Israel is a tiny country almost void of natural resources and surrounded by hostile neighbors. Yet the country boasts more scientists per capita than any other country. This notable statistic means Israel has lessons for the U.S. as it recovers from a long recession. To find Israel’s secret, we spoke with Alex Kaplun, a lawyer with Manhattan based Golenbock Eiseman Assor Bell & Peskoe LLP. Kaplun, an Israeli citizen, specializes in mergers and acquisitions, finance, and the transactional side of law work. “That means I represent investors and venture capitalists in transactions where they invest in early-stage companies or buy those companies, or represent the company in which they invest or acquire. I structure the transaction, negotiate the terms, and draft all relevant investment documents.”
Like Israel, the U.S. is focusing on clean energy technology as featured prominently in President Obama’s State of the Union address. The President discussed encouraging American innovation, especially where there is promise in renewable energy. The President also expressed a goal to reach 80% of U.S. electricity from clean sources by 2035.
Israel, for example, could not have emerged as one of the world leaders in developing new renewable energy technologies without having one of the highest ratios in the world in scientists and labs per capita, according to Kaplun. The country’s few natural resources, such as the sun and desert, help scientists invent new things and influence policy. “For example, almost every residence in Israel has thermal-solar panels, and almost 4% of Israel’s electricity comes from PV panels,” he says. Necessity is the mother of invention, so because Israel is not rich in oil, it resorts to other energy. In addition, government sponsored R&D has a prominent place in the development of innovative technologies. For example, the Office of the Chief Scientist, which is a division of the Ministry of Industry Trade & Labor, provides conditional grants of up to 50% of approved R&D expenditure. The recipient has to repay the grant if the technology is successfully commercialized. This way, the Israeli Government steps in and closes the gap between the early stages of the start-up’s life cycle in which the scientist-entrepreneur begins developing a vision, and the stage in which the first professional investor steps in. Another government sponsorship program provides seed capital and matches investor money in early-stage companies. Israel also has technology incubators that invest up to 85% in any R&D project. These companies must develop a proof-of-concept that requires its entrepreneurs put up 15% of the total investment.
Governmental policy supporting R&D enables a successful venture-capital industry which is essential for success in creating and supporting innovative technologies. “Despite the growing popularity of investing in clean-energy projects, we are witnessing a disturbing trend among professional investors, such as venture capital funds,” says Kaplun. “They are re-examining their investment philosophies with respect to clean energy projects.” The ultimate market for clean-energy innovations is dominated by utilities and other similar institutions that are not always amenable to the adoption of new technologies. Unlike software or other “plug and play” products, clean-energy projects are similar in nature to telecommunications in that they require substantial amounts of capital, longer periods of implementation and, most of all, they require the end customer to have an incentive program available for implementing new clean-energy technology. The initial reluctance to invest in technologies that would take more than 10 years to mature until large-scale production is amplified among venture capitalists (VCs). Ideally, a strong supportive regulatory scheme would let the VC investor evaluate the success of the investment over a longer period. After all, disregarding the social benefits attributed to renewable energy technologies, VC and other risk-oriented investors are ultimately there for the “exit.”
More recently, says Kaplun, Israel has defined a special position to advise the Prime Minister on clean-tech enterprises, known as the National Economic Council. Its role is to devise a plan to develop petroleum alternatives in transportation. The initiative includes a 10-year budget and aims to create an Israeli industry that will serve as a world catalyst to reduce oil dependence in transportation, including providing financing of industrial R&D and project finance, regulatory assistance, and promotion of international cooperation in this global issue. The plan published by the Israeli government states that by 2016 it will have funded more than 100 clean-energy startups and research projects,” he says.
There is no debating that grants and tax incentives are essential, but tax incentives are of little use to startup innovative companies that
are not generating cash to use tax incentives. Turning once again to Israel’s experience, its government’s goal is to have 20% of its energy supplied from renewable sources by 2020. To achieve this goal, for example, Israel has passed legislation that requires the state-owned public utility to purchase electricity from privately-owned, solar products companies and establish a program for feed-in tariff (FIT) for solar plants that require the utility to buy the electricity at a premium. This has led Sunday Solar Energy to announce an investment of $133 million in photovoltaic solar farms.
Although there is a FIT for wind farms, the country is not so windy. Only one area qualifies: in the contentious Golan Heights. The government does encourage wind-power production. A partnership between an Israeli company and a U.S. firm will build a 155-MW wind farm on the Golan Heights, which the Israeli government has declared a project of national infrastructure priority.
Because of the country’s small size, many Israeli companies have foreign markets. Their tactic is to reincorporate themselves as Delaware companies, but keep their R&D in Israel while management and sales relocates to the U.S. For example, if an Israeli company develops a generator, market demand may compel that firm to leave Israel and sell it where needed. While some countries and companies are good at adopting new technologies, Israeli companies are skilled developers but find it more difficult to go out and sell beyond its borders. The ultimate or “uber-consumers”, as Kaplun calls them, are almost always located outside of Israel. WPE
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