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Israel, Government Approves Stimulus Package to Enhance High-Tech Industry

Venture Capital

The Israeli government, in collaboration with the Ministry of Finance and the Israeli Innovation Authority, has approved a stimulus package aimed at elevating Israel’s standing as a global high-tech hub.

Within the framework of the initiative, the following funds will be launched:

Funds meeting the challenges of quantity and diversification of companies:

  1. Establishment of a Startup Fund valued at NIS 500 million a year

This fund aims to assist in the establishment and funding of early-stage deep-tech companies at various development stages, from ideation to growth, in sync with the market. The goal is to provide funding suitable for the company’s development stages, enabling companies to reach the next funding milestone (in contrast to smaller rounds that do not sufficiently advance the company).

The fund includes three main investment programs:

Pre-Seed Program: Israel Innovation Authority grant covering 60% of the total funding round, capped at NIS 1.5 million, with a budget ceiling of NIS 2.5 million.

Seed Program: Israel Innovation Authority grant covering 50% of the total investment round, up to a grant cap of NIS 5 million, and a budget ceiling of NIS 10 million.

Round A Program: Israel Innovation Authority grant covering 30% of the total investment round, with a grant cap of NIS 15 million, and a budget ceiling of NIS 50 million.

  • Updated Tnufa Fund

The fund grants approximately 100 entrepreneurs each year with breakthrough ideas a grant of NIS 200,000 to promote idea development, initial prototyping, preparation for the Proof of Concept (POC) stage and initial funding. Tnufa is available for independent entrepreneurs even prior to the establishment of a company. The updated program was expanded from a total grant of NIS 100,000 that allows for two applications per cycle, to a total budget of NIS 250,000 per single application, at a grant rate of 80% (NIS 200,000). In addition, the application process has been streamlined.

  • Establishment of New Innovation Centers Nationwide

Nine new innovation centers will be established across the country, from north to south. Through a competitive process, nine winners were selected, combining Israeli and foreign corporations, investors, regional clusters, and associations throughout the periphery, aiming to promote the ideation and growth of startups with regional connections and foster high-tech employment in those regions. Among others, new centers were selected in the Upper Galilee, the Kinneret region and the valleys, the Negev, Eilat, and the Gaza envelope. The centers selected to focus on high-tech sectors with substantial global potential, while leveraging the region and Israel’s competitive advantages such as innovative agriculture technologies (Agritech), food (Foodtech), renewable energy, environmental construction, water technologies, response to the climate challenges and desertification (Climate-tech) and health (Health-tech).

The joint investment in the new innovation centers, shared by the Innovation Authority and several government offices participating in the program, will amount to approximately NIS 100 million over a 5-year period.

  • Incubation Fund

A new investment model for the establishment of new Venture Creation entities. A tender will be published in the coming months, allowing international entities to participate. The fund has two main goals: first, to promote the establishment of new companies in the Deep-Tech fields based on research and in-depth knowledge with significant business potential; second, to assist in creating new and large Venture Creation entities in Israel, in partnership with major international financial entities, developing and establishing Deep-Tech companies that can grow and develop independently while raising the required capital for their growth in these areas. Winning entities in this competitive process will gain significant participation, of up to NIS 40 million (about $10 million) over a 5-year period, in the operational expenses of the incubator and the establishment of a central laboratory for the use of the incubated companies. Additionally, companies established by these entities can also receive direct funding through the previously mentioned Startup Fund, throughout the company’s lifecycle, via competitive process with other companies applying for investment.

Initiatives to Tackle Investment Challenges

  1. 2.0 Yozma Fund:

Establishment of the “Yomza (Initiative) Fund” for co-investment alongside Israeli institutional investors in Israeli venture capital funds, with the aim of expanding funding availability for the Israeli venture capital market in the coming years and increasing local capital’s influence and stability.

The fund’s goal is to increase the share of local capital in the Israeli high-tech sector, intending to reduce dependence on foreign capital and thus enhance the stability of the Israeli venture capital market, with a focus on times of crisis. The plan is expected to inject approximately one billion dollars into Israeli venture capital funds in the years 2024-2026. The investments conducted by the institutional investors will be autonomously managed with no government intervention other than the initial approval provided to the Israeli venture capital funds.

The investments of the 2.0 Yozma Fund 2.0 are expected to take place in two rounds, with the government commitment towards institutional investors at a ratio of 0.3 government dollars for every 1 institutional dollar. The first round, with a combined institutional and government investment of $700 million, is expected to commence in the third quarter of 2024. The second round, with a combined institutional and government investment of $300 million, is expected to start in the first quarter of 2026. Thus, the government commitment is expected to exceed NIS 800 million.

  1. Angel Investor Clubs

The Israel Innovation Authority will fund up to three private investment clubs (for Angels) that will operate to establish platforms for private investors to join forces, synchronize investments in early-stage highly innovative technological ventures, provide them with support and additional value in business and management knowledge. Additionally, the Clubs will assist investors with the legal and financial aspects required, including familiarity with the Law for Encouragement of Industry Knowledge, ratified last July, which includes significant tax benefits for private investors in startup companies. Moreover, the networks will support companies in the submission processes of the Innovation Authority’s funding programs or the examination of the required private funding in approved companies. The total investment in this program amounts to approximately USD 9 million over three years period. The networks established under this program aim to attract private investors from Israel and around the world, enabling them to join forces and invest in Israeli startups with high technological depth in the pre-seed and seed stages, all while leveraging the support provided by the Innovation Authority’s fund.

  1. Knowledge Intensive Industries Law

The law, approved in July 2023, grants tax benefits to investors in Israeli high-tech companies in the pre-seed and seed stages with the aim of increasing the share of Israeli investors in the high-tech sector. It provides benefits for Israeli companies acquiring other technology companies, as well as benefits for Israeli companies receiving funding from foreign entities. The first part of the law grants a benefit that allows an investor who made an investment in an R&D company to receive a tax credit, deferring some of his tax payments until he sells the company’s stocks. The second part grants a benefit allowing investors who sold stocks of an Israeli R&D company not to pay tax at the time of sale on the capital gains or exit, but rather to invest in another Israeli company within 12 months from the date of the sale of the stocks. The third part grants tax benefits to Israeli high-tech companies acquiring other technology companies. These companies can deduct the purchase amount from the preferred technological revenues, thereby paying less tax. In other words, their investment will be considered an expense for tax purposes. The rationale is to encourage Israeli companies to grow and thrive in Israel and not sell their activities or merge with international companies.

In addition to the above, the Fast Track program launched in recent months will continue to operate to assist startups facing financial difficulties due to the war.

The Fast Track channel began operating less than a month after the start of the war to assist early stages high-tech companies with sufficient cash reserves of less than six months (Runway) and significant technological and/or business assets to survive the war until they can complete a full funding round. So far, about NIS 200 million has been distributed to approximately 120 companies via this program, and an additional NIS 200 million are expected to be distributed by the end of its activity in March 2024.

All of this complements the national programs for artificial intelligence, bio-convergence, and quantum computing, whose budgets were unaffected and are intended to prepare the new Israeli innovation hub for the next technology trends.