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Non-Dilutive Funding Amid War Crisis in Israel: A Comprehensive Guide for Venture Capital




Venture Capitalists (VCs) are always looking for ways to maximize their investments and support their portfolio companies. One such method, particularly relevant in the Israeli ecosystem, is through non-dilutive funding. Here, we delve into some of the commonly asked questions about non-dilutive funding in Israel.


What is non-dilutive funding?

Non-dilutive funding refers to methods of raising capital that do not require a company to give up equity. This could include grants, loans, and tax credits, among other forms.


The "Runway" Fund by Israel Innovation Authority

In response to the War, the Israel Innovation Authority (IIA) has launched a targeted fund called "Runway". This fund is specifically designed for companies with less than six months of runway. The eligibility for this grant is calculated by evaluating the company's "burn rate" - the difference between revenues and expenses - over the past three months, along with the current balance in all of the company's bank accounts.


What's the Main Difference Between the War-Related Grant and the Standard R&D Grant?

The primary distinction between the war-related grant and the standard R&D grant lies in their focus areas. While the standard R&D grant emphasizes innovative technology, the war-related grant zeroes in on assets. These assets, indicative of the company's future potential, include accumulated knowledge, created intellectual property, a technological base, a product under development, investors, customers, unique personnel, and a strong, cohesive team.


What are the benefits of non-dilutive funding for startups?

Non-dilutive funding allows startups to gain additional capital without diluting the ownership stakes of existing shareholders, including VCs. This can be particularly helpful for early-stage startups where equity is a precious resource.


How can VC partners help their portfolio companies secure non-dilutive funding?

VCs can play an instrumental role by connecting startups with relevant non-dilutive funding opportunities, aiding in the application process, and providing strategic advice. Additionally, they can provide the necessary matching funding which is often a requirement for these programs. Particularly, in the case of the Israel Innovation Authority's Runway plan, VCs can help their portfolio companies by providing the 50% upfront payment required if it is made by existing investors


Does an Israeli Company Owned by a Foreign Company Meet the "Runway" Fund Conditions?

Yes, an Israeli company that is owned by a foreign company does meet the conditions of the "Runway" fund. The conditions stipulate that the R&D activities must be performed by the company submitting the application and that the intellectual property generated by the R&D activities remains the property of the applying company.


Does an Israeli Company Without Intellectual Property Ownership Meet the "Runway" Fund Conditions?

No, an Israeli company that does not own the intellectual property it creates does not meet the conditions of the "Runway" fund. This applies whether the intellectual property is owned by a foreign entity or another Israeli company. To clarify, this remains the case even if the intellectual property is owned by another company related to the Israeli company applying for the fund (such as a parent company, sister company or subsidiary company).


Is non-dilutive funding suitable for every startup?

While non-dilutive funding offers many advantages, it may not be the best fit for every startup. It often comes with its own set of requirements and stipulations that need to be carefully considered.

Non-dilutive funding represents an exciting opportunity in the Israeli startup ecosystem. As VC partners, understanding this landscape can add significant value to your portfolio companies. To learn more about specific non-dilutive funding opportunities in Israel, consider reaching out to experts or organizations well-versed in this area.


Can non-dilutive funding coexist with traditional VC funding?

Absolutely. In fact, non-dilutive funding can often complement traditional VC funding. For instance, a startup could use VC funding for product development and non-dilutive funding for market research. This way, the startup can efficiently use its resources and maintain a larger equity share.


How Much Can a Company Receive from the Grant?

A company can receive substantial support from the grant. Specifically, the grant can cover up to 50% of a 7.5M NIS R&D plan over a period of 9 months. This financial assistance can significantly propel a company's research and development efforts.


What Expenses Are Approved for the Non-Dilutive Funding?

The non-dilutive funding covers a wide range of expenses to ensure the comprehensive growth of a startup. The approved expenses include:

  • Developers, product people, Quality Assurance (QA), and design and User Interface (UI) professionals. Employees and subcontractors in Israel.

  • Uniquely for the war grant, 100% of the CEO's costs are covered

  • Uniquely for the war grant, one Business Development person, designated for market validation

  • Some of the server costs (Amazon/Google/Azure) related to Research & Development (R&D)

  • Up to 10% of the plan can be allocated for marketing costs, such as trade shows

  • Some accounting and legal expenses

  • Some necessary laptops or equipment required for the completion of the plan

This diverse range of approved expenses ensures that startups have all the necessary resources to grow and succeed.


What Expenses Are Not Approved for Non-Dilutive Funding?

Certain expenses are not approved under non-dilutive funding. These include:

  • Subcontractors or employees outside of Israel, unless there's a rational explanation for why the person has crucial knowledge or experience for the plan, and even in this case, it must be under 10% of the plan.

  • Marketing, General & Administrative (G&A), financial, and other roles that are not directly related to Research & Development (R&D).

When Should the Matching Funding Occur?

The matching funding can be arranged around the time of the grant submission or within two months following the grant approval. It's important to note that this funding should not be provided earlier than the month of the submission itself. This flexibility allows startups to better manage their financial resources and plan their funding strategy effectively.


What are the Terms of Repayment and Limitations on Intellectual Property (IP)?

The company is required to pay a royalty of 3% of revenues. This is specifically applicable to the revenues generated from the activity or segment that the funding was used for. In terms of IP, In case of an exit, if the acquiring company chooses to keep the IP in Israel after an exit, the remaining funds along with interest are returned. However, if the acquiring company wishes to move the IP out of Israel but commits to retaining the developers in the country, a negotiated fine which is capped at a multiplier of 3 on the provided funding is applied. If the acquirer decides to move both the IP and R&D out of Israel, the fine is also negotiated but capped at a multiplier of 6 on the funding provided.


What is the Timeline for the War Grant Approval Process?

Unlike the standard R&D grants which require a commitment of 90 days, the war grant necessitates a commitment of only one month. The authorities strive to provide an approval or denial within 3-4 weeks, making the process much quicker and more efficient.


What are the challenges with non-dilutive funding?

While non-dilutive funding has its benefits, it also comes with challenges. The application process can be complex and time-consuming, and there may be stringent reporting requirements. Moreover, some forms of non-dilutive funding may require the startup to focus on specific areas or meet certain milestones, which may not align with the startup's strategic goals.


Conclusion

Non-dilutive funding presents a unique opportunity for startups and their VC partners in Israel. While it comes with its own set of challenges, the potential benefits make it a worthy consideration. By understanding the landscape of non-dilutive funding, VC partners can provide valuable guidance to their portfolio companies, helping them maximize their resources and accelerate their growth.

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