Globes, January 6, 2004
A modest year gives hope to venture capitalists

The deal for the sale of Business Layers to Netegrity, finalized on the last day of 2003, wound up the venture capital industry's most productive quarter in 2003, during which four Israeli startups were sold for a total of some $330 million. This past quarter brightened the outlook for Israeli VC fund managers.

A check by Haaretz found that even though 2003 is still considered a crisis year for the VC industry, fund managers managed to return some $170 million to investors - $52 million from the sale of shares in companies that had gone public or had been sold previously, or from mergers and acquisitions.

Although this is small change compared to the total capital to be returned to investors - close to $4 billion - most funds still have unrealized holdings in startups that are expected to succeed in the next few years. Even though some of the profit-taking this year was done by veteran funds, 2003 proved that even the group of funds that was established in the bubble years (1999-2001) most of which was thought lost, will be able to return at least some of the capital to investors, and perhaps even achieve a measure of profit.

Help from Nasdaq

The rise in share prices on the Nasdaq exchange also enabled the funds to unload some of the shares they had been holding onto over the past few years and to record handsome profits in transactions that totaled some $50 million.

The most prominent funds that sold stock in 2003 were Giza and Pitango. Giza's second fund sold about $20 million of stock in M-Systems and quadrupled its investment in X Technologies. Pitango, which still has to return some $400 million from its Otzma fund, made an impressive $15 million profit on the sale of RADLAN, in which it had invested $10 million.

Other prominent funds were Formula Ventures, which sold stock in both RADLAN and Business Layers. The shares Formula held were worth about $19 million and the profit from their sale is expected to be close to $9 million.

Formula and Vertex both benefited from the portfolios they are managing for the UBS bank. The bank, which until the two Israeli funds began managing its portfolio had not seen any profits, recorded two big successes in 2003: the initial public offering of Wolfson Microelectronics at a value of $500 million, and the sale of RADLAN to Marvell. Analysts estimate the bank sold $60 million of its holdings in the two companies, of which Ventures and Vertex received over $6 million.

Another active fund this year was Genesis, whose first fund, considered the most successful in Israel, continued to enjoy profits from the sale of $13 million worth of holdings in Click Software and AudioCodes. Apax Partners also recouped some of its investors' money when it sold shares in companies such as Ceragon Networks, LanOptics and Compugen, for a total of $11 million.

The Israel Seed Fund also cashed in last year, and it already looks as if 2004 will be a good year for it too, especially if the upcoming stock issue by Shopping.com, in which the fund has invested, succeeds. Israel Seed reaped profits from two deals in 2003: the sale of Business Layers to Netegrity and the sale of Exact Software to Amdocs. Analysts say, however, that the fund suffered net losses as a result of both deals, which were transacted at values lower than the sums invested in the companies.

Yozma also joined the list of profit-takers in 2003, collecting $12 million from its share in the sales of X-Technologies, and another winner was Etgar (the Challenge Fund), which returned $9 million to investors.

Undoubtedly the most successful fund in 2003, however, was Medica Venture Partners, which in one deal reminiscent of 2000 managed to recoup one third of the $65 million it had raised in 2001.

Medica invested just $3 million in the PVT medical equipment company, which was sold to Edwards Life Science last December for $155 million. Medica's profit amounted to some $21 million, the highest profit ever obtained by the fund, which was established by Dr. Yuval Binur and Dr. Ehud Geller.

The relative successes of the past year have sparked optimism in the venture capital industry, and hopes that it will be possible to recoup part of the capital that was invested. These funds, however, still have a long way to go and will get to the end of the road only in 2007-2010, although some of their portfolio companies are waiting for their big opportunity in 2004-2005. A tally done by Haaretz found that the sales of startups during 2003 totaled $700 million - although most of this sum was returned to Israeli and foreign investors, startup founders and workers, such that only about one fifth of all the deals actually netted profits for the Israeli VC funds that had invested in them. In most cases the investors saw practically no profits at all, but did manage to recoup part or all of their investment.

Slim profits indeed

Two deals that exemplify this phenomenon were those made by Exact and Business Layers. Exact, which in the past tempted the funds into investing some $87 million, based on forecast sales or issuing value of $400 million, was ultimately sold for just $29 million to Amdocs. Similarly, Business Layers, one of the outstanding startups that had generated hope of a price tag in the hundreds of millions of dollars, was sold to Netegrity for $44 million - $6 million less than the capital invested in it.

These two sales were accompanied by two deals of a different sort, reminiscent of the profits earned during the bubble years. One was the sale of PVT, and the other, the sale of Algotec Systems to Kodak, for $42.5 million in cash. Star Ventures and JAFCO had invested just $6 million in the company, and together received about $11 million from the sales deal.

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