On Creating Deeptech Confluences: mobilizing private capital into ventures for humanity (Part 3)

Israel — A Deeptech Confluence

This is the third of a four part series On Creating Deeptech Confluences. The work is based off my research & masters thesis at the MIT Sloan Sustainability Initiative. This post dives into the polcymaker’s role in deeptech prioritization & proliferation.

Introduction

This post builds off post 2 where we discussed the deeptech investor’s role in specialization and syndication. This third post covers the deeptech polcymaker’s role in prioritizing government support to proliferate skilled-labor and private capital investment in deeptech. Outlined are three strategies used by policymakers in premier Deeptech Confluences.

These strategies apply to policymakers in city, state / provincial, and national governments. These practices should also be seen as a guiding post for entrepreneurs looking to build their next venture, and for investors looking for prime areas for deeptech investment.

Policymakers: prioritizing and proliferating deeptech innovation

If entrepreneurs are the bedrock of any Deeptech Confluence and investors are the fuel that feeds the fire, then policymakers are like the wind that kindles (or extinguishes) the flames. Their policy winds can blow for good or for worse when it comes to deeptech.

There are three areas in particular where deeptech policymakers should focus their efforts to lift innovation ecosystems and create jobs. They are:

  1. Innovation Policy
  2. Skilled Labor & Immigration Policies
  3. 3) Playing to Geographic Strengths

Each are described in depth below. Israel is used throughout as a case study of policymakers successfully creating a vibrant Deeptech Confluence. Many historical points are taken from Start-up Nation.

Innovation Policy

Governments have a variety of tools at their disposal to stimulate deeptech innovation. These include technology-push policies like government R&D funding, and market-pull policies like carbon pricing.

However above all, policymakers need to have a vision on what they want to accomplish. Is the goal to maximize national security? Increase economic output? Lower carbon emissions? Having a common vision is necessary for a myriad of stakeholders to agree on collective action.

When the modern State of Israel decided to build a Deeptech Confluence in 1968, their vision was to build an entire economy based off the development and commercialization of innovative new technologies. They established an Office of Chief Scientist in 1969 to tinker with different policies that would jump-start their vision into action.

The first smart policy was enacted in 1977 with the Bi-National R&D Foundation (BIRD). The program financed joint development of products between American and Israeli firms. It catered to each nation’s strengths and provided 50% of project commercialization costs — bridge funding for the infamous “Valley of Death”. Israeli firms focused on R&D while American firms focused on marketing and sales. The policy successfully kick-started the Israeli innovation economy by creating a pipeline of over 4,000 deeptech companies that cumulatively sold billions of dollars worth of products by the 1990’s.

The second smart policy was a technological incubator program setup in 1991. The government provided initial funds (~$500k) for new ventures in information communication technologies (ICT), medical devices, cleantech, biotech & pharma, and other deep technologies. The results were astonishing. Between 1991 and 2012, the program funded 1,700 companies with $650M in government money, while leveraging $3.5 billion in private funding (5:1 private to government capital).

The third and arguably most successful smart policy enacted was the Yozma program in 1993. The government injected $100M in venture financing for 10 private venture capital funds and 15 direct investments. The results were even more astonishing. By 1997 the government received its original investment plus 50% interest. Each of the venture capital funds were privatized and on average grew over 10 times their original sizes (10:1 private to government capital). Israel catapulted its R&D intensity from 1% in 1968 to 4.6% in 2004— second lowest in the OECD to highest of all.

Israel definitely acted on its vision to create an innovation based economy. It was an impressive feat of collective action that is unprecedented in today’s age (save China). With access to funding and end markets, these succession of smart policies helped move the State of Israel and its deeptech companies to the forefront of technological superiority.

Skilled Labor & Immigration Policies

Funding is only one part of the innovation equation needed to create a Deeptech Confluence. The other half is building, attracting, and retaining a highly technical labor pool (i.e. the human capital). Since the limiting factor of any innovation cluster or Deeptech Confluence will primarily be talent or money, smart immigration and talent retention policies are just as essential as financial capital to foster deeptech innovation.

Innovation equation for the Deeptech Confluence

Again we turn to the State of Israel for a case example of how long-term skilled labor and immigration policies are used to develop a Deeptech Confluence. Ironically, we look at how two non-innovation focused policies led to the most concentrated pool of skilled labor in the world.

The first successful policy was Israel’s Law of Return. Passed in 1950, the Law of Return permitted any Jew to immigrate to Israel and become an Israeli citizen. Its fruits yielded in the 1990s when almost one million soviet Jewish immigrants moved to Israel. These immigrants were highly educated and skilled in the engineering and sciences — exactly the fields Israel was looking to bolster. It wouldn’t take long until these immigrants obtained funding and helped launched successful deeptech ventures that now make up 50% of Israel’s total exports.

The second and most successful policy was Israel’s mandatory military service inscription. While a byproduct of necessity, the policy had a massive impact on the nation’s labor pool. It funneled every 18 year old in the nation (including women) to participate in defending the nation against physical and virtual attacks. Every Israeli has to serve 2–3 years followed by a long period in the reserves. The highly improvisational, creative, and relatively flat hierarchy of the military made it one of the most sophisticated and egalitarian forces in the world. The result has been an enormous pollination of entrepreneurial minded leaders, tight knit teams, and advanced technologies that have all spawned thousands of deeptech companies.

What can be gleaned from these immigration policies is the importance of a highly skilled labor force. Without it Israel would not be the R&D powerhouse it is today. It demonstrates the importance of the often forgotten second half of the innovation equation.

Playing to Geographic Strengths

The final tactic policymakers have to create Deeptech Confluences is utilizing abundant natural resources in their respective regions. Whether it is abundant rare earth minerals, ocean access, flat arable land, sunshine, or some other resource, every region has a comparative advantage with a certain set of natural resources. This natural capital can be overlooked in today’s globalized economy. However it is key to fostering leading innovation economies because it is a force multiplier. Playing to geographic strengths gives rise to distinctly strong Deeptech Confluences, and hence a modified innovation equation.

Modified innovation equation for leading Deeptech Confluences

Once we again we turn to the State of Israel for insight on how geographic strengths are leveraged to develop leading Deeptech Confluences. The arid region has little natural resources other than ocean and sunshine, and is geographically surrounded by enemies of the state. However these constraints and superfluous resources have played a tremendous role in advancing the nation’s innovative outputs.

For example, Israel only has 14% arable land while neighboring Turkey has 27% arable land. Yet Israel produces almost double the amount of cereals per hectare than Turkey. Innovations like drip irrigation, grain cocoons, and biological pest control all came out of Israel and have made it almost self sufficient when it comes to food. Today it exports $2.2B annually in agricultural products.

Another area of deeptech innovation is freshwater. Demand far outstrips supply in Israel so it built the largest and most advanced desalination plant in the world, taking advantage of ocean it has abundant. When combined with brackish and reused water, Israeli’s pay an average of $30 USD per month for their water — far less than residents of Las Vegas and Los Angeles who pay $47 and $58 per month. As a result, today Israel exports more than $2.2B annually in water-related technology and expertise.

Equally powerful has been the fact that the small region is surrounded by enemies of the state. As a result it has built some of the most advanced military technology in the world. From Iron Dome to drones to cybersecurity, it has dominated the space. In fact, Israel has been and remains the largest exporter of drones in the world. Today it exports approximately $6.5B a year in military technology.

Lastly, Israel has abundant sunshine so it has correspondingly innovated in solar. For example, Israel invented solar water heaters. Today they are used by 95% of the country. Israel is also creating the world’s largest solar tower. It is one of six other key solar innovations that are counted in a top 45 Israeli invention list. It goes without saying Israel has plenty of know-how in solar because of its abundant sunshine.

In sum, natural capital has magnified Israel’s specific strengths in multiple deep technologies. It shouldn’t be surprising since we know that constraints produce creativity and abundant resources lead to comparative advantage.

Policymakers’ role in all of this has been creating the streamlined permits, incentives, and regulations to encourage industry and innovation according to its geographic strengths. The work has unmistakably propelled the nation to become a leading Deeptech Confluence.

For case studies on companies benefiting from geographic strengths and related policies, see the following: BrightSource, Better Place, TaKaDu, Netafim, IDE Technologies

Conclusion

Deeptech is the product of years of basic science research, then years of applied science and engineering research, and then even more years of commercialization work. Governments therefore need to think long-term with their innovation, labor, and natural capital policies. Just like Israel did.

It is important to note there will always be a myriad of choices and trade-offs when it comes to these policies. It is in the best interest of policymakers to be practical rather than idealistic when it comes to employing these tools. Often the best work any policymaker can do is just provide a stable and predictable set of policies for industry to work from. That should be the ideal.

The policymaker’s role in advancing the Deeptech Confluence is much like the wind that feeds the fire. It is dual-edged so policymakers must take precaution. But when done in alignment with the work of deeptech entrepreneurs and investors — the foundation and spark of the fire — they are crucial for forming Deeptech Confluences.

With all three players now evaluated, we turn to the individuals and organizations that form the binding glue of the Deeptech Confluence. We will cover the role of these ‘Confluence Champions’ in the fourth and final post of the series.