Lessons From Yozma: How the CHIPS Act Can Amplify VC Investment in Semiconductors

Structuring VC Investment to Amplify the CHIPS Act

The CHIPS Act presents a major opportunity for the Department of Commerce to reestablish US competitiveness in semiconductors. A key component is the funding allocated for venture capital, aiming to catalyze innovation through investments into startups. As policymakers develop this venture capital program, there are structural approaches that could amplify impact. The Yozma program provides some key insights into how public venture investments that are aimed at fostering ecosystems can be structured to amplify their impact.

The Yozma Program: A Model for Government-Backed Venture Capital Funds

Israel's Yozma Program in the 1990s provides an instructive case study. Yozma addressed a similar problem - lack of venture funding hindering an emerging tech industry. It provided matching government funds but required private investor participation in new VC funds. This attracted far more foreign capital than the state invested.

Israel is now known as a startup hub for technology innovation. But this was not always the case. In the 1980s, Israel's economy was struggling and there was little venture capital available to fund emerging tech companies. This changed in 1993 when the Israeli government established the Yozma Program to spur the development of a venture capital (VC) industry.

Yozma, which means "initiative" in Hebrew, was a pioneering public-private partnership led by the Israeli government. Its aim was to attract foreign venture capital to Israel by providing incentives and matching a portion of the investment. This helped mitigate the perceived risks for foreign investors in backing Israeli startups.

The Origins of Yozma

In the years leading up to Yozma, Israel had built strong engineering and R&D capabilities. Many technologies with commercial potential were being developed, especially in defense and semiconductors. However, there was a shortage of funding and entrepreneurial acumen to transform these into viable startups.

Venture capital was scarce and existing government R&D grant programs like the Office of the Chief Scientist provided support for research but not business creation.

To address these gaps, the Israeli government launched Yozma in 1993 with $100 million in capital. Yozma set up a venture fund to invest directly in startups. But more importantly, it catalyzed the formation of 10 private VC funds focused on early-stage Israeli companies.

How Yozma Worked

Yozma mandated several conditions for participating funds:

• Include a foreign VC firm as limited partner, to bring investment expertise into the space.
• Partner with an Israeli investment company for local connections
• Focus on early-stage Israeli startups
• Raise at least $20M with about 40% from Yozma's capital

If a fund met these criteria, Yozma invested 40% of the capital (up to $8M). This was matched by at least 60% from private investors.

The incentives were structured to benefit from home runs. Yozma took an equity stake, rather than provide grants. And the private partners could buy out Yozma's shares at cost after 5 years if successful. This gave upside potential through ownership of valuable startup stakes.

Outcomes of Yozma

The results of the program exceeded expectations:

• Yozma raised $100M from the Israeli government. This attracted $150M in private foreign capital.
• 10 new Israeli VC funds were established with Yozma incentives between 1993-1997
• Yozma backed funds invested in over 200 startups between 1993-1998
• Yozma "follow up" funds grew to nearly $6b in capital.

The influx of capital and foreign expertise kickstarted Israel's startup ecosystem. It led to the development of a globally competitive and innovative high-tech industry.

Key Success Factors

Yozma succeeded due to several interlinked factors. First, the funds were designed so that incentives aligned all stakeholders to build profitable funds and startups: rather than protect against downside, the funds were designed to incentivize upside for investors. The fund-of-funds model brought discipline and oversight but avoided government intervention. Finally, the investment was for a limited 5 year program with clear exit path for government stakes.

Implications for American Semiconductors

As the CHIPs Act is implemented, it could look to structure the mandated venture capital initiatives as public-private partnerships. Rather than directly investing government funds, the government could establish requirements for private matching capital. The programs could mandate that funded VC firms:

• Raise substantial capital from non-government limited partners
• Recruit experienced investors with semiconductor expertise
• Demonstrate follow-on fundraising ability after program completion

Venture firms that meet these partnership conditions will be well-positioned to nurture semiconductor startups. A co-investment approach would incentivize capable VCs focused on building long-term deep capabilities in the space.

The Yozma program highlights the power of well-designed public-private structures. Programs that compel private participation can reshape industries, beyond what government investment alone can accomplish. As government agencies looks to spark semiconductor innovation through the CHIP Act’s venture capital funding, public-private partnership models could amplify the impact this historic initiative has on the domestic semiconductor investment ecosystem.