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Corporate VCs give key boost to Israel's technology industry

Venture capital has played a major part in the growth of the Israeli high tech industry. Yet the contributions from corporate venture units are often overlooked. Joel Bailey of the Israeli Venture Capital Journal discusses the pros and cons of corporate venturing and gives an outline of the current activity in the region.

Israel's venture capital industry has drawn substantial worldwide attention for its rapid ascension and role in helping catapult many of the country's high tech firms to success. Often overlooked is the contribution from corporate venture units, which have likewise helped start-ups with funding and, perhaps more importantly, with credibility emanating from an association with a major corporate player.

Generally, corporate VCs offer several advantages to their portfolio companies. In addition to credibility and respectability, they may provide technological assistance, a clear and knowledgeable assessment of the market, established contacts to enable market penetration and widespread distribution.

While, overall, the advantages to a start-up having a major corporate investor often outweigh any downside, teaming with a corporate partner is not necessarily for everyone as corporate objectives may differ significantly from those of entrepreneurs or traditional VCs. For example, a corporate VC might discourage acquisition interest from competitors or not sufficiently staff up to work with their portfolio companies as traditional VCs can. Financial gain is an important consideration for corporate investing, but more often the underlying reason for the investment is strategic.

Corporate investment may be via a specially established venture capital entity such as Applied Materials Ventures or Koor Corporate Venture Capital, or venture investment may be conducted through a firm's business development unit as is the case with IBM and Bezeq. In either form, corporate venturing units benefit their parent companies by providing exposure to new technologies and a means to keep research and development spending under control.

In Israel, foreign corporate investors have been active for several years, while venture units of local companies are of more recent vintage. Below are descriptions of recent activity of some of Israel's principal corporate investors.

VC industry slows Intel down
Intel Capital is the world's largest corporate venture investor and a prolific investor in Israeli technology. In 2001, Intel invested over $350m in some 175 companies. The amount is down more than 70 per cent from each of the previous two years. In 2002, its investments are likely to dwindle even further to the area of $200m. Les Vadasz, Intel Capital's CEO, says, ‘Intel Capital would like to invest at the same rate as it did in 2001, however, Intel Capital always co-invests with other VCs. When they slow down, it impacts our rate of investment.' In 2002, Intel has made two new investments in Israeli companies, as well as follow-on investments. There are now 32 companies in Intel's Israeli portfolio.

Applied Materials Ventures moving into high gear
A year since opening an Israel-based office, Applied Materials Ventures is about to close on its first Israeli investment. The target company, involved in RF chips, is the first of what is expected to be a bountiful next few months when, according to AMV's Josh Siegel, ‘another two or three deals could be closed.' The venture unit got off to a slow start as it shifted its focus from optics - its original target industry - to networking software and semiconductors. Parent company Applied Materials has long been an investor in Israel, having directly invested in several companies in past years.

Applied Materials Ventures is a prime example of the benefits that a corporate partner can provide. It offers its portfolio companies access to development and production partnerships, technical know-how for components and systems, especially related to semiconductor processes; connections to potential partners and customers, including some of the biggest multinational firms in the world; operational experience; and connections with VCs for funding.

Orbotech still searching for attractive candidates
Orbotech Ltd is among the few Israeli companies to form a dedicated corporate venturing unit. Orbotech Technology Ventures seeks firms that are a good strategic fit with the parent company in terms of markets, technology or products, or that are active in semiconductors, photonics and biotechnology markets. Orbotech has made three investments to date - BioView, Sagitta Engineering, and most recently, Negevtech. The venturing unit is continuing its search for investments, although there are no candidates currently in the pipeline.

Koor concentrating on existing portfolio companies
Koor Corporate Venture Capital was a pioneer among local companies in establishing an independent venture unit. Koor currently holds 16 investments in technology and life science companies. Since March 2001, its policy has been to focus on its existing portfolio, makes only follow-on investments in its most promising companies.

Partner eyeing cellular firms
Partner Future Communication 2000 Ltd. (PFC), a wholly owned subsidiary of cellular services provider Partner Communications, seeks start-ups that are developing cellular technologies, infrastructure, applications and services for the global GSM market. PFC has taken an equity position in 16 companies. While investment activities have slowed in 2002, PFC's Sharon Hasson says PFC continues to consider investments as part of commercial transactions.

Biomed firms expected to see more activity
Boston Scientific and Millennium, two leaders in the biomedical field, have opened offices in Israel in the past year. Boston Scientific is an experienced investor in Israel with stakes in Medinol, start-up Mel Medical and bio-venture fund Vitalife. It is examining potential investments in the medical device field. ‘Millennium is focusing on advancing its clinical development pipeline of 11 drugs - particularly those in the oncology area,' says Millennium Vice President Yigal Koltin, who heads the company's local office. Thus far Millennium has not made any investments, but has developed relations with Compugen and is having discussions with others with an eye towards licensing technologies that provide a good fit with its own activities.

Infineon Ventures still seeking ‘first' investments
Infineon Ventures is the venture subsidiary of Germany's semiconductor giant, Infineon Technologies. The slowdown in the technology sector has not affected its search for firms in micro-electronics and semiconductors. ‘Infineon Ventures is still seeking excellent start-up companies for first-time investment,' says Infineon's Michael Hochholzer who is in charge of Israeli investments. The venture unit has not made new direct investments in Israeli start-ups in 2002, but has continued to support local companies through investments in funds of Benchmark Israel and Jerusalem Venture Partners.

Bezeq has made major contribution to local venturing
Israel's telecommunications giant, Bezeq, operates its venture activities through its business development division. Its activities take two forms - direct investment in Israeli start-ups, with several strategic investments under its belt, and investment in venture funds. According to Shimon Olieal, who heads Bezeq's investments in VC funds, Bezeq is Israel's biggest venture capital investor with commitments of about $30m in three funds - Stage 1, BRM and Eurofund 2000. Yael Hareven, Bezeq's direct investment chief, says, ‘Bezeq seeks start-ups where it can bring added value and where Bezeq can obtain strategic benefits for itself.'

IBM wants ‘equity for value'
IBM has made investments in both start-ups and locally based venture firms. Its last direct start-up investment was in Aduva, made at the end of 2001. But IBM is still very actively searching for new companies that can bring it strategic advantages. IBM has a broad scope of activities, but currently has particular interest in the enterprise software and storage sectors. Cash investments are possible if the investment is right, but according to Zippi Dekel, IBM's local investment chief, ‘We're looking for
equity for value.'

Agilent targets Israeli firms
Agilent Ventures is the venture capital unit of Agilent Technologies. Formed in early 2001, Agilent Ventures has targeted Israeli technology. Its investments include Lambda Crossing, Trellis Photonics and CommLaunch, a venture fund managed by Jerusalem Global Ventures, which concentrates on Internet infrastructure.

Copyright © 2002 Israeli Venture Capital Journal

Joel Bailey is the chief editor of the IVCJ.

This article first appeared in the Israel Venture Capital Journal

IVC Research Center publishes the Israel Venture Capital Journal (IVCJ), a bi-monthly 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.