Israel Seed Partners (ISP) general partner Jonathan Medved tells how he conducted a road show in 1987 to prepare for a share offering by his family's company, which was scheduled to take place in November of that year. When the market collapsed in August, he called his underwriter and asked how the collapse would affect the issue.
”You’ve had it,” the underwriter answered. The Medved family did not consider issuing shares in the company before 1990. I spoke with Medved at the beginning of March. He said then that the market is in the worst state he can remember, even worse than at the beginning of the 1980s. The past two weeks have made the most confirmed optimists agree with him.
ISP and Medved himself are strange birds on the local venture capital scene. “I could never be a partner there,” a senior venture capital figure recently told me. “They are simply nothing like us.” The first difference between ISP and the Israeli industry is its Jerusalem location. Although large funds like Jerusalem Venture Partners and Jerusalem Global are also based there, many people still don’t think of Jerusalem as a business town.
The second difference is the people. ISP has four partners: Medved, Michael Eisenberg, Neil Cohen, and Alan Feld, all from English-speaking countries, and most of the office personnel are religiously observant. “I know they call us the Orthodox mafia,” Medved says.
”Globes”: That’s not right. They call you the Jerusalem mafia.
Medved: ”Yes, well, it’s true we’re a little different, but it’s not by choice. Director of Recruiting Sigal Widman, for example, is a typical Tel Aviv resident, and she is one of the key people around here. In the fund’s order of priorities, everything known as ‘added value’ is of secondary importance. The main thing is recruiting senior executives.”
There is another difference between ISP and the rest of the industry – the way its people regard themselves. You won’t hear too much from Medved, for example, about "added value" and the other worn out fund cliches. He is a very informal type, in contrast to the rest of the industry. “In venture capital conversations, they're always talking about wine. That’s not really me. I like jazz. I’ll also miss these offices – we’re moving soon.” If you prod Medved, you can almost hear the word "self-important" as he describes the local VC community. “But let it go,” he says, changing the subject. “I prefer not to sound critical.”
Condemning formality
Medved was late to our meeting, after putting it off by 30 minutes two hours earlier. Being late appears to be fairly routine for him. His personality still retains the residue of the 1960s, which he spent in California. He studied history at university. Accordingly, before discussing finance, he prefers to review the points of similarity between Israel and Silicon Valley. For a moment, I felt like a potential investor, but he really does raise quite a few interesting points. I give him the floor:
”Israel and Silicon Valley are more similar than any two other places on earth,. High tech in Silicon Valley is a cultural phenomenon that also exists here, with only slight differences. You can cross Silicon Valley from north to south in two and a half hours and from east to west in one hour, which is about the same as Israel’s business zone. That creates a very close community that you don’t find in large countries. The population size and the proportion of engineers are also similar, which creates a critical mass. In the venture capital industry, both here and in Silicon Valley, you reach a deal – or an arbitrator – within two hours.”
”The culture is similar, too. There it is very flat, without a hierarchy. You remember Andy Grove’s cubicle culture? Being a boss is nice, but unimportant. Here? Every man a king. It’s part of the Socialist-Zionist ethos. This creates informality, which is fertile ground for business. I was just in both California and Boston. On Route 128 they wear ties! Here? Here they call the Prime Minister ‘Bibi’ or ‘Arik’. Where else in the world do you have that?”
”Another thing we have in common is the pioneer myth. There it is the Gold Rush and the flight from the East Coast after WWII. Here everyone is an immigrant. Immigration is an important element in entrepreneurship. An entrepreneur has to start from scratch, which is something immigrants have already experienced. Did you know that non-Americans founded over 50% of the start-ups in Silicon Valley? By the way, this culture also encourages testing the borders of authority and coming into conflict with it, like the drug culture that sprang up in San Francisco.”
”There are also important universities in both places. Both the counterculture and the great developments arose there at Stanford and Berkley. Here we have the Haifa Technion and the other universities.”
”Our special twist is the army. That is the ultimate advantage. It’s not just the technology developed in the army; the army is an entrepreneurship school, where elites learn to work in teams and get real tasks. Where else do you see 22 year-olds get budgets and manage projects costing tens of millions of dollars?”
”At ISP, we are like an odd bridge between Israel and Silicon Valley. We have an integrative outlook. We grew up there and we live here. For the Americans, we are an outpost, while here we are a bit different. The vast majority of our ventures are also like that. I don’t think we have invested in anyone that didn’t live overseas for a while. All in all, I think we accomplish this bridging at least as well as any other fund in Israel.”
Continuing seed stage investment, but not at full speed
ISP has been operating for five years and has posted four exits during that time. That is not particularly impressive, considering the great boom here, but it is not bad, either. Compugen (Nasdaq: CGEN), the only ISP company which has issued shares, has been impacted a great deal more by the Nasdaq crisis than the biotechnology boom. ISP also sold PhoNet Communications to VCON Telecommunications and NomadIQ to OmniSky at high prices.
ISP’s only impressive exit was the sale of Tradeum to VerticalNet for 400,000 shares, a deal that was worth $500 million at the time. VerticalNet has experienced many negative developments since then; its company value fell by over 99% to $218 million at the end of last week.
”We did not exit VerticalNet at the optimal time,” Medved admitted, while declining to state the value VerticalNet shares had when they were distributed to ISP’s limited partners. “In any case, that was an unbelievable return. We invested $1 million at the seed stage and sold the company within a few months.”
ISP’s portfolio of private companies looked outstanding several months ago and is now causing problems, in view of some of the companies’ latest valuations. Dealtime.com, XACCT, Mercado Software, Chiaro Networks, and Banter look like they are losing their market. Memlink, ProActivity, Business Layers, and Lynx Photonic Networks raised money at high company values. Medved says that ISP’s portfolio companies raised over $600 million last year, so they have enough money to last for a while. He is also one of the people who was close to quite a few exits, and is now waiting for the next train to pull into the station.
In his overall assessment of ISP’s performance, Medved says, “We are lucky. I won’t say we’re extremely wise, but the large financing rounds give the companies a chance. The market still doesn’t understand how bad the situation is.”
Do you have enough money? Are you still making seed investments?
”We just invested in Unicorn Solutions, founded by Zvi Schreiber, who was Tradeum’s entrepreneur. This was a purely seed investment. In general, I can say we will continue to invest in seed-stage, but the valuation will go back down to $1-3 million before money. Entrepreneurs are still coming to me with business plans, thinking it is worth $10 million. I draw their attention to Commtouch’s market value.”
It’s wonderful that your companies raised all this money. It will last exactly until the next round.
”That’s right. We gave the money under the assumption that it would last for nine months. Today things look a little different. Today you have to work much harder in order to achieve less. It’s time to start building companies in a different way. You can’t put your foot down on the accelerator.”
You have a great many portfolio companies. Will they all survive?
”We haven’t written any off recently, but that can change within one week.”
Published by Israel's Business Arena on March 29, 2001