“Globes” has frequently mentioned the names of US venture capital funds Benchmark Capital and Sequoia Capital in recent months. Both firms recently raised follow-on funds for investment in Israel, to be managed by Israeli partners in their local branches. Benchmark quickly raised $250 million for its second fund. Immediately afterwards, Sequoia announced that it had closed its $200 million third fund.
Less well known, but at least as extensive, is the Israeli activity of Accel Partners. In an interview with “Globes”, Accel Partners partner Joseph Schoendorf said half of the $500 million the firm raised in 2001 ended up in Israel. “We raised the money at the bottom of the burst bubble. We made about 40 deals, half in Israel, and the rest in Europe, mostly in the UK.”
Schoendorf visited Israel last week to attend the Ernst & Young Journey 2005 Conference for Venture Capital and Entrepreneurs of Emerging Growth Companies. He said the Accel II fund would probably invest over half its $400 million in Israel. “Although we don’t have a geography-based investment policy, I don’t see any dynamic that will change the scale of our investment in Israel. If were asked to bet, I’d be prepared to say that we’ll even invest more than half the amount in Israel. This is because I see no slowdown in the pace of innovation in Israel.”
IVC Online reports that Accel’s investments in Israel include Atrica Inc., Discretix Technologies, Imperva Inc., founded by Check Point Software Technologies Ltd. (Nasdaq:CHKP) co-founder Shlomo Kramer, and Outsmart Ltd.. Accel has marked up two Israeli exits: P-Cube, sold to Cisco Systems (Nasdaq:CSCO) last year for $200 million; and Kagoor Networks, recently sold to Juniper Networks (Nasdaq:JNPR) for $67.5 million.
“Globes”: Why haven’t you opened an office in Israel?
Schoendorf: “The moment we open an office here, people will want us to lead deals. We never want to make a deal in Israel without local partners. We prefer working with Israeli venture capital funds on each investment and leading the transactions together with them. The fact that we don’t have an office in Israel doesn’t mean that we have no presence here. No week goes by without one of my colleagues visiting Israel.”
Beyond your focus on Israeli communications equipment and enterprise software companies, are their other niches you’ll invest in here?
“We intend to invest in Israeli start-ups with close ties with China. In other words, in companies that have developed products to be sold in the Chinese market or companies establishing partnerships there.”
Does Accel have a specific partner responsible for Israel?
“No, but we have four partners at our London office, who have handled most of our investments in Israel: Kaj-Erik Relander, Bruce Golden, Joe Golden, and Kevin Comolli.”
Shanghaied
Schoendorf, known by colleagues as Accel’s foreign minister, was one of the firm’s founders. He worked for many years at Hewlett-Packard (NYSE:HPQ) in a variety of posts and VP sales at Apple Computer (Nasdaq:AAPL). He sits on the boards of several companies on Accel’s behalf.
Schoendorf’s new baby is Accel’s activity in China. He lectures enthusiastically about the advantages of the Chinese market. At last year’s Israel Venture Association (IVA) conference, he gave a lecture whose title says it all: “Shanghai or Die”.
Schoendorf has handled Accel’s activities in China since 2002. Accel and International Data Group (IDG) recently announced the establishment of a joint $250 million venture capital fund: the IDG-Accel China Growth Fund.
“China is the only country in the world run by engineers. It is also the only country with a plan for a growth rate of 7-8% a year for the next 20 years. China will exceed this target this year, with 9% growth. There might be years with only 3-4% growth, but there will also be years with 10% growth,” says Schoendorf.
“I think that China’s stability today comes from only one factor: job creation. If the Chinese let the genie out of the bottle, and allow a completely free market, many people, especially from agricultural areas, will seek new jobs. The Chinese government is trying to control the labor market in accordance with needs, and if it didn’t do so, there’d be a real mess.”
Many companies complain about high costs and the long time needed to penetrate the Chinese market. What can be done to shorten process and make it less expensive?
“Companies marketing products in China must decide on a marketing strategy for China the day after they are founded. I advise companies to build part of their development inside China itself. It’s much easier for a start-up developing its products within China to sell them to the domestic market. It’s much easier to market a product in China than to try to sell a later-stage product to the Chinese market.
“In the 1960s, when I worked for Hewlett-Packard, I was sent to Europe. I learned then that the best way to operate in a country is to hire locals. Companies that want to operate in China should establish a presence with partners. All the multinational companies have already learned that all markets are domestic markets, and they dress international brands on local activity.”
What other tips would you give companies seeking to enter China?
“Moore’s Law has driven business for the past 40 years. The future of the law will focus on China, India, Russia, and Brazil huge markets from which most of the customers will come in the coming years. These markets are very sensitive to prices, and I think that processor designs adapted to these markets will be essential from day one.
“Take Dell Computer (Nasdaq:DELL) for example. It avoided the Chinese market because its competitor Lenovo sold PCs there for $329 each. Lenovo learned how to design a computer and how to market it in the domestic market. It succeeded very well.”
So you think Moore’s Law is dead?
“Not at all. Under Moore’s Law, processor complexity doubles every 18 months, while the price remains roughly the same, or even falls slightly. I think that instead of processor complexity growing every 18 months, its price will fall every 18 months. This means that the complexity of new processors will be adapted to cheaper markets, rather than the US market.
“The best example I can give to demonstrate this situation is the 441 computer, which is very popular in libraries in South Africa. This computer was designed so that four monitors could simultaneously operate on the basis of a single processor. Obviously, the cost per person on this computer is much less than using four different computers.”
Published by Globes [online], Israel business news - www.globes.co.il - on September 21, 2005