startupmania

Yossi Smoler, manager of the Ministry of Industry, Trade and Labor’s Greenhouse Program revealed data that shows that start-up companies approved to join the Greenhouse Program are having a difficult time returning the government-sponsored loans upon their completion of their Greenhouse stay.

Smoler presented the data to a Knesset finance subcommittee which discussed this week the Greenhouse Programs.

According to the agreement with the start-up companies which go into the greenhouse, Smoler explains, the stay lasts between 2-3 years, with few exceptions which last longer. After this time, the companies are supposed to raise funds from outside sources – venture capital totaling at least half a million NIS in a first fund-raising round.

Smoler’s reports shows that, by the end of 2009, about 31 companies operating in the Greenhouse were supposed to repay the government loans totaling 81 million NIS, whereas in reality, only 14 million were repaid. The reasons for this, he says, are the economic crisis and the fact that the venture capital funds are focusing on investing in their own portfolio companies and shy away from investing in SEED initiatives or companies which had just left the Greenhouse.

The country, Smoler says, enslaves the stocks of those start-up companies until the loan is repaid. The committee members informed him, however, that in the case where a company is having a difficult time raising funds, these stocks carry no real value, and put the money the country invests in these companies at risk.

Smoler says that the Ministry of Industry, Trade and Labor is currently working on new ways to solve the problem, such as prolonging the companies’ stay in the Greenhouse. These solutions, however, require an additional budget of 30 million NIS. Other solutions include starting privately sourced funds with government backing and providing initiatives to investors to put their money in SEED companies.

In Smoler’s review to the committee he added that the current Greenhouse budgets stands at 180 million NIS – a similar sum to the 2009 budget. He tells that the program, started in 1991 as a government initiative to encourage first-stage start-up companies and to create employment opportunities for the large influx of ex-soviet union immigrators arriving to the country. In 1993, the Greenhouses were privatized and are now run by private entrepreneurs.

Israel has 26 Greenhouses, which serve 179 companies – roughly 7-8 companies in each Greenhouse. According to Smoler, 90% of the start-ups successfully complete their Greenhouse stay, and so, each year sees 75-85 new projects. In total, 444 of the 1,209 companies which have “graduated” the Greenhouse Program are still active in the market today. “This is a testimony to the success of the program over time, especially considering that the program invests in first-stage companies, which are by the very nature more dangerous,” Smoler says.

Haim Kopans, a private partner in JVP, praised the Greenhouse Program, but claimed that dealing with the government is filled with beauracracy, and in light of the economic crisis there is a significant market failure in continued investments in Greenhouse graduates.

Itay Zandbank, manager of Platonix Joint Ventures, which “roosts” start-ups and does not enjoy a government budget, claims that entrepreneurs fear approaching the Greenhouse in light of their requirement of paying overheads: rent, law services, accounting, etc. The topic of overheads, he says, is decided upon at the CEO level, where the Greenhouses can charge the companies as needed. Furthermore, it seems that the Greenhouse, particularly those who don’t provide the added necessary funds, take advantage of this possibility and make a profit at the expense of the entrepreneurs.

Knesset member Robert Iltuv has issued a call to the Minister of Indsutry, Labor and Trade, the chief scientist and the manager of the Greenhouse Program to commit the Greenhouse to provide additive funds in all cases, something which will testify their seriousness and trust in the companies they invest in, and will prevent, even if only on appearance, taking advantage of the government and the entrepreneurs.

Translated by Itai Rosenbaum