If one looks at the Israeli companies that have floated on Nasdaq in recent years, it becomes apparent that they have not seen much in the way of success, and not just because of the instability on Wall Street. In 2006-2007, a number of Israeli start-ups went through the classic process of becoming a public company, but the only one that has really managed to stand on its own two feet and deliver some value for investors is Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX), which currently has a market cap of $400 million.
Mellanox, which develops interconnect chips and cards for high speed communications between enterprise IT resources, did not have an easy time. Between 2001 and 2003, the companies that specialized in InfiniBand - the communications standard for operating system-free high speed point-to-point connections between computers - collapsed one after the other, but Mellanox believed in the vision and eventually succeeded. The company came first in the "Globes" most promising start-up ranking for 2006-2007.
"There isn't a single thing in Mellanox that isn't by the book," said company founder and CEO Eyal Waldman last Thursday in a speech to the high tech forum organized by the Israel Center for Management. "From day one, the company put out financial reports and there was a proper distribution of shares and roles. Nothing was left to the day we went public." If nothing else, Waldman can give everyone a lesson on how to turn a company into success, because Mellanox has been a success in every category that exists for start-ups. In addition, he also brings the experience he gained as VP engineering at Galileo Technologies, a post he held until 1999.
Waldman talked at length about financial matters and the distribution of management roles in young companies in this field. "Sometimes I see a company with 15 employees that has a CFO. That is not right, and it is totally unnecessary," he insisted.
Mellanox itself raised $90 million while it was still privately owned, (from 1999 to its IPO in 2007), most of it from US funds (Sequoia Capital, US Venture Partners, Bessemer Venture Partners, and Raza Ventures, and from strategic investors and Israeli funds (Gemini Israel Funds, Walden Israel, and Jerusalem Global Ventures (JGV).
The raising of money from the funds left a positive impression on Waldman. "I believe in going straight to the funds, it's their profession, and they know what they're doing. That way, you also add experienced people to your company board, people who have been involved in many companies. The alternative, going to the angels, is far more difficult since it's not their profession."
On the choice between US and Israeli funds, Waldman said, "US funds have a lot more experience, even though the Israeli funds have improved greatly in recent years."
Returning to the subject of company boards, Waldman said, "If you come out of a board meeting and you feel good, then your board is no good. Don't build a board that is a rubber stamp. I had a lot of problems with my board."
As to the right time to make an exit, Waldman believes in building companies, not "making money." "How do you know when to make an offering? Being able to see ahead is just about the only factor there is. There are a good many companies that may have met their guidance for the first quarter, but didn't for the second, and then the share got cut, and the investors didn't forget. At Mellanox, we stand by our numbers. You have to treat investors just like you treat employees and be able to look them in the eye."
Waldman noted that occasionally, opting for an IPO will not land a company in Wall Street, but in the arms of another technology giant. "Deciding to hold an IPO brings a lot of sale offers because the company has suddenly become attractive," he added. "Mellanox also had offers just before the IPO, which were turned down."
What things are important when preparing for an IPO? Waldman singles out the CFO and supporting team. "When getting ready for an offering, you must have a highly experienced CFO. You have to build a forecast and learn how this is done. Being able to trust your team is vital - if you don't believe your lawyer, it can cause tremendous problems." Waldman also views the choice of founding team as a crucial decision. "Nothing can be more damaging that picking the wrong team or the wrong investors," he says.
In Mellanox's case, it floated at a value higher than the price range it was aiming for. Waldman said in the past that this was done against the advice of some of those involved in the offering - apparently the underwriters and, possibly, also several board members. "You also have to know how to sell the company to the underwriters," he said, and mentioned one area in which Israeli managers undoubtedly have a lot to learn. "Underwriters I met told me that they often had to take Israeli managers out to buy suitable shoes, and tell them how to match a shirt with a suit."
Published by Globes [online], Israel business news - www.globes-online.com - on August 7, 2008
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