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Structural changes in mature Venture Capital industry: Evidence from Israel
Gil Avnimelech
Leon Recanati Graduate School of Business Administration, Faculty of Management, Tel Aviv University, Israel
Dafna Schwartz
Department of Business Administration, Bengis Center for Entrepreneurship, Hi-Tech Management, Guilford Glazer School of Business and Management, Ben-Gurion University of the Negev, Israel
Abstract
This article deals with the penetration of Venture Capital (VC) industry to a new geographical market and the changes that took place during its transition from the growth to the mature stage of development.
We suggest that when VC industry enters a new geographical market, it will initially include very few, but extremely innovative agents. As the industry grows more agents enter the market, and it becomes on one hand more conservative and on the other more competitive. The first effect has a significant negative side effect - a decrease in industry innovativeness and barriers to industry renewal. We illustrate this argument using the Israeli case and present detailed quantitative analysis of the Israeli VC industry development between 1991 and 2007.
Keywords
venture capital, industry life cycle, regional cluster, innovation, maturity
Article Text
This paper analyzes the process of development of a Venture Capital (VC) industry in a new geographical market, based on experience that has been accumulated in Israel in the last 17 years (1991-2007). Within this analysis, we examine the changes that have occurred in the Israeli VC market since its creation in the early 1990s, through its growth stage in the mid-late 1990s and up to its current mature stage. The paper focuses on the transition to the maturity phase of industry development. We identify changes in the market structure, stages and areas of VC investments, and VC performances.
Avnimelech and Teubal (2006) have analyzed the process of the emergence of Israel's high tech cluster in terms of a cluster life cycle comprising four phases of development: Background Conditions (1969-1985); Pre-Emergence (1986-1992); Emergence (1993-2000); and Post-Emergence (since 2001). A significant event in this development process was the successful emergence of the VC industry, which took place during the years 1993-2000. The VC emergence was an outcome of supportive internal background conditions developed after 1969 (based on government support and market forces; see Avnimelech & Teubal 2004b, 2006), the significant global growth of ICT industries and VC investment during the 1990s, and a targeted VC policy - the ‘Yozma' program implemented during the years 1993-1997 (see Avnimelech & Teubal 2004a, 2008). Accompanying the process of VC emergence was the transformation of Israel's high tech industry from a military-oriented sector to a dynamic ‘Silicon Valley' type of cluster, involving considerable entrepreneurial and innovation activities. The VC industry co-evolved with the high tech cluster, triggering and significantly contributing to the rapid development and growth of the startup segment within the high tech cluster.
In this paper we shed light on the later stage of VC industry development - the VC industry maturity process. Within this phase of development we present various qualitative changes. We also suggest potential weaknesses of this stage of development, such as conservative behavior and reduction of innovativeness of VC companies, which may lead to a decrease in its contribution to the regional high tech cluster and increase the risk of cluster lock-in (eg barriers to cluster renewal). In the discussion we also suggest potential collective actions for decreasing these risks.
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