Yozma

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A public–private venture capital co‑investment policy that seeded Israel’s VC industry through minority state stakes in new funds with a time‑limited buyout option.
What are the main aims and objectives?

Yozma aimed to catalyze a competitive, self‑sustaining venture capital industry in Israel by crowding in reputable foreign and domestic investors, increasing early‑stage risk finance for high‑tech startups, transferring investment know‑how to local managers, and ensuring a credible government exit through a five‑year buyout option on the state’s equity at cost plus interest.

How does the program work?

Yozma was launched in 1993 as a USD 100 million government‑owned venture program with two functions: a fund‑of‑funds placing up to USD 80 million as minority stakes (typically 40%) across ten newly created private VC funds, and a separate USD 20 million direct Yozma Venture Fund for startup investments. The 40% public share was conditional on attracting at least 60% private capital and a reputable foreign financial partner, professionalizing fund governance and linking Israeli funds to global markets.

A defining incentive was a five‑year call option allowing private partners to repurchase the government’s stake at cost plus 5–7% annual interest, which aligned incentives to perform and embedded a clear path for state exit; most funds exercised this option, paving the way for privatization by 1997–1998. This structure favored market discipline while limiting long‑term public ownership.

The initial cohort included funds such as Gemini, Jerusalem Venture Partners, Polaris (Pitango), Walden, Star, and others, generally sized USD ~20–40 million with government commitments capped around USD 8 million per fund; the direct Yozma fund typically made USD 1–6 million initial investments with reserves for follow‑ons. The program also emphasized “learning‑by‑doing” through compulsory foreign participation and Yozma managers’ involvement in boards, which fostered co‑investment, diffusion of VC practices, and improved access to U.S. exit markets (notably NASDAQ).

By design, Yozma targeted a “critical mass” near USD 250 million under management to trigger ecosystem emergence. The program did not rely on guarantees or tax incentives as its core tool; instead, it used structured co‑investment, foreign partnerships, and a strong upside incentive via the buyout option, differentiating it from earlier instruments such as INBAL loss guarantees.

What is the overall cost?
  • Initial government commitment: USD 100 million in 1993 (approximately ILS figures were not specified in official sources reviewed); allocation included roughly USD 80 million to hybrid funds and USD 20 million to the direct Yozma fund.
  • Leveraged total: Designed to mobilize about USD 150 million in private capital in the first phase, bringing Yozma‑related capital toward USD ~250 million by mid‑1990s; broader Israeli VC under management reached ~USD 440 million by 1994. (All figures cited in USD; original ILS amounts were not found in the sources reviewed.)
How was it implemented?

Yozma was established in 1993 under the Office of the Chief Scientist in the Ministry of Industry and Trade (now the Israel Innovation Authority) to address a missing market in venture financing despite strong national R&D capabilities and growing high‑tech entrepreneurship in Israel in the early 1990s. The government created a USD 100 million program structured as both a fund‑of‑funds for co‑investing in new private VC funds and a direct investment fund; the state took minority positions (up to 40%) conditioned on attracting reputable foreign partners and at least 60% private capital, embedding professional governance and international linkages from inception. A time‑limited buyout option allowed private partners to repurchase the government’s stake at cost plus interest after five years, aligning incentives and establishing a credible state exit; most funds exercised this option, facilitating privatization of the program by 1997–1998.

Implementation proceeded through competitive selection of ten private Israeli VC management companies paired with foreign financial institutions, forming the initial cohort often cited to include Gemini, Jerusalem Venture Partners, Polaris (later Pitango), Walden, Star, Eurofund, Inventech, Nitzanim/Concord, Vertex, and Medica; the direct Yozma fund operated in parallel to invest in startups. Public commitments were typically capped around USD 8 million per fund (no more than 40% of each fund), with individual funds commonly sized between USD ~20–40 million; the overall target was to reach a critical mass of about USD 250 million under management to catalyze an industry take‑off. Yozma managers also took board seats and coordinated across funds, which supported co‑investment, information sharing, and diffusion of venture practices, while mandatory foreign participation connected Israeli funds to U.S. and other international markets.

Key milestones include the launch in 1993; formation of the ten hybrid funds during 1993–1996 (specific closing dates vary by fund and were not comprehensively listed in the sources reviewed); widespread exercise of the buyout option within the five‑year window; and privatization completed by 1998, after which Yozma continued as a private entity (the Yozma Group) and the original management companies raised follow‑on funds without government capital.

What impact has been measured?

Multiple studies credit Yozma with catalyzing Israel’s VC take‑off, with VC investment rising from about USD 5 million in 1990 to roughly USD 3.3 billion in 2000, alongside a sharp increase in foreign financial institutions operating in Israel and more than 2,000 startups formed by 2000. While attribution is multi‑factor, Yozma is identified as the key policy trigger of cumulative growth.

By the early 2000s, managers originating in Yozma‑related funds accounted for a substantial share of Israel’s VC capital under management, with evaluations reporting dozens of follow‑on funds and strong survival of the initial cohort. The initial funds achieved notable exit activity, and the market shifted from state “pump‑priming” to private sustainability, with privatization finalized within about five years of launch.

Reports and evaluations

  • OECD, Venture Capital Policies in Israel (country study) profiles Yozma’s USD 100 million design, 40% stakes, and privatization path.
  • Avnimelech & Teubal’s analyses detail incentive design, learning dynamics, and ecosystem co‑evolution with quantified industry growth.
  • IFISE and related compilations document follow‑on fund formation and capital managed by Yozma‑origin managers in the early 2000s.
  • Contemporary OECD notes and Israel Innovation Authority materials discuss the newer institutional‑LP‑focused “Yozma Fund 2.0.”
What lessons can be learned?
  • The buyout option at cost plus 5–7% interest was a powerful incentive; replicators should calibrate terms to balance upside with fiscal risk and ensure genuine private due diligence rather than reliance on soft guarantees.
  • Mandatory reputable foreign partners accelerated learning and access to exit markets; where comparable partners or exit venues are scarce, similar programs may underperform.
  • Israel’s 1990s context—deep public R&D, immigration of engineers, and NASDAQ access—amplified Yozma’s effects; outcomes may differ in ecosystems lacking these complements.
  • Earlier guarantee‑based approaches (e.g., INBAL) did not produce durable follow‑on funds, suggesting that co‑investment with upside incentives and professional selection are preferable to loss guarantees as core tools.
Notes + Additional Context

Yozma 2.0 is a new Israel Innovation Authority incentive that co-invests alongside Israeli institutional investors in Israeli venture capital funds to boost domestic LP participation and stabilize VC fundraising in 2024–2026, echoing the original Yozma’s crowding‑in design with a buyout option and preferential terms for deep tech. The fund:

  • Encourages insurance, pension, and provident funds to invest in Israeli VC funds by adding public co‑investment and enhancing the institutions’ net returns, without government involvement in fund selection or deal decisions beyond eligibility checks.
  • Aims to mobilize about USD 1 billion into Israeli VC across two rounds, leveraging roughly USD 160 million in state funds at a 0.3:1 public‑to‑institutional ratio; OECD and sector reports describe it as part of a broader 2024 stimulus together with a Startup Fund and revamped incubators.
  • Is positioned as “Yozma Fund 2.0,” the instrument’s goal is to increase the share of local capital in Israeli high tech, reduce reliance on foreign LPs during slowdowns, and sustain capital availability for startups; it complements the Startup Fund that directly backs early‑stage companies and updates the classic Yozma logic to today’s market conditions.

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom