Globes (Re: Deal Time), January 27, 2003
"This Industry Likes Home-Runs"

By Gilad Nass, Globes

Israel Seed Partners general partner Michael Eisenberg was one of the most vocal participants in yesterday's Kesselman and Kesselman - PricewaterhouseCoopers Israel conference, held following the publication of PWC's MoneyTree venture capital survey. When fellow general partner Neil Cohen joined the discussion, there some present who expressed concern that a Jerusalem VC monopoly was in the works. "Very few funds currently operate in Jerusalem, so we have to make a bigger splash," Eisenberg answered.

As indicated by its name, Israel Seed Partners deals in investments in start-ups at the critical seed stage, but like many others, it too refrained from seed-stage investments in 2002. The fund was occupied with companies like Foxcom Wireless, which almost closed down, but has recently stage a surprising recovery; DealTime, which informed sources claim had sales of $ 29 million in 2002; Alchemedia, which was merged into Finjan Software; and MemLink, which closed down, although "It had a lot of money left in the bank," according to Eisenberg. Before discussing the renewal of seed investment, however, Eisenberg said he wasn't sure if things had really been so bad in recent quarters. "One of the problems with the published figures about seed investments is that there is no clear definition of a seed investment. A year ago, we invested in Finjan Software, as part of the rebuilding of the company. Was that a seed investment? Another of our portfolio companies, Aelis Photonics, has eight employees, and has already raised $ 2 million. If someone invests in that company, is it a seed investment?

"There used to angel investors, and at that time, there was another financing round before the seed stage, but the attitude towards this is different now. The Money Tree figures said there were only 20 seed investments in 2002. I say there were more, but they weren't counted as seed investments."

Counting on your fingers

Eisenberg diverts a discussion about government intervention in the venture capital industry into a discussion about government intervention in companies, not funds. "I'm from the US, so I'm a believer in capitalism. The government shouldn't directly help the funds. If the funds can't raise money, it's not because the government didn't set up funds to match investments. The taxation system is a problem, which should be addressed. The paradox by which US pension funds can invest in Israeli venture capital funds, while Israeli pension funds can't, should be solved. I don't think they should be given guarantees and security, though.

"The situation here is very interesting, and should give rise to concern. The number of start-ups being supported by the venture capital funds that have sales of over $ 20 million can be counted on the fingers of both hands: DealTime, Scopus Network Technologies, Schema, and not many more."

"Globes": Now, all of a sudden, when companies have no chance of an IPO, you're interested in how much a company sells. Two years ago, you were concerned about raising a company's value through R&D.

Eisenberg: I don't agree. Tradeum and Chromatis were acquired, but subsequently closed down, because they couldn't justify their activity. Intellectual property may be wonderful, but without sales, it's worthless. Even those who are selling their IP technology now are getting a very low price. Israeli industry can't count on developing IP technology here and selling it later.

"One of our investors conducted a study, which showed that in the past 30 years, 91% of the return came from 6% of the companies. When you take into account that the fund in question invests in other funds, and that the 6% came from the companies in which these funds invested, not directly from the funds, you realize that this is a pretty amazing figure. In this industry, you swing for the fences: Juniper Networks (Nasdaq: JNPR), (Nasdaq: AMZN), CIENA Corporation (Nasdaq: CIEN), VeriSign (Nasdaq: VRSN). These are the companies that bring in the profits the $ 100 million deals.

"Government activity shouldn't be through an initiative like a seed fund; a government seed fund won't have the know-how that the venture capital funds have. When the Investment Promotion Center of the Ministry of Industry and Trade approves an investment for ECI Telecom(Nasdaq:ECIL), which can't pay for itself, the money may very well go down the drain."

You'll agree that if ECI doesn't get the benefit, and lays offs employees, it looks much worse on TV than lay-offs at a few start-ups that might get that money.

"Let's look at the global picture. The world is divided into four economic categories: free, mostly free, not really free, and repressed. Per capita GDP in the first category is $ 25,000-26,000 a year, half that in the second category, $ 5,000-6,000 in the third, and $ 2,000 in the fourth. Israel is in the second category, and wants to achieve a free economy. But you can't achieve a free economy by trying to increase something by 1-2%. You have to think big. Giving ECI a grant that will enable to it keep another few employees is a temporary solution. An investment large enough to create a growth industry is a method of creating tens of thousands of jobs. With Yozma Venture Capital, the government created an industry employing tens of thousands of workers."

Recycling brains

Eisenberg asserts there is no lack of money, but the money isn't being distributed correctly. "I and some others are proposing that a short list of fields in which Israel should invest should be drawn up, and significant amounts allocated to those fields. Look at the National Institute of Health (NIH) in the US for healthcare, or the National Nanotechnology Initiative (NNI), or the Defense Advanced Research Projects Agency (DARPA), and all the financing for internal security. These US agencies finance research activities that can create an industry. It would be more effective to take the government seed fund money and give it to the Chief Scientist of the Ministry of Industry and Trade."

Come to think of it, weren't the venture capital funds the ones who wanted the government to establish a seed fund?

"Only some of them the same funds that have shied away from seed investments recently. Everyone knows that Israel's most important resource is its human capital not technology or money. I say this human capital has to be recycled. I'll give you an example from our portfolio. Earthnoise closed down (some of its customer list was sold to CastUP, G.N.), but I brought one of the people there, Eli Campo, to manage DealTime Israel. I recycled a brain, and he did a terrific job in streamlining DealTime's system. It's a better company, and a balanced company like DealTime is always better for employees from a company that is not balanced.

"Ofer Shoshan and Moshe Bar worked with me for seven or eight months on what became Qlusters. Today, 17 months after they were given $ 10,000, they're launching their product at LinuxWorld. I've got a new entrepreneur with me now -- what do I need an incubator for?"

Because an incubator has hundreds of ventures, and funds that work under the Entrepreneur in Residence (EIR) model produce no more than 10 companies a year.

"But the ones they produce are the best ones, and they have a better chance of turning into a good company than the ones from the incubators. Better enterprises will employ more people. The goal isn't to make more deals; it's to establish as many big companies as possible. It's true that this is an exhausting process. It took me six or seven months to recover from the process with Shoshan, before we began a new venture on the same model, but it was worth it. Getting back to the subject of DealTime -- the more money it makes, the more people it can employ."

Published by Globes online - - on January 27, 2003

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