Tnufa Grant from the Chief Scientist Office – Pros and Cons

A startup has various possibilities for funding its’ Research and Development (R&D) costs: whether it’s through raising capital from friends and family or via smart investors like angels or VC funds. Another popular funding method is receiving a government grant from the Office of the Chief Scientist (OCS). This article will cover the most well known funding program the OCS offers: “Tnufa” program.

 

Israel, the “Start Up Nation”, is one of the world’s leading countries in entrepreneurship and innovation per capita. The high-tech industry is a major sector of the Israeli economy. As such, the importance of the encouragement of new start up ventures is widely acknowledged, and receives significant government support, considering how receiving funding is one of the biggest obstacles for a young venture.

The purpose of the OCS is “ensuring economic prosperity by technological innovation”, and among its main goals are supporting R&D in the Israeli industry, promoting export and protecting Israel’s place at the frontier of global innovation.

To advance these goals, the OCS offers several programs that encourage ventures to advance and develop according to the objectives set by the OCS. Among the offered programs are the R&D Fund, the MAGNET Tracks, the Tnufa Program, the Incubator Program and the international programs.
1

The Tnufa program encourages technological entrepreneurship in its pre-R&D phase, and is meant to assist in funding technological ventures. The financial assistance provided by the program is given for the development of a model or prototype, the feasibility testing of the idea and the protection of the Intellectual Property (“IP”), amongst other things. This is done to increase the venture’s chance of success to raise capital from potential investors, and to help enable the continued development of the venture.

Eligibility for the Tnufa Program

In order to be eligible for an OCS grant, the applicant must be:

1.    A private entrepreneur, or a group of entrepreneurs;

2.    Israeli residents who are permanently residing in Israel.

3.    The entrepreneurs must be at least 18 years of age at the time of the initial request.

4.    The company must be registered in Israel and owned by private individuals – in some cases not having a registered company will not prevent the receiving of the grant.

5.    The company (or venture) must be at a fairly early stage, meaning that it hasn’t started selling its product or service, or received a significant investment yet.

6.    The company must operate in a technological field and develop an innovative product/service, or a product/service that significantly improves an existing one.

7.    They entrepreneurs or the company need to declare that they haven’t received OCS funding in the past.

Additional information in Hebrew on the terms of eligibility can be found in the Tnufa Program conditions.

The Criteria for evaluating the request

  • The entrepreneur and development team: As a rule, the Tnufa Program offers the grant to entrepreneurs with suitable skills for building the venture. Certain key factors are education, professional skills, prior experience and the ability to devote the necessary time to the venture.
  • The market and business opportunities: Many good ideas are submitted to the OCS, but often someone has already thought of them or began implementation. Therefore, the OCS will consider whether there is a market for the proposed product or service, and will the price of it match the demand. The Chief Scientist asks these questions in order to try and understand the business potential of the venture, whilst taking into account the size of the market, its growth rate, the expected market share of the product, the benefit to export, and the advantages and price of the product compared to its competitors.
  • The business model: To increase the chance of receiving a grant, the venture must present a business model showing the potential.
  • The product and technology: The venture must show that the technology is innovative, and doesn’t violate protected IP, such as existing patents.
The number of submitted projects (dark blue) vs. the number of accepted projects (light blue) by year.

The number of submitted projects (dark blue) vs. the number of accepted projects (light blue) by year.

The Budget for the Tnufa Program

The financial support that Tnufa offers is a grant of up to 85% of the approved budget of the grantee, up to a total amount of 200,000 Shekels. For example, if the total budget requested by the applicant/venture is 100,000 Shekels, then the maximum that the OCS will give is 85,000. This funding is intended to pay for materials, the drafting of a more comprehensive business plan, patent applications, advisors (legal or technical), programmers and exhibition costs. The grant can’t be used for wages or overhead expenses like rent or office supplies.

The Pros and Cons of a Tnufa Grant

Pros:

Not a loan, no stocks: One of the key advantages of an OCS grant is the fact that unlike with a private investor, the government doesn’t require stocks in return for its investment, but rather royalties from future earnings. Also, and unlike taking a loan from the bank, if the venture does not succeed, the OCS does not demand the return of the grant. These two factors are important to entrepreneurs who are often reluctant to risk their own capital, dilute their shares or just don’t have the money to invest.

Show of faith: Another advantage is what the receiving of a grant says to potential investors: “we’ve been vetted by a governmental body (which in this case is a type of investor), and received the money” – this acts as a show of faith, and often serves as encouragement to other investors who know that they are dealing with a fairly organized company who has already been checked by at least one other ‘investor’.

Tnufa Program’s budget

The Tnufa Program’s budget, shown in millions of Shekels

Conditions and Transfer of IP: The disadvantage of receiving the grant is the fact that the grantee will be subject to the terms & conditions of the Industry Research and Development Encouragement Statute, (The “R&D Statute)”.Cons:

In the past, according to the R&D Statute, accepting a grant from one of the OCS programs required the company to keep any IP it developed, while using the funding from the grant, within Israeli borders. Any transfer of the IP outside of Israel required the approval of the Chief Scientist, and was accompanied by a heavy fine. Entrepreneurs who, at some stage, wished to sell their company and make an exit were bound by the R&D Statute and found it difficult to actualize their plans.

However, the R&D Statute was amended in 2012 and among other things eases the restriction on the transfer of the IP out of Israel. The amended law stems from an understanding that modern companies are operating in a global market, and a local restriction can damage their chance of success. While prior to the amendment there was no limit on the amount of the fine paid to the OCS for transferring IP overseas (which often deterred investors from investing in such a startup), the amendment limited that fine to no more than six times the grant received by the company, and three times the grant if the company still holds an R&D center in Israel with at least 75% of the employees after the transaction is made. For example, if you received a grant of 100,000 Shekels, and your company has just been bought by the international corporation of your dreams, you are now faced with two options: Option A is to sell the company with no limitations and pay a fine up to 600,000 Shekels, and Option B is to sell the company under a limitation that it must hold an R&D center in Israel with at least 75% of its employees, and pay a fine of up to 300,000 Shekels. This solved the uncertainty that many grantees and potential investors faced in the past and made the grant a lot more attractive.

Final words: All things considered, the Tnufa Program is an excellent option for early stage startups looking for funding and can be a significant jumpstart for developing technology, finding additional funding, and improving the chance for the success of the venture. 

The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.

By | 2016-11-20T14:48:08+00:00 July 9th, 2016|Articles, Featured Article, Funding, Start-ups|0 Comments

About the Author:

Mali Topchiashvili
Third year Law & Government student at the IDC Herzliya. In her free time loves to practice yoga run and travel.
Accessibility