Startup India, a First Step in the Right Direction - Adv. Stephen B. Rozen, Adv. Benjamin Grossman and Adv. Amit Kurz

On the eve of January 16, 2016, in a lavish event held at the prestigious Vigyan Bhawan Conference Center in New Delhi, the Prime Minister of India, Mr. Shri Narendra Modi, unveiled the much anticipated Startup India Action Plan. The Plan is primed to be one of the flagship initiatives of the Indian Government, as it intends to build a strong eco-system for nurturing innovation and startups.

While there is no doubt that the 19 objectives set forth in Prime Minister Modi’s action plan illustrate a welcome pivotal change in the mindset of the Indian government, it is clear that the Startup India Action Plan is only a stepping stone in a long path - a path which the Indian government ultimately believes will shift its economy from a traditional economy to an innovation based economy, while driving sustainable economic growth and generating large scale employment opportunities.

While there are many differences between the Indian and Israeli economies, “looking west” and importing ideas and policies - which have been successfully implemented by the Israeli government - to the sub-continent might prove beneficial. Specifically, additional policies which should be considered stem from the operations of the Israeli National Authority for Technological Innovation, including its Technological Incubators Program.

The purpose of the Israeli technological incubators program is to promote innovative, early-stage technology entrepreneurships, which due to the high-risk involved, experience difficulties securing private financing. The program also furthers ancillary purposes, such as promoting investments in peripheral areas of Israel and driving research and development in a few specific fields deemed to be of a higher R&D priority.

The program was founded in the early 1990’s in order to help absorb the influx of hundreds of thousands of immigrants from the former Soviet Union (many of them educated and skilled) that arrived after the fall of the Iron Curtain. The incubators specialize in diverse fields, from medical devices and pharma to new media, from ICT and cyber security to clean-tech and life sciences.

The incubators are, essentially, the pipeline to significant amounts of governmental financing for Israeli startups in dire need of funding. Over 1,700 projects have been supported during the course of the program’s two decades. Over the years, these projects have received, in the aggregate, more than USD 650,000,000.

A project is accepted into the technology incubator program after receiving specific OCS approval. Such approval entails an in-depth examination of the proposed project and each project must submit an R&D plan. Such plan must focus on generating knowledge, a method or a process which results in the development of a new product or improves an existing product, process or method, in each case - with commercialization potential.

The incubation period of each project typically lasts between 18 and 24 months, during which it receives funding in an amount that ranges between NIS 2,000,000 and NIS 2,975,000 (approximately USD 520,000 to USD 770,00 at current exchange rates). The level of the funding depends on the field of the project and the physical location of the incubator under which it participates in the program.

The program has singled out certain fields as those in which R&D investments should be preferred. Therefore, projects in the fields of cyber security, clean-tech, medical devices, integrated medical projects and biotechnology receive higher levels of funding.

Projects incubated in peripheral incubators also receive increased levels of funding, as part of the government’s effort to encourage the growth of the local economy of these outlying areas.

As part of the approval process, each project submits to the OCS an operational budget for the course of the incubation period. If approved, the OCS provides funding for 85% of the budget; which is itself provided in installments over the course of such project’s incubation period. The incubator itself must invest the 15% balance of such operational budget and must also provide each project with business development and marketing services, office space and infrastructure and various other services.

In exchange for its investment and support, the program mandates that each incubator receives between 20% - 50% of the equity of the company formed for the incubator project, which leaves the founders with between 50% to 80% of their project’s equity.

In order to ensure that the local economy will benefit from the long-term successes of the incubated companies, the State of Israel has attached several “strings” to its funding. First, each incubator project is obligated to repay the government-provided funds back to the State of Israel, by way of royalties. Additionally, there are limitations on the transfer outside of Israel of knowhow resulting from the research and development conducted by the OCS funded projects. Any products resulting from such must generally be manufactured inside Israel. However, recognizing the importance of foreign investments and the challenges of globalization, these restrictions will typically be lifted in exchange for increased repayments to the OCS.

The technology incubator program has provided crucial funding for many projects that otherwise would have had slim chances at getting off the ground. At the same time it is an amazing deal for the incubators - who receive equity in the projects, mainly on account of government funds.

The success has been phenomenal. Of the incubator projects, 60% have managed to raise follow-on investments, of over USD 3,500,000,000 in total! This amounts to more than USD 5 for each USD 1 that the government has invested in the program. Furthermore, many of the projects have managed to provide an amazing ROI to the local economy.

In conclusion, while it is clear that the Startup India Action Plan signifies India’s willingness to take a “leap of faith” towards an innovation based economy, there is no doubt that the advancements that will be attributed to the Plan will only be the first step – however giant - forward. We strongly believe that a follow-on plan is necessary. Such a plan should mimic the successful programs of the OCS, and specifically the technological incubator program. If India ultimately decides to pursue such initiatives, there is little doubt that such will be an additional catalyst for Indian innovation.

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