The Chief Scientist – To Raise Money or Not? (Innovation Authority)

Raising money from the chief scientist – how bad could it be? After all, you get the money and you do not give any equity in return. It’s a grant! You even keep control of the board to yourself!

Doesn’t it sound kind of perfect!?

But the truth can’t be further away from that! The Chief Scientist has destroyed excellent startups in the past, and made many entrepreneurs measurable. That’s why market leaders such as Check Point, as well as many small startups, will never raise money (again) from the innovation authority. They tried it, they got burnt and learned their lessons.

How about raising money from the chief scientist indirectly? E.g. through its technological incubators program or Tnufa, for example? Incubators could be better or worse. We further discuss it in our blog Shall I Raise Funding from an Incubator? Regarding Tnufa, the simple is answer is No.

So what is so bad about the chief scientist? And perhaps your startup’s circumstances are different? Maybe the innovation authority is right for you? Read this to find some answers…

The Startups Unfair Advantage

First, let’s understand who are we, startups. What’s our ballgame? What’s our unfair advantage? Which are our strengths? Then we can look at the innovation authority, and asses: to what degree are the two of us compatible…?

Most likely as an entrepreneur, you have loads of passion by your side. You are likely to be the expert of your niche. You are sharp, you understand your market, you have a clear vision of your product, and you perfectly understand the market need and product fit. You are quick to notice trends and opportunities and even quicker to act and react.

Additionally, you can put together a team which would absorb your startup DNA. A team which would solely focus on results: getting the product developed, implementing new features, etc. For as long as you give your team the right tools and platform to stay focused and deliver, they will!

Weaknesses of Startups

For sure, the startup advantage is not in having great procedures, protocols and processes in place. Startups are not masters of administration. The opposite is true: we set goals, e.g. a minimal viable product, a beta, GA, etc.. And then we effectively achieve them. Anything else, is a destruction!

The Chief Scientist Destruction

If there is one thing which can consistently destruct you from achieving your goals, then the innovation authority it is. Rather than focusing on R&D, strategy or sales, your focus would shift to… Writing and long applications. You’d then fill additional forms, fix clauses, prepare to meetings with financial examiner, technological examiner, head of field, and… OMG!!!

Before you know it, you’d spend hundreds of hours on administration and bureaucracy!

Raising Money – The Grant Application

Understanding and filling the chief scientist application will probably consume more than you can imagine. And that’s just the beginning. Forms and administration would consume a growing portion of your labor thereafter. But you could quit if you wanted to, right? Not exactly. Working with the innovation authority is more like marriage than a quicky…

You’d find it very difficult to delegate tasks relating the chief scientist grant application. Instead of doing what you got used to do: defining strategy and executing on it, you’d find yourself filling in the blanks…

Then after perhaps 1/2 a year, if you’re lucky, your application may be approved. By then, the market may shift a bit, and you will respond with adapting your R&D accordingly. Unfortunately, that may not comply with your grant application. The innovation authority regulations require that you stick to that original R&D plan you submitted!?

Now you’d have a dilemma…

Honesty or Practicality?

Shall I waste additional time on modifying the application and applying for re-approval (which also embeds the risk of not receiving the funds retroactively)? Or shall I stick with my obsolete R&D plan? Actually, that would be too stupid, wouldn’t it?

Probably you’d end up acting dishonestly, unlawfully. You’d develop the up-to-date R&D content. But! you would not spend the resources to update the chief scientist application for change (thus risk loosing the entire grant).

Now where does this put you? What kind of cultural DNA seed you’d be planting? Whatever happens from here, you already lost. Lost your way, your focus, whatever… 🙁

A True Story – Innovation Authority

A colleague of mine worked in the position of VP R&D, in a startup company which raised about $50M. He quite much hated it, but he had to waste his own personal time (again, it’s a VP R&D), on filling the technological portions of the chief scientist application. Unfortunately, he could not delegate it. As in many cases, nobody in the organization could do this but the CTO/VP R&D.

Then when the examiner audited the company, he asked to meet with the company CEO, whom was an American living in the US. The examiner could not care less. The company CEO, VP R&D and other senior executives spent precious resources on this nonsense.

The Checkpoint Experience

A senior VP in Checkpoint once told me: “for only one year we worked with the Chief Scientist. It was a nightmare. It wounded our organizational culture badly. We would never repeat this mistake again.”

Why Not to Work with the Chief Scientist

1. It can destroy your organizational culture. From lean and mean you’d become administrative-bureaucratic oriented, and slow to respond to a change.
2. Instead of spending your time on strategy and execution, you’d spend your time on submitting annual applications, filling quarterly reports, bi-annual reports, pre and post grant reports, and more…
3. The R&D vibe will shift from fun, to process and procedure oriented. The attendance clock as well as plenty of must-follow protocols will become god. In several companies we know of, following the chief scientist auditing, R&D employees burst into tears from humiliation. They were treated and felt like the last of criminals.
4. It’s not really a grant. There is a price to pay and not all investors accept the price. Some VCs won’t invest in your company, as they just don’t accept the chief scientist nonsense.
5. If the innovation authority does like your potential investor, they may threaten to revoke the entire funding, retroactively! They’d claim that it could be against חוק המו”פ, though they will not let you know the specifics, so you won’t be able to argue with that.
6. Many of the examiners are ruthless, and will treat you in a disrespectful and abusive manner. Just because they can.
7. If someone in the system decides to, they can make your life a nightmare, and there’s very little you could do about that.
8. The innovation authority does not really care about administrative transparency, or the freedom of information law (חוק חופש המידע). Would you take them to court when they operate in bad faith, and against good governance?
9. If the Innovation Authority believes the taxes your startup pays are too low (???), they could penalize your for that! E.g. by deducting funds! Though it’s not written in their formal protocols, this is an internal practice!

It’s not All That Bad

It is quite interesting, but just as we witnessed horror stories from companies which worked with the chief scientist, we also heard many good stories as well. How can we explain this inconsistency?

First, we learned that some investors (e.g. super angels, VCs) are in good relationship with the innovation authority. It seems as if all startups they are involved with, consistently receive preferential treatment.

Innovation Authority – Preferential Treatment, True Story

A company submitted a grant application to the chief scientist. The application was approved and all agreements were signed by both the company and the chief scientist (Mr. Avi Hasson personally signed the כתב אישור).

Despite the company’s eligibility for funding, the innovation authority did not transfer corresponding funding for a very long period of time. This applies to both the advance payment and the quarterly payments. The reasons for delaying or reduced payments were unclear.

So I went ahead and asked couple of colleagues of mine, both of which were granted funding from the chief scientist. I asked them: “How do you comprehend with the problem of delayed or reduced payments? Doesn’t it create a problem with your cash flow or ability to commit?”

I was surprised to hear their answer: “We get the payments even before we spend the money. We do not have any such problems!”. It is important to mention that both companies were backed by high-profile investors (e.g. super-angels) which are involved with people in the chief scientist.

It was clear that a company which is backed by investors whom are connected with the chief scientist, receives good service. This in contrast with “not important” startups, whom may be harassed, and eventually may not even receive their entire funding (or even nothing at all!).

Doomed to Fail

Interestingly enough, we learned that startups are treated much better throughout the 1st 1-2 years, compared with the 3rd year.

We’ve learned that if the innovation authority thinks that a startup is about to fail. they may actively reduce risk, by either refusing to pay funds they committed to; Or they may even revoke an active program and request that payments would be returned to them!

Of course officially they would not tell you what the true reason is. But then again, administrative transparency is not their strongest part.

When Should You Work With the Chief Scientist

1. When this is your only funding option and there is no alternative
2. When you are backed by low profile angel investors, where money is more expensive (compared with a VC funding). In such a case the chief scientist addition may be of significant value to the company.
3. When either one of the investors or directors in your company is well connected with the chief scientist system.
4. When it’s your 1st application (rather than 3rd year).
5. If you are generally speaking lucky 🙂

Do Not Risk Your Own Money!

Our best advise with regard to the innovation authority, is that you never put your own money in the company (e.g. investor’s loan). Do not expect that the company will repay the loan to you, once the chief scientist grant comes in.

How to Better Protect Yourself

In case you have decided to work with the innovation authority, our recommendation is to partner with a CPA whom specializes in working with the chief scientist. We can recommend such an office if you wish.

We also recommend that you work with a specializing firm (such as who we are), to walk you through the process, end to end. That includes writing and submitting the grant application; preparing you for meetings with the examiners; submitting supplementary content; submitting requests for changes during the R&D period; Writing the final technical report; and so on.

In conclusion

We believe that you shall do anything possible to avoid working with the innovation authority, unless your company is well connected.

However, if you have no connections nor alternatives beware of the risks, and equip yourself with specialists (CPA / accompanying counselor) throughout the entire way.