Lehman Brothers Venture Capital (LBVC) has been investing in Israeli companies since 1999. It invested in 11 local technology companies and one venture capital fund. The investment bank's venture capital arm always invested in companies alongside other institutions so it is difficult to determine exactly how much it has invested in Israeli companies. Estimates put the sum at $100 million.
The significance of the disappearance of an investor like Lehman Brothers is not entirely clear. The CEO of one of the Israeli technology companies LBVC invested in said yesterday, "I called my contact but he didn't have any answers either. At present, no one has a clue. Everyone is confused. As we see it, since the investment has already been made, we're continuing as usual and are awaiting news."
The Lehman Brothers venture capital arm was established in 1995, for the purpose of investing in technology companies that can leverage innovative technologies and management solutions for successful businesses. LBVC usually invested in privately-held venture capital-backed companies at the middle or late stages, but it also invested in mature and public companies. It invested in early stage companies very rarely. Not only did Lehman Brothers itself invest through LBVC but also its employees as well as institutional and private investors.
According to the LBVC website, it managed more than $1.1 billion, of which $717 million has been invested in 84 companies in different fields and at various stages. In September 2007, LBVC closed its fifth fund on $356 million. One third of this fund has probably already invested in companies.
Yossi Vinitsky, executive VP at Challenge Fund - Etgar, who did not make investments together with LBVC, gave his prediction of the impact the bank's collapse is likely to have. "At the moment, it does not look critical. Lehman invested in technology companies that were fairly mature, and their only problem is that they are apparently unlikely to see any further investment from it in future financing rounds. You have to understand that when a start-up receives an investment, in most cases it is made in one transaction. The companies have already raised the capital and they have the cash. No one owes them money. Investment in venture capital funds is a different story, because the money is transferred in stages."
Globes: Won't Israeli companies be harmed?
Vinitsky:"To the best of my knowledge, Lehman did not function as a regular venture capital fund in the Israeli market. It made a limited number of investments. It's not as if the companies will have to cope with having a shareholder who was also chairman and had a commitment and then one day disappeared. The companies' ongoing operations are unlikely to be harmed."
According to Vinitsky, another issue has arisen in the wake of the Lehman collapse that could have repercussions on the local market. "Lehman took quite a few Israeli companies to Nasdaq and the question now is who will float Israeli companies in their place. It is true that no one is holding IPOs at present, but I presume that there will be alternatives. This is an enormous crisis but at the moment the impact on Israeli high-tech doesn't look that bad."
Adv. Ian Rostowsky, a partner specializing in corporate law, securities law hi-tech and venture capital transactions at law firm Amit Pollak Matalon & Co. explains the legal repercussions of a situation where one of the investors in a company goes bankrupt. "The right of veto that investors have in companies is positive. Meaning that difficulties can arise in any material event in the company requiring the approval of not just the board but all the shareholders, if the investor does not respond," Rostowsky says.
What sort of events are you referring to?
Rostowsky:"A material deal by the company, bringing in a new investor with preferential rights, mergers and acquisitions and even a flotation, licensing technology, taking loans, and collateralizing company assets, all these generally require the approval of the shareholders. When problems arise with investors who also sit on the board it is sometimes easier because the investor has someone who represents him and keeps him in contact with the company. In certain cases, the director will resign from the board. But when it comes to dealing with shareholders, it's more complicated. What often happens is that the rights of the investor company that has run into difficulty are transferred to its liquidator, but sometimes the liquidator doesn't cooperate."
LBCV made joint investments with many local venture capital funds, including Carmel Ventures, Sequoia Capital, Genesis Partners, Concord Ventures, which has now ceased operations, Pitango Venture Capital, Plenus Venture Lending Fund, Poalim Ventures, and Star Ventures which has also ceased operations.
A spokesperson for Lehman Israel said the company could not comment on this specific issue, but that a number of decisions would be taken in the coming days that will clarify the situation.
Published by Globes [online], Israel business news - www.globes-online.com - on September 17, 2008
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