘pool of capital’. The alternative ‘VC as an industry’ view adopted in this paper explicitely considers issues of VC organization, capabilities, strategy and institutions. An analysis of their impact on VC policy requires considering the context & timing of policy implementation; and the links between VC and VC policies on the one hand and high tech and high tech cluster policies on the other.The new approach focuses on the process of creation of the new industry (“VC Emergence”) and on targeted VC emergence policies which are significantly more complex than the VC-directed policies suggested in the literature. Moreover success necessitates adoption of a systems/evolutionary perspective to Innovation & Technology Policies in general and to VC-directed policies in particular. The successful emergence of a VC industry in Israel during the 90s was not a ‘pure’ market-led process, rather it was triggered by a targeted VC directed policy/program (Yozma), implemented during 1993-98. The incentives structure & timing of this program as well as other elements in its design stimulated entry both of high quality domestic managers/ entrepreneurs (many of them with prior high tech experience) and of reputable, capable and networked investors from abroad. Both groups provided significant added value to the emerging VC industry and hi-tech cluster. Moreover by successfully dealing with the ‘system failures’ associated with achieving critical mass, collective learning, and other processes associated with the emergence or transformation of high tech clusters — Yozma (the Israeli VC targeted policy program) facilitated an extremely rapid and efficient process of VC emergence based on co-evolutionary and other cumulative processes It also assured a pattern of investment which followed a strict definition of VC (dominance of early stage investments in pure high tech SU). Based on the Israeli case and on information on the U.S’s experience, the paper presents an Industry Life Cycle (ILC) model of VC industry evolution. The model contains five distinctive phases with VC emergence being preceded by two phases (background conditions & a pre-emergence) and being followed by the remaining two (crisis & restructuring; and consolidation). Our analysis suggests that a successful process of VC emergence does not by itself assure industry sustainability. Additional restructuring & reconfiguration processes would be required, frequently in response to a post emergence crisis caused by late emergence overshooting.Despite the enhanced complexity of VC policy, the experience from Yozma suggests that Targeted VC (directed) policies are possible and could be successful; and that their likelihood of success depends on a successful policy-high tech co-evolutionary process which in Israel started two decades before implementation. It also suggests that VC emergence policies in certain countries could contribute to high tech industry and to the emergence of new high tech clusters.