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Big Deal Time
Make note of last week. It was the week in which the Israelis planted their
flags on the map of Silicon Valley's largest capital raising exercises.
Previously, we raised an eyebrow at the $23 million raised by Xaact, but now
Israeli companies DealTime and Chromatis are glorying in financing rounds of
$50 million (in the process of being raised) and $38 million (signed and
sealed) at company values of $250 million (Dealtime) and $140 million
(Chromatis).
For several months, venture capital funds have explained their enormous
capital raising efforts by the ever increasing volume of the start-up
rounds. Just like any other trend, it took some time for milestones to be
plainly visible. "The effects of both these quite different trends are
reaching Israel, each in its own area," says Yossi Vardi, who is invested in
DealTime's competitor RUSure. "Everything is stepping up a rung, both
company valuations and the amounts raised, though all this is subject to the
market continuing to be enthusiastic."
We are still a long way off from the US, and it is reasonable to assume that
it will always be this way. Like Hanukka candles, company valuations and
financing rounds in the US will always be a matter of look but don't touch.
However, that does not mean we should belittle our own dramatic developments
generated by, of course, the Internet.
Both DealTime and Chromatis deal with the information technology market's
hottest sphere - the Internet. While DealTime deals with "destination"
applications, Chromatis belongs to the Internet infrastructure sphere. While
DealTime addresses the general public, the end user, Chromatis's customers
are the large telephony companies. DealTime has to spend tens of millions on
marketing and advertising, but the financial yoke on Chromatis's shoulders
consists mainly of the high cost of technology professionals and testing by
telephony companies.
Moreover, while companies like DealTime must show a broad marketing base and
invest in a major financing to penetrate the market with their brands,
Chromatis needs to stay afloat in the unexpected storms likely to hit the
communications market regulation and standardization ship. Until it safely
reaches shore, a company like Chromatis must display staying power and
financial and image soundness that will keep it in the telecom fleet, and
attract to it leading industry names to help it navigate (Chromatis recently
recruited a Nokia executive).
All this positioning is important not only for raising a great deal of
financing, but in order to build up company value towards an IPO. It is all
very nice that DealTime needs $50 million up to the IPO, but it also needs
someone who believes it is worth it, in exchange for the seemingly slight
dilution of 20%. US-international positioning assists these companies to
place themselves in league with market giants, mostly US public companies,
or companies acquired by industry giants.
In Chromatis's case, for example, Cerent was acquired by Cisco in a huge $7
billion deal. According to Chromatis, which claims its solution is much more
complex, this enables it to derive a company value based on proven success.
"This is a milestone in the industry's development," says Arel Margalit,
co-manager of Jerusalem Venture Partners, the venture capital fund that is
the major shareholder in Chromatis. "To date, many Israeli entrepreneurs
would calculate the dilution they needed until the IPO stage, and would then
reach either a small or a medium-size IPO, of which they retain a sizable
stake. The latest financing rounds express a new way of thinking: if you
wish to be a market leader, it is not enough to barge ahead technology wise,
you also have to build the business infrastructure in a calculated and
professional manner."
Margalit says that if you wish to genuinely become a business center , not
merely a development center, the entire Israel market should be directed
towards this, including income tax authorities and all the factors involved.
"They have to decide whether they want Israel to become a business center,
engendering market leaders, or remain a development center. If they decide
on the market leader path, this will be a much greater revolution than the
start-up revolution. It will be more than a ship riding a wave, it will be
the wave itself."
Published by Israel's Business Arena on November 22, 1999
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