Tornado Insider, May 28, 2002
VC of the Week

Jonathan Medved, General Partner, Israel Seed Partners Israel Seed Partners is a seed venture capital fund in Israel, with $262 million under management.

How is the Israeli VC market affected by its political and economic conditions?
"In Israel, despite the fact that we have to deal with our local political quandry as well the nightmarish world market conditions, our entrepreneurs have not stopped creating new technologies and companies. They even continue to find funding in good numbers despite politics and the condition of the financial markets.

"Surprisingly, we have statistically not been hit as badly by these conditions as one might expect. Israel has actually improved its overall relative position in the world tech scene over the past year. From 2000 to 2001, there was a 36% drop in Israeli VC investments, compared to a 64% decrease seen in the US. This trend of Israel "outperforming" the US continued into Q1, where Israel saw a 19% drop, while the US experienced a 25% decrease in private investments. (source: IVA)

"Israel is actually more influenced by the technology and venture trends occurring on a worldwide scale, than by our own political issues. We are more in sync with the US VC market than any other. Because we have no domestic market to speak of, in order to grow our companies we have to transcend Israel. For many of our companies, we hire US management and move headquarters there. The most successful Israeli companies go global from day one.

"One classic Israeli company is Chiaro, a company that has raised over $210 million in private funding. In order to build its optical packet node router - which is the biggest of its kind for core networks - the company opened its system level production facilities in the US and hired US management. However, the fact that the company's HQ is in the US doesn't make it less of an Israeli company, because it was founded in Israel, retains significant activity here, and has retained its Israeli identity."

How would you characterize the current VC market?
"Today's market is not simple, but has lots of opportunity. Competition for deals has waned, but smart investors are now going back into the market to look for high quality new deals. For example, we have portfolio companies with relatively low burn rates of $300,000 - $400,000 per month (which was unheard of in the previous era of big spending), who will achieve millions of dollars of customer revenue this year. They are achieving good degrees of capital efficiency. Many VCs used to believe that companies would to have to spend at least $1 million per month in order to close their first paying customers. Today's companies with burn rates under $500,000 a month, and generating millions of dollars a year in sales, are close to breaking even, and this makes for attractive investment opportunities."

What do you look for in venture capital opportunities?
"We are currently looking at two kinds of investment opportunities - very early stage, where we have the opportunity to incubate the company ourselves in-house - and later stage companies that are having trouble raising money after a third or fourth round, and are pricing their rounds more like Series A.

Qlusters, which developed a Linux-based clustering system for high performance computing, is a good example of one of our early stage, incubated companies. We have funded Qlusters with $800,000 worth of seed funding since May last year, and it has already closed its first group of paying customers. In the past, companies like this were expected to spend many millions before gaining their first paying customer.

"In the later stage scenario, we invested $2 million in Finjan, a security company that provides 'first strike' protection for computer networks from malicious code-like viruses. Founded in 1996, Finjan has raised tens of millions of dollars, and is already making sales progress with dozens of good customers. We were very fortunate that we were able to make an investment into such an exciting, well-developed company at an attractive valuation. As the new investor, we got the benefit of the prior investment at the right price. The benefit of investing in later-stage companies is that when the market turns around, these companies will be the first to exit."

Where is Israeli venture capital headed?
"Because Israeli technology companies tend to go global, VC activity is very active in Israel, with foreign investors leading the way. Deals are being made in Israel almost every week, including those major deals recently closed by Lycium Networks and P-cube. In addition to the active US funds like Benchmark, Sequoia, and Accel, several Italian, German, and French funds have recently been searching for good deals in Israel. Nowadays, people are not jumping on airplanes to come here as often as they used to - which is somewhat of an obstacle to funding - but, on the other hand, deals are still getting done, which is a testament to Israel's strong position in building technology companies."

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