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Investing in early stage companies: the challenge and the opportunity16/11/2005. Source: Israel Venture Capital Journal. Dov Hershberg, executive director
of the BIRD Foundation
 There are many interesting opportunities among Israel's start-up companies that do not attract support from traditional venture capital sources. In this IVCJ article, Dov Hershberg, executive director of the BIRD Foundation, urges that these firms not be overlooked.
There are many early stage technology companies in Israel. The Israeli environment and entrepreneurial spirit "generates" an impressive number of such companies every year.
Unfortunately, most of those young companies do not get anywhere, wasting resources, human talent, time and money and misusing a potentially profitable opportunity for investors and founders. This is a national problem. Start-up companies are a national resource. We tend to consider our technology companies an unlimited resource and shrug away the emerging giants from the Far East, former Soviet Union and Europe as a source of competing technologies, although it is only a question of time before they pose serious challenges to us.
Elements of risk should be minimized, but cannot be avoided. Steering clear of very early stage companies and concentrating on more mature companies will reduce risk, but that is cutting the branch that the technology industry is built on. Supporting new companies is first and foremost a business opportunity that should be conducted in the most efficient manner possible. Access to emerging companies should be made easy, assistance - not just financial - should be provided as needed, and an exit strategy should be planned from the beginning.
Risk sharing with other investors, by itself, is not enough and is not a replacement for knowledge and market understanding. Tapping into knowledge banks of organizations such as the BIRD Foundation that continuously work with foreign companies and have access to their needs and demands could definitely lower investment risk for all parties in a beneficial way.
There is no magical solution and, like many other opportunities, there is a need for entrepreneurship, daring, lots of common sense and hard work. There aren't that many shining opportunities, and identifying them is difficult. One very promising way to look for attractive deal flow is via the BIRD Foundation. The BIRD Foundation is trying to actively encourage global companies to increase their presence in Israel. Israeli technology is an accepted icon, and global companies are interested in becoming part of the Israeli game, or to put it in even stronger terms, do not want to be excluded from knowing what is going on in Israel. Therefore, they will agree to disclose their technology wish list, review Israeli companies and in many cases apply for a joint development project for a strategic product with an Israeli company. A joint project can lead to investment, acquisition, and additional projects with other Israeli companies and creation of a development center in Israel.
There are guidelines adopted by BIRD that lead to more efficiency in company selection, a better understanding of company needs and an optimal assessment of a product's commercial potential.
A. Basic rules and guidelines
1. Two companies - one American and one Israeli - should intend to develop a joint product in a realistic period of time (usually one to three years).
2. At least one of the companies needs to be sufficiently large, that is, with tens of millions of dollars in annual sales.
3. There should be a defined product, ready for commercialization at the end of the project.
4. The planned product should contain innovation.
5. Forecasted sales of the planned product should be at least $20 million to $30 million three years after project completion.
6. There should be sufficient financial means to sustain the smaller company throughout the project and immediately afterwards.
B. Major areas of interest
BIRD is paying special attention to several specific technology areas -
- communications
- medical devices
- biotechnology and pharmaceutical research
- semiconductors
- enterprise software
- nanotechnology
- homeland security
- in which it is:
- gaining experience and knowledge
- organizing teleconferences and seminars
- matching US and Israeli companies in joint projects
- focusing on a few larger companies and treating them as preferred accounts
Each area was selected because of significant commercial activity in Israel or the potential for substantial future involvement. The selected areas have few similarities. Life sciences is an established market domain in Israel. Communications is recovering in Israel and worldwide from the global industry-wide slowdown. Nanotechnology is extremely challenging and holds great promise. However, there is no significant nanotechnology industry, yet. Homeland security is still being defined and business models, customers, products and even technology are beginning to emerge. There is a relatively long history of implementing security systems in Israel, but not a significant number of companies with specific homeland security products or applications. There are, however, companies with related technologies that can be applied to homeland security, especially in view of the need and the financial resources expected to be available worldwide.
C. Major accounts focused on by BIRD:
Kodak Stryker
Agilent
C.R. Bard
Molex
St. Jude Medical
Scientific Atlanta
J&J
TI
SAP
GE Medical
Oracle
GE
Amgen
Guidant (J&J)
Pfizer
Medtronic
D. Selected Israeli technologies seeking support
BIRD is working with several high potential companies at various stages of their product development. The companies are small, the founders are doing it for the first time, and the market may be large, but not huge. For any or all of those reasons, the companies are still looking for needed financial support.
A few examples of such projects:
- Efficient means for collecting and analyzing video surveillance data from a large number of video cameras
- Friendly and efficient system to check baggage (homeland security)
- Large, out of screen, display methods for cellular phones and other handheld devices
- Support procedure for collapsed vertebrae (orthopedic application)
- Video conferencing over wideband to the home
Conclusion
There are attractive technologies supported by companies that find it difficult to market their abilities and obtain financing. The run-of-the-mill VC funds are not able, or are not willing, to support such companies, for a variety of either structural or ideological reasons. It is obvious that a several hundred million dollar VC fund will find it difficult to invest smaller amounts or be involved with companies of still lower value. Therefore, without an investment, a business opportunity and sometimes even the valuable technology itself can be lost, as well as the energy, effort and goodwill that was expended along the way.
I am pointing to the problem and also to a possible solution. Small investments can be provided by funds able to benefit from such investments. It takes hard work and a high degree of involvement and expertise. The funds should focus on identifying potential investments by utilizing information, screening and reviewing resources of such organizations as BIRD. The BIRD Foundation approval process resulted in the generation of more than $7 billion in sales from BIRD-supported projects, and many of those projects were with very small Israeli technology companies.
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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