Creating Technology Business Incubators: Successful Business Model of Israel

Creating Technology Business Incubators: Successful Business Model of Israel

The rapid advancement of Israeli technology is well known around the world. Some companies, especially the large scale, have realized that continuous development is hard to sustain. They realized that simply enlarging manufacturing scale by importing production lines from developed countries is no longer enough for developing their businesses. Today they seek new hi-tech partners to upgrade the present product mix or introduce new products. The Government of Israel has stressed the importance of R&D and built a very sound system and infrastructure.

The steps that the Israeli government has taken to promote new prospective technologies have made Israeli experience one of the ideal examples for establishment Business Incubators.

The main mission of business incubator is to turn novel and sound technologies, which have international and domestic market potential, into successful companies by guidance and fostering enterprises from initial concept to commercial realization. The primary   purpose of establishment of incubators is to optimally harness and utilize the significant advanced technological knowledge existing in research institutions, universities, hospitals, medical centers and leading technological companies by creation of new companies with unique, innovative know-how and potentials, possessing “inherent economic value”. These incubator companies will operate as business entities which enable potential acquisitions of additional funding for R&D projects from other sources; private investors, institutes, universities, VCs, strategic partners, bi-literal funds and etc.

Each project to be launched into an incubator must have, at its outset, a guaranteed perspective and clear vision regarding the future product, market definition and potential during R&D and incubation phase. The business model and operation principles of the Incubator are simple – all it takes is the knock of a good idea to the door. There are only three main selection criteria at the first stage: it must be a development with an actual market, it must be a clear technological innovation, and it must be also a business management capability behind an idea, Only these developments reach the funding decision that are in some way unique and that are found to have a sufficient demand on the market. Simple and very productive business model

A project initiator brings a valuable idea to the incubator and the incubator adds all necessary resources. In the course of an average two years incubation period each start-up established in the incubator receives 500.000 USD  from the government formalized to the incubator, at very favorable conditions, as a loan. The incubator is a shareholder in any start-up pursuant to an agreement between the parties, predominantly possessing about 50% of shares. For its own part the incubator contribute all the knowledge, skills and experience as well as 15% of monetary investments to build up a start-up company and bring it to private investors. The government financing incubator projects through the Office of Chief Scientist, Ministry of Industry One the second phase, private capital will be included in almost all incubator projects.

The experience of Israeli Incubators Program shows that initiators are capable of very intensive work and achieve a success when they are helped in solving accompanying problems, such as legal and management related as well as market strategy up to planning their day to day work. Most of the projects in technology business incubators achieve commercial success and contribute to the innovation development.

Without the government taking the risk and making the initial investments to these initiatives, the companies would not have been established and the private investments that the incubator companies may successfully raise would not materialize. The incubators program positioned itself as the manufacturer of start-ups establishing 70 – 80   new companies every year.

Since 1991 to the end of 2012 the government initiated 1700 companies with a total cumulative government investments of over 690 Million USD.

Over 1500 companies had matured and left incubators. Of these graduates 60% have successfully attracted private investments. By the end of 2012, 40% of incubator graduates are running. The total cumulative private investments in graduated incubator companies reach over 3,5 Billion USD

Development of business incubators both in capital Baku and regions of Azerbaijan is a crucial step for development on non-oil sector, which is a main direction of government programs. In order to promote and support information technologies and start-ups, the government should establish entire legal and practical mechanisms for operating incubators. Specific attention within the development of legal mechanism should be provided to the copyright of idea owner and other parties.

Lack of private investors in non-oil sector in Azerbaijan is increasing the role of the government on development of specific programs or structures for establishment of business incubators and financial support of start-up ideas. Allocation of funding to start-up ideas based on the shareholder structure will increase the responsibility of both sides and interest in promoting and development of start-up idea. Provided funding should be through the direct investment and low-interest loans.

Azerbaijani government also should consider the establishment of business incubators by professionals and also supports the capacity building of managers and mentors of business incubators.

Integration and using of Israeli system for development of business incubators will help to Azerbaijan to create better legal and practical mechanisms for development of this sector.

Dr. Yuri Yakub – Wazana Group Ltd. Management & Investments (Ashkelon, Israel)

Ilyas Safarli – “Uluchay” Social-Economic Innovation Center (Sheki, Azerbaijan)