Israel’s Chief Scientist on Mastering the Art of Public-Private Partnership

Avi Hasson 3

Avi Hasson, Chief Scientist, Ministry of the Economy, Israel

“Imagine you had a machine where you put in a dollar and five dollars come out, sometimes ten,” says Avi Hasson. “We have that machine and it’s called the Office of the Chief Scientist.”

After working for ten years as a partner in a venture capital firm, Hasson became four years ago the Chief Scientist at Israel’s Ministry of the Economy. Buttressing this position is a long tradition that has helped turn Israel into a “startup nation,” as the Office of the Chief Scientist (OCS) has been perfecting the art of public-private partnership since it was created in 1965.

With dual responsibilities for the government’s R&D investment (excluding basic research and defense R&D) and for its innovation policy, the OCS has been acting as an innovation catalyst, entrepreneurial matchmaker, and strategic investor. It has learned how to balance stability and dynamism, due diligence and risk taking, encouraging foreign investment and ensuring Israel’s competitiveness, helping enact regulation and legislation while also serving as the voice of entrepreneurs within the government.

The annual budget of the OCS is about half a billion dollars. “A lot of people know that Israel invests in R&D more than any other country worldwide as a percentage of GDP,” says Hasson. “However, not many people know that the government’s share in that investment is the lowest in all OECD countries.” It amounts to only 5% of total business R&D investment.

The economic impact of the government’s R&D investment, however, is not measured by the size of the investment, but by the size of the “additionality,” a term used by economists to capture the net positive difference that results from the government’s intervention in the economy. A 2008 study (re-validated in 2014, according to Hasson), found that a government grant of NIS1 million causes firms in the manufacturing sector to invest another NIS1.28 million (the comparable figure in computer-related sectors is NIS1.81 million), meaning that the economy gains NIS2.28 million invested in business R&D that would not have been invested without government intervention. The study also found that the economic effects (in terms of incremental GDP) of the government’s investment in R&D are, at a minimum, between 5 and 6 times the amount of money invested by the government.

It’s nice to have an additionality generating machine that gives back at least 5 dollars for every dollar you put in, but does the Israeli government pick up winners in the marketplace? To ensure that it doesn’t, the OCS has designed a unique and elaborate selection process to evaluate the applications it gets. It is not based on a master plan, designed by a government committee. “We don’t decide that there are five strategic sectors and that’s how we allocate our budget,” says Hasson. “It’s a very bottom-up process.”

The OCS has 180 evaluators, working as contractors, selected every few years in competitive tenders on the basis of their educational background and industry expertise. Each application is typically reviewed by two evaluators conducting due diligence similar to what a VC would do, assessing criteria such as market potential and the capabilities of the team. Unlike VCs, however, instead of looking at the exit potential of the startup, they assess its potential impact on the Israeli economy. The evaluators’ recommendation is brought before a committee, typically chaired by Hasson, for a final decision. In general terms, this process is also used for other types of OCS investments, such as assisting with the R&D of established companies or collaboration between foreign and Israeli companies.

The key is to design into the process the government’s exit. “We are very careful not to crowd-out the private sector,” says Hasson, “always giving it the option to buy the government out at cost. We let the market do its thing.”

The public-private partnership starts by “acknowledging what each side does best,” says Hasson. “We don’t think that we know better than the private sector what’s the next big thing or how to build companies and mentor them. “ But he believes his office is much better than the private sector in designing infrastructure-related projects and in managing risk.

The first aspect includes R&D infrastructure, development of human capital, and innovation-related policies. “If we identify a missing piece of infrastructure or a market failure, some sort of a gap, we design and initiate the desired change, carrying it forward, funding it, even if eventually it will be implemented by a different ministry,” says Hasson. One example is a national tissue bank his office helped create which is managed by the Health Ministry, providing services (for a fee) to thousands of companies and researchers. Another example is the “angel’s law” the OCS helped draft and promote, giving a tax benefit to angel investors, with the aim of bringing “more people to the table and increasing investment in early-stage companies.”

Counter-intuitively, Hasson also identifies handling risk as an area in which the OCS has an advantage over the private sector. “Taxpayer money and risk don’t usually go together, but when a project is described in our committee deliberations as a risky project, it actually excites us,” he says.

If a company fails, the venture capitalist sees it only as a failed investment. But the OCS looks beyond the failure, at the know-how gained, the intellectual property and talent developed, the lessons learned, and the number of companies that grew out of the failure. “We have a different risk profile and return function,” says Hasson. “Unlike the single investor, I gain from failure, which means I can take more risk. If 70% of the projects we fund were successful, I would say we are funding the wrong projects. We shouldn’t be too successful.”

The OCS’s 40 programs cover all stages in the lifecycle of innovation and all types of companies from pre-seed investments to startup incubators to long-term support of the R&D budgets of established companies to international collaborations to the Israeli R&D centers of foreign multinationals. With all of these programs, the OCS strikes a balance between providing a stable innovation environment and pursuing a dynamic and flexible decision-making process.

The key to keeping innovation policies and processes stable is the de-politicization of the office. The Chief Scientist is appointed to a six-year term and the OCS agenda is widely supported regardless of which government (and which Minister of the Economy—four different politicians during Hasson’s tenure so far) is in place. “There is no political agenda impacting our work,” says Hasson. It is also important, he says, to have processes and regulations: “Government money shouldn’t be too easy to obtain.”

But this also presents a challenge to the type of work the OCS does. Hasson: “If it takes you two years to design a program and another year to launch it, in these three years, either the problem has moved somewhere else or my company is dead.”

For Hasson, the required dynamism, flexibility, and adaptability of his government agency is not necessarily about making quick decisions—they already do that: “On average, we give an answer within three months,” he says. The challenge is in execution, in rapidly developing the tools and programs required by changing market conditions. “The time that passes between knowing what you want to do and the first company benefiting from that program or policy is too long,” says Hasson. ”In high-tech, you don’t have that privilege.”

Hasson hopes that a new law currently under consideration by the Israeli parliament will address this challenge. It will create a new national administration for innovation and “will take the OCS to the next twenty years.” The new administration, while a government agency, will be more independent than the OCS and will not sit in a specific ministry. Creating a new program in the new administration will not require going through a lengthy government approval process. “What used to take two years, may take only four months,” says Hasson.

More operational flexibility will be important given the new, multi-faceted, mission of the new innovation administration. Whereas the mission so far has been focused on creating an innovation ecosystem, the new mission will be to pursue two goals simultaneously: Maintain Israel’s position in an increasingly competitive global innovation marketplace and inject innovation into all sectors of the Israeli economy.

Today, the high-tech sector employs 10% of the Israeli workforce but is responsible for 50% of Israeli exports. Hasson: “We want to bring the rest of the Israeli economy to the same place and that means injecting innovation into traditional industries such as food, plastics, agriculture, and the services sector. When you want to support the continuing growth of Israeli companies, you can’t use the same tools you used to start them up.” When I take this to mean infusing technology know-how into traditional industries, Hasson corrects me: “It’s not just technology, it’s innovation and R&D. I don’t want to finance a new machine for the food factory. I want them to develop an R&D team, answering the question of how to create new products for the global market.”

Hasson is optimistic about the future success of startup nation. He observes that innovation is going to be driven in the future by trends that favor Israel’s specific strengths. He cites primarily the convergence of technologies and the interdisciplinarity that will be the hallmark of tomorrow’s innovation breakthroughs. “All of a sudden biology meets software and medical devices meet communications—this is exactly where Israel excels because everybody talks to each other and they don’t work in silos. People here are very much out of the box,” he says. (For more on out of the box behavior, see Intel’s guide for doing business with Israelis).

When we talked by phone, Hasson just came back from his weekly field trip, visiting this time a biotech company his office supports. He doesn’t like to spend time in conference rooms, he told me. Instead, he prefers to walk around “and see the actual stuff, the clean rooms, the labs.” Then he talks to the company’s management and insists on hearing their concerns. That day, he heard about issues with healthcare regulation. “I’m not the regulator,” Hasson says, “that’s the Ministry of Health. Yet they come to us with these issues. We are their voice within the government. So we talk to the ministries involved and try to find a solution.”

Acting as the voice of entrepreneurs inside the government. Balancing stability and dynamism. Selling Israel’s as THE startup nation to multinationals, states, provinces, and countries. Forging productive collaborations in Israel and across the globe. Taking risk off the table and encouraging tolerance for failure. Advancing legislation and managing forty different programs. I asked Hasson how he and his team find the time for all of these doings, designs, and decisions. His laconic answer: “We wake up an hour earlier.”

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