Last week, I spent Thursday and Friday with Oren Gershtein. Oren was chief executive of Israel’s leading technology incubator, Jerusalem’s Van Leer Ventures, for nine years. He was in New Zealand to talk to the three new tech-focused incubators recently selected by Callaghan Innovation to introduce this tech-focused incubator model to the country.

At a presentation to a group of local entrepreneurs and angel investors in Tauranga, Oren talked about how Israel’s high tech sector had grown over the past 20 years. It has been a journey that has significant parallels with New Zealand’s own economic landscape.

Oren Gershtein presents at Wharf42's Ignition offices in Tauranga

Oren Gershtein presents at Wharf42’s Ignition offices in Tauranga

Twenty years ago, agriculture was Israel’s number one industry. It was supported by textiles and other smaller sectors, but volatility in prices and demand meant that the country often experienced runaway inflation and frequent economic and social malaise. Whilst New Zealand has not suffered so greatly, recent falls in dairy and log prices show just how dangerous it is for a country to depend on the primary sector as its principal source of earnings.

And so the Israeli Government at the time decided back in the 1990s that it needed to invest in the tech sector. Innovation and risk were to become the new drivers of the Israeli economy. Today, only the United States has more companies listed on the NASDAQ.

The strategy was based on a new generation of technology-focused incubators. If there was no risk, the Government would not invest. It would ONLY invest in high risk investment opportunities. At startup level, this investment amounted to 85% of the startup’s cap table. For every $450,000 invested by Government, the technology incubator had to match with approx. $75K. The government’s own expectations were realistic. They expected a failure rate of between 80%-90%. If however, that 10%-20% success rate led to an exit of say $100M, then the model would be deemed to have been a success.

In 2002, technology-focused incubators in Israel were privatised. Today, there are 24 such incubators operating in the country. What started out as primarily a Government funding initiative is now matched by massive inward investment. Since 2002, over US$3.6B has been invested by the international investment community into Israeli startups. Rather than buying Israeli companies and moving them lock, stock and barrel to the US, major US corporates such as Microsoft, Google & Intel have built research and development centres in Israel around their startup acquisitions.

The Israeli Government continues to invest heavily in the programme. The strategy of rinse and repeat has seen a massive growth in both technology AND entrepreneurial know-how. It has transformed the country’s economy.

The decision by Steven Joyce and Callaghan Innovation to establish a similar regime in New Zealand marks a significant uplift in the Kiwi startup incubator space. WNT Ventures, Astrolab and Powerhouse Ventures have been tasked with the mandate to replicate the Israeli model. The New Zealand Government’s expectations are realistic. Not every venture is going to be a success. By investing $450K into the incubator sponsored startups in the form of a repayable grant, the startups will access capital that the private sector investment community would probably not have invested. Why? Because of risk.

Oren got a great response from his audience in Tauranga. People attending the presentation got it. The tech-focused incubator model is not going to transform the New Zealand tech sector overnight. If one takes a 5-10 year view however, the opportunity to accelerate that transformation is real. As Oren said, there is no shortage of innovation and great ideas in New Zealand. What we have lacked however is the capital to commercialise that innovation and take those great ideas to the global market.

The three new tech-focused incubators are already working to address this issue. Quietly, they are beginning to identify complex IP in our universities and crown research institutes. They are starting the process of engaging with investors, both onshore and offshore, to support immediate and follow-up funding.  They are working with public and private sector partners to build a pipeline of investment opportunties. Quietly, the real transformation of the New Zealand economy is already underway.

Photographs of the Wharf42 Live! Series Oren Gershtein presentation are now online