Just before New Year's 2004, "Globes" asked 30 venture capital partners and investment managers to pick the Israeli start-ups they thought would achieve a break-through in performance and reach an exit this year.
The weighted responses resulted in a list of seven companies that won the majority of the respondents' votes. The list represents the venture capital industry's "talk of the town". These are the companies that the majority of venture capitalists believe will achieve prominent exits during 2004.
Each venture capital partner or investment manager was asked to prepare a list of ten start-ups (which "Globes" is keeping confidential, for obvious reasons), not necessarily from the firm's portfolio. The questionnaire stipulated that no more than two start-ups could come from the firm's own portfolio. The following venture capital companies participated in the survey: Carmel Ventures, Challenge Fund - Etgar, Concord Ventures, Evergreen Partners, Formula Ventures, Israel Infinity Venture Capital, Israel Seed Partners, Jerusalem Global Ventures (JGV), Jerusalem Venture Partners, Shrem Fudim Kelner Technologies (TASE:SFKT) Vertex Israel Management, Vitalife Life Sciences Venture Capital, and Walden Israel.
Following is the list of start-ups the venture capitalists believe will be the hits of 2004. Please cut out, keep safe, and reread at the end of the year.
Product: Power over Ethernet (PoE) technology that allows power to be transmitted over the same network cable as data.
Shareholders: Ampal - American Israel Corporation (Nasdaq: AMPL), Argoquest Holdings, ASB Ventures, Clal Industries and Investments (TASE:CII), Challenge Fund, JVP, Vertex, Plenus Venture Lending Fund, Poalim Capital Markets RBC Capital Markets (formerly Dain Rauscher Wessels), and Yozma.
Reasons:PowerDsine is profitable, has tens of millions of dollars in annual sales, defined the industry standard, has substantial growth, has sufficient cash, and can approach the capital market.
PowerDsine CEO Yigal Rotem says, "We're profitable. Our main objective this year is to increase profitability and further consolidate PowerDsine's control of its market. We control 70% of the market, and that's a challenge, because we face major competitors, including Texas Instruments (NYSE:TXN), Linear Technology (Nasdaq:LLTC), and Maxim Integrated Products (Nasdaq:MXIM). We're about to reveal next generation products. Our cash situation is good and we plan to increase our staff by 10%."
"Globes": What about Nasdaq?
Rotem: "We're constantly talking about an IPO, but it's still a long way off. I think that the market must go through another wave of IPOs by medium-sized technology companies to create a good opportunity."
Product: Network planning and optimization solutions for wireless operators.
Shareholders: BRM Capital, Docor International B.V (a subsidiary of the Van Leer Foundation), Challenge Fund, EnerTech Capital Partners, Gemini Israel Funds, TL Ventures, Walden Israel, and Yozma.
Reasons:Schema is profitable, has a large amount of cash, a good penetration of the US market, good and attractive technology, and fast growing sales.
Schema CEO Yosi Ben-Dov says, "Ratings are really very nice, but I say we should look ahead at the challenges we face and strive to meet them. Our main challenge is to break into 3G. After years of just talk, major operators in Europe are now publishing tenders. This is precisely our area, and this should be the year in which we prove our ability to win contracts. If we succeed, we'll keep our promise."
Product: Non volatile memory (NVM) technology for flash memory processors for mobile devices
Shareholders: Concord, Gemini, Israel Infinity, STI Ventures, Infineon Technologies (NYSE; XETRA:IFX), Morgan Stanley, Bank of America Equity Partners, and Advanced Micro Devices, Inc. (NYSE: AMD)
Reasons: Leading technology, initial sales, active in a growing market, strategic partnerships, well-connected and well-known among all investment banks.
Saifun Semiconductors president and CEO Boaz Eitan says, "In 2004, we plan to continue expanding and increasing sales of Saifun and our partners' technology to between $500 million and $1 billion, devote efforts to our joint subsidiary with Germany's Infineon for flash memory (Infineon Technologies Flash GmbH & Co.), and meet our aggressive growth plan, especially in hiring, in order to increase our staff by 20%."
What about an IPO, maybe on Nasdaq?
Eitan: "There's no point in discussing that now. I haven’t met with investment banks, and I promise that when it becomes relevant, everyone will know."
Product: Single chip solutions enabling communications infrastructure equipment providers to migrate their product lines to the next generation of access networks.
Shareholders: Concord, Genesis, Magnum Communications Fund, Taiwan's China Development Industrial Bank (CDIB), Texas Instruments, and Marvell Technology Group (Nasdaq: MRVL).
Reasons: Proprietary technology, the right target market (access networks), growing sales, and exceptional entrepreneurs and managers.
Wintegra president chairman and CEO Kobi Ben-Zvi says, "We predict that we'll become profitable in the second half of next year, and reach sales of $15 million. We'll begin working seriously on an IPO in the second half of 2004, with the aim of holding an issue in 2005."
Product: Formerly DealTime. Price comparison technology for e-commerce.
Shareholders: America Online (AOL), Israel Infinty, Israel Seed Partners, Odeon Capital Partners, Nomura Holdings (TSE:8604; NYSE:NMR), Bank of America, Singapore Telecom, and others.
Reasons: $75 million has been invested in the company. It is profitable, expects to post $70 million in sales in 2003, active in the hot market of online price comparison, and able to approach the capital market.
Shopping.com chairman and CEO Daniel Ciporin says, "Shopping.com made significant achievements during the current holiday season. We doubled the number of online shoppers whom we helped. In the coming year, we'll concentrate on increasing traffic on the site and improving our services."
No word was said about an IPO.
Shareholders: Benchmark Capital, Star Ventures, Israel Seed Partners, and CSK Venture Capital.
Reasons:The company switched its technology direction to security.
Finjan Software chairman, and CEO Shlomo Touboul says, "We doubled our sales last year, and reached top-tier global customers that employ over 100,000 users. Finjan has doubled, and we predict we'll grow at the same rate in 2004."
What about your hoped-for exit?
Touboul: "Finjan is a dominant and independent company, making good progress, and without an exit. A successful company has no problem exiting."
Product:Data protection applications.
Shareholders:Battery Ventures and Jerusalem Global Ventures.
Reasons: Kashya has launched a product and has sales, reaching top-tier customers. Its sector, remote replication of storage, is very hot. The survey respondents say it has a superb management team.
Kashya CEO Michael Lewin says, "Kashya has adopted an innovative approach to solving problems in its field at low cost. For the first time, enterprises are energetically seeking solutions of the kind we offer. In the coming year, Kashya plans to contact these large enterprises and increase its market share."
Eyal Kaplan is cautious and realistic
To conclude, following is a sample of venture capitalists' predictions for the record.
Walden Israel general partner Eyal Kaplan is cautious about predictions. "Many award-winning companies I've known have disappeared. I still define a promising company as one that can show growth and profits, be a leader in its field, rather than one with a fantastic IPO."
But you work in a venture capital company and you need exits.
Kaplan: "True, but I still think that 2004 will not be a year for exits. I think there'll be a turnaround this year. I don’t call the sale of a company for less than the amount invested in it an 'exit'. While it's very nice to send a check to investors, I don’t think that 80 cents on the dollar is a great success. The challenge is to build Israeli companies oriented toward international markets that can make sales and profits. These are the elements that build a good exit."
Kaplan thinks that 2004 will be a year in which companies will still have to struggle to produce strong growth, in view of the recovery. "I don’t believe we should count a possible exit as the essential criteria for a company's success in 2004. The markets are only just recovering, and I think a promising company is one that recovers, grows rapidly, and knows how to convert growth into revenue and profits. Financial matters at this stage are secondary."
Kaplan thinks there are some promising companies that didn’t make it into the "Globes" list. "These are companies with over $20 million in sales, which have consolidated their position in significant markets - companies like Mellanox Technologies and SintecMedia - profitable companies positioned to exploit momentum to increase revenue without increasing costs.
Gemini's Pundak-Mintz is cautiously optimistic
Gemini Israel Funds general partner Adi Pundak-Mintz takes care to warn that fortune-telling is for fools, saying, "This is going to be a wonderful year for venture capital funds and companies. The companies that survive the harsh winter will be able to show some muscle come summer."
Pundak-Mintz thinks the "Globes" list failed to include some promising companies. " E4X will go far. It's a company with an unusual business model that has proven itself. I think it has huge potential. It's an Internet company in the best meaning of the word. Actimize has good technology with an application packaged in a high-demand product in the very trendy field of compliance. There is also Scopus Network Technologies. Zend Technologies is a leader in its field with a strong brand in PHP, the language for developing web pages. WebCohort has a new approach, good investors - Check Point co-founder Shlomo Kramer is active in the company - and it could become a company with a system instead of a component. I mention it even though it's not a Gemini portfolio company. Gemini portfolio companies that I think will make a mark this year are Mellanox, a provider of InfiniBand technology, which is expected to grow and become the clear leader in its field; and IXI Mobile, which develops end-to-end solutions for mobile devices and has a daring business model. 2004 will be its critical year."
How would you define a 'promising company' in 2004?
Pundak-Mintz: "A company that survived the crisis, and has achieved a business success or has hard-to-copy technology, or companies that are in a sector that the market expects will be hot in the coming year, with rapid growth. 2004 could be a year of value creation for all these companies, and there might be some exits. I bet that we'll see more exits in 2005 than in 2004."
For the sake of comparison, below is the Dolev and Abramovitch (D&A) list of promising start-ups. The control group for the "Globes" survey of venture capitalists is the D&A current list of ten most promising start-ups. The list is based on D&A's own analysis, on the basis of company performance and the condition of the company's target market. The list is updated monthly.
FIS (Formula Insurance Solutions). Slowly but surely, FIS is taking its place among the worlds leading insurance companies. An IPO is certain this year or next.
Diskotech. This company already turned down a $100 million acquisition offer, and will probably be sold for a much higher price.
Genoa Color Technologies. Royal Philips Electronics (NYSE:PHG AEX:PHI) believes this is one of the most interesting companies in Israel, and Samsung Electronics (KSE:05930) and LG Electronics (KSE:66570) are both trying to acquire it. The technology is apparently a winner.
Veraz Networks. This company beat Cisco Systems (Nasdaq:CSCO) on its home court. Do you need another reason?
Mellanox. The company's has a dizzying rate of sales.
MobilEye. If the company's product succeeds, it will unquestionably be a great success.
IXI Mobile is creating its own industry. If it succeeds, it will have a huge exit.
BigBand Networks. Another slight push and this company is on its way to an IPO.
V-Target Technologies offers a solution to a real problem. It will be no surprise if the company is sold to a major medical imaging company.
Published by Globes [online] - www.globes.co.il - on January 14, 2004