The Office of the Chief Scientist of the Israeli Ministry of Economy ("OCS") has recently published three new tenders for franchises to form and operate government-supported technological incubators in Israel. The franchises are for a period of eight years. The tenders are for one incubator in each of three districts: Haifa, Acre and the Golan. The tender in the Haifa district is expected to be highly competitive. Preference is given to bidders that are comprised of more than one party (i.e., a joint venture). Therefore, potential applicants may wish to find partners with complementary abilities, for joint participation in the tender. If their joint proposal wins, they will share the rights under the franchise and the related obligations.
Deadline for submitting a proposal is July 15, 2015.
A government franchise to form and operate a technological incubator is based on a unique model that offers business opportunities for Israeli and foreign corporations and investment funds. Multinational corporations, such as Takeda and Johnson & Johnson, Teva Pharmaceutical Industries, Hutchison, Philips, Nielsen and Elbit, operate in Israel government-supported incubators following their selection through prior tenders. By forming a technological incubator in Israel, the franchisee gains access to Israeli deal flow and innovation (entrepreneurs, startups, and academia) in the franchisee’s technological field of interest and is able to invest in and work with the entrepreneurs and ideas it finds the most promising. The franchisee also receives substantial equity (between 20-50%) in the startups that operate in the incubator in exchange for a relatively small investment (15% of the startups' R&D budget for two years), while the government funds the bulk of the costs (the remaining 85% of the two-year R&D budget). The franchisee is also obligated to operate and fund the incubator with an annual budget of at least NIS 1.26 million. Participation in a tender requires, in addition to submission of a detailed bid, preliminary preparation, which includes, for example, recruiting of the incubator's management team, preparation of applicable investment and business plans, presentation of a budget and financial resources, and locating an office space. In light of the long-term commitments involved in the franchise, it is essential to consider in advance all structuring and legal implications, including tax, IP ownership, financing, labor and commercial issues. Structural changes may not be permitted after winning a tender. We note that although the bids in the current tender are due on July 15, 2015, the Israeli Ministry of Economy has announced that later this year it intends to publish additional tenders for incubators in other regions of Israel.
Government-Supported Technological Incubators - In a Nutshell
The Goal of the Incubator Program – To help entrepreneurs establish start-up companies, to take their innovative ideas and develop them into commercial technologies, and to make such companies attractive for private-sector investments.
Framework – A government R&D-funding incubator program administrated and implemented by the Incubator Administration of the OCS by virtue of the Law for Encouragement of Research and Development in Industry 5744-1984 and accompanying regulations (the “R&D Law”) and Circular No. 8.3 of the General Director of the Israeli Ministry of Economy (the "Circular").
- The franchise for formation and operation of the government-supported incubator lasts for a period of eight years. The franchisee may exit after four years, at which point it can terminate the franchise.
- The incubator locates and screens companies that will be invited to operate within the incubator ("Incubator Companies"). Each Incubator Company must be approved by the OCS. Incubators are expected to admit at least four new Incubator Companies each year.
- The government provides funding for 85% of the approved R&D budget of the Incubator Companies for a two-year period and the incubator provides the remaining 15% during that time. This government support of R&D may be available for a third year. In certain cases, the incubator (either by itself or through others) will then have to provide funding for the remaining portion of the R&D budget of the Incubator Company.
- The incubator is required to provide a wide range of support to the Incubator Companies, including R&D infrastructure (space, labs, equipment), technological and business advice, introduction to strategic partners and investors, assistance in recruiting and fundraising and administrative services (accountants, lawyers, regulatory advice, secretarial support, etc.).
- Accordingly, the obligations of the franchisee include: (i) operating and funding the incubator with an annual budget of at least NIS 1.26 million invested by the franchisee. Incubators that are located in Israel’s periphery (e.g. Acre, the Golan) may receive government participation of up to 49% of operational costs (a loan repaid upon sale of shares in Incubator Companies); (ii) investing 15% of the approved R&D budget of each Incubator Company in the two-year period that the Company participates in the incubator; and (iii) committing to providing a third year of R&D support to Incubator Companies either by the franchisee or by others (to the extent a third year government funding is approved).
- The obligation of the franchisee to operate the incubator and to support the Incubator Companies lasts approximately ten or eleven years, until the last Incubator Company that was admitted to the incubator during the eight-year franchise period finishes its incubation period (i.e., a period that lasts two to three years).
- In return, subject to certain exceptions, the Incubator receives at least 20% equity in the Incubator Companies and the entrepreneurs receive at least 50%, as determined by agreement between the entrepreneurs and the incubator. The government does not receive shares in the Incubator Companies.
- The government support in an Incubator Company is provided for two years. Incubator Companies engaged in clean-tech, medical devices and biotechnology (and at times in other fields) may also receive funding for a third year, the amount of which varies based on the Incubator Company's field.
- The approved R&D budget of the Incubator Companies in the two-year period and the 85/15 R&D funding allocation (in NIS millions) based on the Circular dated March 16, 2015 is as follows:
Please click here to view table.
Repayment of Government Support – The Incubator Companies (not the incubator) are liable to repay the government funding received plus interest at the rate of LIBOR through royalties on future revenues (generally at the rate of 3-3.5%). The total amount of royalties as well as the royalty rate may increase if products that are connected (directly or indirectly) to the government funding are manufactured outside of Israel. The R&D Law – Applies to the government funding the Incubator Company receives. Therefore, the basic rule is that any know-how resulting, directly or indirectly, from the government funding, and any right in such know-how, must be owned by the Incubator Company and may not be transferred outside of Israel or to a foreign entity (including for the purpose of manufacturing or further R&D), unless otherwise approved in accordance with the provisions of the R&D Law. The limitations under the R&D Law also apply after the Incubator Company ceases to operate within the incubator and after the government funding is fully repaid by the Incubator Company. The Tender
- The franchisee is selected by the OCS Incubator Committee through a competitive bidding process. The criteria include: (i) the experience of the bidder's shareholders, (ii) the experience of the bidder's management team for the incubator, (iii) the added value of the bidder and its shareholders; (iv) funding resources, (v) the bidder's business plan, (vi) general impressions of the bidder, and (vii) past performance (for bidders who have previously operated OCS-supported incubators).
- A bid proposal must meet certain prerequisites, including the following:
(i) Incorporation. The bidder (the future incubator) must be incorporated and registered as an Israeli entity (company or partnership). The shareholders of the incubator may be non-Israelis.
(ii) Location. The bidder has to present a signed lease agreement (or a term sheet) for a period of at least three years for the location of the Incubator. The location needs to meet certain criteria (e.g. located in the geographical region of the tender and suitable for at least four Incubator Companies in the first year of the incubator and for eight Incubator Companies from the second year on).
(iii) Management team. The bidder must have already recruited a full-time management team for the incubator, which consists of at least of the following: incubator manager, business development manager, CTO and administrative manager. Draft employment agreements or term sheets for a three-year period need to be submitted with the bid proposal.
(iv) Funding resources. The minimum financial commitment required from the bidders for the benefit of the incubator and the Incubator Companies is NIS 50 million for the franchise period. Bidders must provide proof of available funding resources. A bidder that makes a commitment of at least NIS 150 million and who has the most stable, liquid, and available financial resources will receive the maximum score on the financial portion of the tender. We note that winning bidders generally make higher commitments in order to receive additional scoring in the discretionary part of the tender.
(v) Business plan. The bidder has to present a detailed business plan that addresses,inter alia, deal flow resources, incubators' investment committee, investment strategy in Incubator Companies, screening and selection process and follow-up investment policy.
(vi) Submission guarantee of NIS 250,000. The bidder is required to submit with its proposal a submission bank guarantee of NIS 250,000. If the proposal wins, it will be replaced with a performance bank guarantee of NIS 1.26 million for the duration of the franchise. The amount is lower in periphery incubators.
Please click here to view chart.