Venture capital start-up co-evolution and the emergence & development of Israel's new high tech cluster

Abstract

This paper provides an account of the emergence and development of a Venture Capital Industry in Israel, and the role it played in the recent successful growth of Israel's high tech cluster. The paper focuses on Israel's Venture Capital Industry, its emergence and operation during the 90s, in which period the number of VC Funds increased from 2 to over 100. The context is the transformation of Israel's high tech industry from the Defense-dominated Electronics industry of the 70s/80s to the ‘Silicon Valley’ model of the 90s characterized by large numbers of SU companies. During this period the share of high tech in manufacturing industry; and ICT's share in the Business Sector increased considerably attaining one of the highest levels worldwide. Given the importance of Venture Capital an analysis of the waves of new SU companies should be done jointly with an analysis of the emergence and development of Venture Capital (and vice-versa). The approach adopted is Evolutionary & Systemic rather than a focus on ‘the operation’ of a mature Venture Capital industry, which has been more frequent in the VC literature. We focus on the Dynamics of Venture Capital particularly of the emergence and of subsequent development of the industry. We link these with core Evolutionary concepts such as variation, selection and reproduction (Nelson 1995). The paper discusses the co-evolutionary and dynamic process involving the business sector, technology policies, venture-capitalists, individuals & Startup companies, and foreign linkages. We attempt to show that VC emergence is part & parcel of the reconfiguration of a pre-existing Electronics Industry one involving large amounts of SU and new and powerful links with global capital markets. The main conclusions and policy lessons of the paper are that specific technology policies targeted to the Venture Capital sector can be effective only to the extent that favorable background conditions exist or are created. The main groups of factors, events or sub-processes influencing the emergence process which started in 1993, and subsequent development, are: (1) favorable background conditions; (2) features of the immediate pre-emergence period (1989–92); (3) Targeted Policies which directly triggered VC Emergence (1993–98); (4) Strong VC-SU co-evolution; (5) Global Capital Market Links.