Israeli chief scientist Avi Hasson spoke to Globe and Mail business correspondent Barrie McKenna in Ottawa. Mr. Hasson, 43, is a former military intelligence officer, venture capitalist and entrepreneur. He directs Israel's annual $450-million (U.S.) business R&D efforts.
Why should government pick R&D winners?
One of the pillars of our policy has been try to focus every party on what they're good at. The government may not be that good at mentoring and growing companies. But it is much better at taking risks, even though it might seem counterintuitive. The word "risk" in the Office of the Chief Scientist is a good word. We like to fund risky projects because industry won't. We don't want to crowd out private dollars. And by definition, I don't want to carry the full load, rich as I may be.
If you don't take equity in companies, what do you demand from them?
We have many models, but the main one is the royalties model. If the project fails to generate commercial revenues, no harm done, it's a grant. If the project generates commercial revenue, royalties are paid back to the chief scientist – 3 per cent to 3.5 per cent of the revenues – until the grant is paid. And miraculously it goes back into my budget to support new projects. All the risk is on me. It's the opposite of what a typical bank would do.
At the end of the day, how much do you get back in royalties versus what you pay out?
One of the first questions I asked when I took the job was, "What percentage of the projects are repaid?" If the answer was 70 per cent, I would have said, "We are funding the wrong projects." If the answer was 5 per cent, I would have fired everybody and spread the money from an airplane. It would have had the same impact. If I'm too high, I'm probably crowding out private investors, which I don't want to do. So it's less than 50 per cent.
Are these programs open to foreign companies?
No. But let's define foreign companies. IBM Israel is not a foreign company. I don't care who the shareholders are. They could be Canadian, American, German or Australian. But the R&D has to be done in Israel and the intellectual property should stay in Israel. There are almost 300 multinationals with R&D facilities in Israel. [For] many of them, it's their only R&D centre outside their home country, such as Apple and Facebook.
How do you ensure that intellectual property stays in Israel?
It's part of the contract when they get my funding. I'm talking ownership of the IP. When you sell the product, that's okay. But you cannot license or transfer ownership without coming to us.
What about the selection process? How does that work?
We don't bet on sectors, but we do selection. I have 120 evaluators. The reason I need so many is because I have so many sectors – communications, life sciences, plastics, agriculture, food and Internet. These are not government employees. You could call them consultants. All of them, in addition to having science degrees, have worked in the private sector. I get amazing people.
What's the range of investment size?
There is no limit, low or high. Some companies get $6-million in a single year. And then we go as low as $40,000. It's always a percentage of the project. About 80 per cent of my budget goes to [small and medium-sized enterprises]. Not by design, but because there's natural market selection that happens. If I'm a life sciences company, I have to go to government; there's no way anyone is going to give money at the seed stage. It's not by design. You don't come to the government if you don't need to.
There is often a resistance to governments picking winners. Part of your system is to de-politicize the process. Is that the trick?
One of the secrets is the detachment from politics, and it's not just in the way I am nominated. My office is very independent. There is a consensus in Israel, among the political parties and the public, that this is a good agenda, it's strategic to our economy, and it's money well spent. Part of that is keeping the politics out.
How crucial is private sector involvement?
I spend one day every week visiting companies. It's the best day of the week. I don't need to get a report that there is a shortage of scientists. I hear it from CEOs. That gives me the ability to identify what's happening and then to devise solutions.
How important is military spending in driving R&D and commercialization?
A lot what made Israel a startup nation are not good things. The fact that we don't have natural resources, the fact that we are a very small market. It's not an advantage. But it created globalized companies. A lot of countries are trying to create that sense of urgency. In Israel you don't have to do that – it's there. We need water technology because we don't have water. We need defence technology because we have a real threat. We have to be global because we don't have a local market.
This interview has been edited and condensed.