Why Israel is the "Start-up Nation": 30 Years of Success with IIA’s Three Incubation Programs

Located in the Middle East and surrounded by powerful adversaries, Israel faced a pressing need to develop its economy, particularly after its establishment brought back a significant number of talented expatriates.

The country's government focused heavily on technological advancement to address the rising demand for new job opportunities. Over the past 30 years, the Israel Innovation Authority (IIA) has led this charge by implementing three major incubation programs, helping the nation emerge as the renowned "Start-up Nation."

Can Israel’s Model Serve as a Blueprint for Taiwan’s Startup Ecosystem?

In recent years, the Taiwanese government, through the Small and Medium Enterprise and Startup Administration (SMESA) of the Ministry of Economic Affairs (MOEA), has actively supported the incubation of startups.

By leveraging Taiwan's industrial strengths and government policies, i2i has been tasked with developing Taiwan’s own startup ecosystem. Can Israel’s IIA model serve as a valuable reference?

From 2013 to 2021, 317 startups participated in IIA’s incubation programs, with 212 successfully graduating. 

To date, 75% of these companies remain active, and most have secured funding. The total funds raised by these startups amount to NIS 27.1 billion (TWD 231.5 billion).

According to IIA’s Latest Data (2024-Annual-Report-The-State-of-High-Tech):

• Israel’s tech output has continued to grow, contributing about 20% of its GDP by 2023, equating to NIS 338.8 billion (TWD 2.9 trillion).

• High-tech exports accounted for 53% of Israel’s total exports in 2023, with software and related services being the primary contributors. These exports surged from 40% in 2013 to 71% in 2023, marking a strong upward trend.

• In terms of employment, Israel's high-tech sector grew to 396,000 employees in 2023, a 60% increase compared to the past decade.

• Despite a 54% decline in high-tech startup funding in 2023, with NIS 30.2 billion (TWD 237.3 billion) raised, this reflects a broader global trend among innovation hubs.

Three Decades of Incubation Programs by the IIA

Israel’s Innovation Authority has successfully navigated the ups and downs of the global startup scene, especially during challenges like the COVID-19 pandemic and investment slowdowns.

Since the 1990s, IIA has implemented three main incubation programs:

• Technology Incubators Program (TIP) (Industrial Development)

• Regional Innovation Incubators (Rural Development)

• Hybrid Seed Incentive Program (Comprehensive Improvements)

These programs have played a pivotal role in shaping Israel’s startup ecosystem.

In 1991, IIA Launched the Technology Incubators Program (TIP)

Objective

Led by the Office of the Chief Scientist within the IIA, this program focused on supporting early-stage startups, helping them grow and accelerate.

Focus on Future Technologies

The program specifically targets startups in cutting-edge fields like quantum computing, artificial intelligence, nanotechnology, climate tech, and bio-convergence.

Various Support Schemes

These include setting up incubators, pilot projects for concept validation, and consortiums linking academia with industry.

How the Program Works

• Startups are evaluated based on three main factors:

  • Founders' Expertise: The entrepreneurial team’s background and integrity.

  • Technological Innovation: The uniqueness and market potential of the startup’s technology.

  • Market Potential: Startups must demonstrate the potential to scale globally, as projects focusing only on domestic markets are discouraged.

• Professional Services for Startups:

  • To maintain quality, each incubator typically manages no more than 15 projects at a time.

  • The government also incentivizes incubator performance by allowing them to hold up to 20% equity in their startups, with an additional 3% reserved for incubator managers as an incentive to ensure project success.

• Government Funding Without Interference

  • The government provides operational funding for the incubators and covers up to 85% of the costs for each incubated project. Incubators operate as independent companies under market-driven mechanisms.

Current Challenges Facing the IIA

• Insufficient Budget: The IIA’s budget for 2022 and 2023 was NIS 1.5 billion (TWD 12.77 billion), with a slight reduction to NIS 1.4 billion for 2024. Though the nominal budget has remained steady for 20 years, accounting for inflation, it has significantly decreased. In 2002, the IIA’s budget was NIS 1.5 billion, equivalent to NIS 5.2 billion (TWD 44.3 billion) today.

• Challenges in Early-Stage Startup Funding: Investors are increasingly favoring later-stage startups, while early-stage funding has stagnated, raising concerns about the future of Israel’s “Startup Nation” status.

• In Response, the IIA Launched the Hybrid Seed Incentive Program in 2021.

In 2019, IIA launched the "Regional Innovation Incubators Program", aiming to establish three incubators with a total budget of USD 50 million over eight years.

Objective

The program seeks to stimulate tech industry development outside of Israel’s high-tech hubs, fostering local employment opportunities and mitigating the talent drain to Tel Aviv.

How the Program Works

The program invites bids to establish these innovation incubators, with the following provisions:

• An annual grant of NIS 1.58 million (TWD 13.5 million) to cover operating costs.

• Bidders must provide startups with workspace and guidance in technology and business.

• Incubators must collaborate with academic institutions, industry hubs, investors, and potential customers.

• Each contract lasts for five years, with the possibility of a three-year extension based on performance.

• Participating startups can receive up to NIS 1.05 million (TWD 9 million) in annual funding.

In 2021, IIA launched the "Hybrid Seed Incentive Program"

Objective

While the Technology Incubators Program (TIP) has been successful, early-stage startups continue to face significant funding challenges, with the number of new startups in decline. Continuous establishment of startups is vital for the ecosystem's growth, and early support is crucial.

However, early-stage startups carry high risks, which remains a key obstacle for Israel’s startup ecosystem.

The Hybrid Seed Incentive Program aims to increase the success rate of startups, encourage the creation of seed-stage companies, and attract experienced investment firms to invest in early-stage ventures.

Target Sectors

• Sectors that are difficult for investors to enter, such as food tech, bio-convergence, and pharmaceuticals.

• Where the technology is proven but commercial viability is still in question.

• Institutional investors interested in seed-stage startups.

How the Program Works

• The program will allocate NIS 80 million (TWD 680 million) to support 40 startups.

• The IIA will provide up to 40% of the fundraising target per startup, with a maximum of NIS 3.5 million (TWD 29.75 million).

• For startups based in peripheral areas of Israel or founded by underrepresented groups in high-tech industries, the subsidy can increase to 50%.

• Pre-emption right:

  • Venture capital funds participating in the fundraising will receive preemptive rights on the shares covered by the IIA’s subsidy for up to three years, or until a larger funding round is secured.

  • The IIA’s 40% participation provides protection to investors, allowing them to buy shares at the original price plus 5% interest after three years.

  • Startups receive immediate funding, while investors only bear 60% of the risk, gaining future preemptive rights.

• Under this mechanism, the IIA can expect faster returns compared to traditional R&D grants, which are repaid only after the startup generates revenue. If investors choose not to exercise their preemptive rights, startups repay the IIA through future earnings.