Pitango Venture Capital has become synonymous with Israel's venture capital industry, and it is now considered a brand in its own right. Every novice entrepreneur knows the name, and that it is Israel's largest fund. Although there are other funds with better results, the name Pitango has become a brand that represents success. Two months ago, it closed its fifth fund, which was oversubscribed, on $330 million.
The fund was founded as Polaris in 1993 by Rami Kalish, who was joined three years later by Chemi Peres. Pitango now has 12 partners, and manages $1.3 billion in five funds, investing in IT, telecommunications, life sciences, Internet, and other fields. In an exclusive interview with "Globes", Kalish and Peres talk about Pitango, and about the venture capital and high-tech industries in Israel in general.
Globes: One of the claims made against Israeli venture capital is that companies are sold too soon, that there are not enough billion-dollar companies.
Peres: "There's Teva, Amdocs, NICE, Check Point, and others. They didn't grow to what they are now in a day either. I think that more big companies have come out of here than people believe, and fewer than they dream of. It takes patience and time. Let us grow in peace."
Perhaps you could explain why the venture capital sector draws so much fire and so much hostility in Israel. Why does everyone love to hate venture capital funds?
Peres: "This attitude really is difficult to understand, and it is different from the attitude towards venture capital in the US. The entrepreneurship world is the one that matters to us. We try, overall, to invest in top quality groups. We look for ventures with a great vision, and with which we can go forward together. We receive about 1,000 business proposals a year. That means at least 1,000 people who believe in their stories and see their futures in them. On the other hand, we make around one investment a month. That means 10-12 a year. This leaves quite a few disappointed people, although the fact that we didn't invest in an idea does not mean it isn't a good one and that the company won't be a success.
"Entrepreneurs often come away with a sense that they have been misunderstood, although we conduct a very thorough and respectable vetting process. Entrepreneurs are not always happy with the speed of our response, so there can be bad feelings afterwards. It's part of the business. That said, it's important to remember that you can't be a venture capital investor without experiencing failure."
Kalish: "We say no to 990 entrepreneurs. They might be high quality and with a vision, but they don't fit our slot."
Is Pitango a carefully designed brand, or a successful venture capital firm?
Kalish: "Pitango is both a brand and a good fund. The smooth and rapid closure of the latest fund proves this. We planned to raise $300 million, since we felt that would be the right size. There was demand, and we had to increase the sum because there were investors who didn't want to give up their share, and new investors who wanted to join. So we raised $330 million. We didn't want to go any higher than that."
Were there any investors who opted not to carry on with you to the fifth fund and left?
Peres: "There are always investors whose agenda doesn't fit in with the funds' timetables, whether they're involved in raising a fund themselves, or have made commitments to other funds."
Kalish: "We try to maintain a balance whereby 80% of the investors are veterans, and 20% are new and interesting investors, who haven't invested in Israel before. As a fund, we obviously feel it's important to increase our circle of investors."
Can you describe the fund's investors?
Peres: "They are non-Israeli institutional investors, top-rate financial institutions with a thorough understanding of the venture capital sector, and institutions which invest in venture capital. We have also increased the share held by endowment funds."
In other words, foreign investors?
Peres: "I don't like that word. The entities that invest in us are international institutions that have an allocation for venture capital investment and they want to invest in Pitango. They just happen not to be Israeli."
How is it that all the funds talk about the importance of bringing in Israeli institutional investors, yet nothing is happening?
Kalish: "I believe it will happen. I think that in the past there was a lack of coordination between investors and venture capital funds. Israeli investors took the wrong attitude towards the field. The expectations were different. I think this has changed and that they now have a better understanding. So I believe we'll see them investing in Israeli funds in the near future.
Peres: "Regardless of Pitango, as someone who is a former head of the Israel Venture Association and still active in it, this issue is of national importance. It is vital that the entire food chain supporting start-ups in Israel is strong. I mean capital funds, the Tel Aviv Stock Exchange, and, obviously, institutional investors. There must be a strong Israeli base, and I believe we'll see it taking shape. We all know there's a dissonance in the fact that Israeli investors don't invest in venture capital."
The other week, "Globes" published the quarterly results of the California Public Employees' Retirement System (CalPERS). According to these, your third fund, which manages $500 million, recorded a negative 11% return in the second quarter of 2007, and a multiple of 0.6 on the money, meaning a write down of $200 million. Aren't these dismal results?
Peres: "These are reports that reflect a financial reality. We value our portfolio value, but the reporting on CalPERS' results is not always accurate. There's a good deal of information that hasn't been taken into account."
How many Googles are there in the US?
Let's talk about the failures.
Peres: "We're proud to have invested in 120 companies. It's true that some of them were not successful, or have yet to become so. There are many reasons for this. We do our utmost to provide the financial and managerial means of realizing the vision, to support and help. I really don't understand why Israeli venture capital is unpopular."
According to IVC data, you closed only 8 out of the 56 companies in the third fund from 2000, and made 18 exits, not all of which were resounding successes, and you didn't close any companies in the fourth fund. Does this mean you have a lot of companies that barely survive?
Kalish: "The figures aren't far removed from reality."
Peres: "It's very rare to have companies where everything goes smoothly from the day they are founded to the exit. This is a difficult process, by definition, with crises from all directions. Sometimes a new competitor appears with a better product, sometimes the development takes longer than expected and needs more resources, or a big deal collapses. You also have instances where managers can't handle things, and occasionally the market simply disappears. It happens in public companies too.
"Pitango goes out of its way to help companies experiencing crises, and does whatever it can to help them cross this river. There are those who despair and throw in the towel, while others believe they have to carry on and keep the company going until it is successful. This is true of all companies, save the odd ones whose path was strewn with roses. The same goes for the US. How many Googles do they have over there?"
Kalish: "On the other hand, sometimes there are companies that clearly have to be closed down, and this is the hardest part of our job. We reach the decision together with the entrepreneurs and company managers, once everyone understands that time and effort will not deliver results. When you reach the point where there's no chance of surviving the crisis, you have to be able to call a halt.
"We believe that as long as there is motivation on the part of the entrepreneurs and managers, you can go on fighting. We realize what a lonely and cruel role entrepreneurs have, and we want to help them cope. We've done this several times before, and our experience can help them cope when times are tough."
Have you given any thought to the future? To the building of the next generation like Jacob Burak and Ofer Ne'eman have been doing at Evergreen?
Peres: "No way! We feel we've only just begun. The passion is still there, and we're not out of touch. We still make telephone calls and accompany our portfolio companies to exhibitions."
Kalish: "The next generation grows naturally, you don't need to build it. I have no plans for retirement. I believe the changeover will happen on its own. I feel our industry is still in its infancy and that it has tremendous potential. How it will happen is difficult to predict, but the industry is expanding and reaching some interesting places, and we want to be part of this, to be the leaders."
The Pitango supermarket
Pitango's investments cover a diverse range of fields. In this respect, it is a kind of supermarket with investments in life sciences, Internet, communications, telecoms, storage, networks, and, more recently, a few investments in cleantech. Peres and Kalish are actually proud of the diversity.
Peres: "We have three partners in life sciences - Ruth Alon, Nissim Darvish, and Ittai Harel. They, for example, will not handle investments in software, even though they are, of course, exposed to the other partners' activity during partner meetings."
Kalish: "We have believed in life sciences from day one, and we have reaped the benefits. Our team is positioned to realize the potential this field holds. We have made all kinds of investment in biomed, including pharmaceuticals and biotechnology, and not just medical devices."
What about up and coming fields? How do you the buzz?
Kalish: "If a new field surfaces that we feel we ought to learn, we put together a team, sometimes together with a venture partner, and we look at what it has to offer. We look at how companies are built, how to calculate company valuations, where the market is, who the potential customers are, and then we decide.
"We've looked at Homeland Security over the years. We're now looking at cleantech, and we've already made three investments in it - two in energy companies, and one in a company that offers energy conservation solutions in the IT world. You have to stay away from hype and fads in all the new fields. You need to fully understand which fields are worth taking a risk on.
"We decided not to develop Homeland Security as a sector in the fund, but we have made the odd investment in it. It's not what we're looking for - rapid growth, and a launch on international markets. This is venture capital's contribution in Israel - boosting growth and exports, and creating new jobs."
A diversification and balance strategy
Kalish and Peres believe that what makes Pitango a success story is, among other things, its strategy.
Peres: "Our strategy is guided by two key elements - diversification and balance. Diversification, from this angle, means we won't invest all the capital in companies in one field, but we spread the resources across different fields; and balance, in this context, means ensuring we don't invest solely in companies at a certain stage, but we divide the investments among companies at differing stages. This creates a balance in the portfolio between fields and stages.
"Another element is the attempt to remain balanced and generate interaction between the sectors, something that gives companies an element of support and reinforcement. An even more important element is the team. Rami and I wanted, right from the outset, to build a strong and large partnership. Pitango now has 12 partners, two of whom are less active - the US partner Bruce Crocker, and Zeev Binman, our CFO, who does not make investments. In other words, there are 10 partners that make investments. If a funds invests, on average, in 30 companies, that means that each partner will make two or three investments during the fund's life, one a year.
"In addition, the partners support the companies right through to the exit. I think that in comparison with any other fund in Israel, we have the largest team, and the most resources per partner."
Kalish: "We wanted a team of partners that will be in for the long-haul. Every partner has the time he or she needs to work with the companies. They used to think that it takes two years to set up and float a company; today it can take ten years, and that's OK. The companies need to be more mature when they're preparing for an IPO. The infrastructure we've built and the money we have helps them get there."
Published by Globes [online], Israel business news - www.globes.co.il - on November 29, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007