ASIA SEEN AS NEWEST FRONTIER FOR FIRM WITH OFFICES IN ISRAEL, NEW YORK AND LONDON
Right from the start in 1993, it was obvious to Jerusalem Venture Partners that it needed a global reach. Its debut investment was in an Israeli team based on the West Coast of the United States. The startup’s first major market for its wireless communications equipment was Europe. Netro Corp. went public on Nasdaq in 1999 and by the time the Jerusalem-based investor sold its stake, the company was trading at more than $5 billion, according to Erel N. Margalit, the venture firm’s founder and managing director. (The company did not survive the telecom collapse and was acquired by SR Telecom Inc. of Montreal this year.)
In its first decade, the firm, which insiders call simply JVP, has evolved into an important player in the venture industry internationally. It maintains a large office in New York, which also provides space for portfolio companies, as well as offices in London and Jerusalem and a presence in Japan and China. It is almost halfway through investing a $404 million fund and is looking to add two more partners to its roster.
The firm’s strategy, Mr. Margalit said, it to take significant stakes in early-stage technology companies, usually in concert with one or two other firms. It looks for startups that it can help expand internationally and believes it has a better eye than most venture firms for companies that can tackle global markets.
JVP has expertise in communications, enterprise software and semiconductors. According to VentureOne, it has made seven new investments since the start of 2002— two each in application-specific chips, communications connectivity products and fiber-optic equipment, and one in enterprise software. Semiconductors and business software are its chief targets right now.
In semiconductors, the firm is particularly interested in “the whole drive towards media both in the home and within the devices,” said Mr. Margalit. An example is Adimos, a Kfar Saba, Israel, startup that is developing chips for wireless networking applications in the home. The company, which has an office in Sunnyvale, Calif., raised a $12 million fist round in August from backers that also included Benchmark Capital, Menlo Park.
Driving JVP’s enterprise software investments is an interest in transaction-performance technology that enables managers to improve business performance without getting hopelessly involved with underlying IT issues. An example of this is Bristol Technology Inc., Danbury, Conn. (Venture Capital Analyst-Technology, September, page 8). The company started off in 1991 selling tools for running Windows applications under Unix, but got in a legal battle with Microsoft Corp. It’s now selling transaction- monitoring and management software. JVP and Apax Partners, London, both new investors, backed the company in a $9.1 million later round last July.
Summing up his firm’s strategy, Mr. Margalit said: “Semiconductors is within the theme of moving to the media and digital capability. In enterprise, it’s moving toward giving the business people in the enterprise a good understanding of what IT resources they need and how to manage them better.” He said the firm is also busy assessing technologies such as online gaming.
While it has been investing heavily in U.S. companies, chiefly in the Boston-Washington, D.C., corridor, JVP has not abandoned Israel. It still looks to make about half its investments in startups based there, Mr. Margalit said.He’s seeing “some of the most interesting technologies” coming out of Israel that are being developed by second- or third-time entrepreneurs who “know that they need partners in order to grow a big company in other places in the world pretty early in the game.”
At the same time, he said, the Israeli venture industry has shrunk from somewhere between 50 and 100 funds to about 10 “serious, dedicated funds.” As a result, “you have a good environment to make new investments if you believe in some of the markets these companies are going after.” Mr. Margalit said he remains optimistic that a political solution to the violence there will be found.
One sign of JVP’s continued confidence in Israel is that it has Haim Kopans, a founder and former chief technology officer of Precise Software Solutions, working full-time as a venture partner there at an in-house incubator for software and media companies. Veritas acquired Precise, a JVP portfolio company, in July for $609 million.
Developments Worth Watching in Japan, China
Through its London office, JVP also invests in companies doing business in Europe, although most of them can trace their roots to the United States or Israel. Asia seems of greater interest to the firm right now, particularly given its communications and semiconductor bent.
About 21/2 years ago, JVP undertook an intensive look at that part of the world. Its partners traveled there repeatedly with portfolio companies to see what markets might develop. Japan and China emerged as the most promising countries. Japan is where the firm sees decisions being made regarding the future of broadband, mobile and wired, and in consumer electronics technologies, such as video compression. JVP set up a business development office in Tokyo headed by Venture Partner Hiroshi Ikeyaya, a longtime friend of the firm.
China presented a bigger challenge. “There, more and more of our companies began to have initial sales,” Mr. Margalit said. “And when you have an initial sale in China, that’s when you’re really in trouble because once you begin to sell, the Chinese customer will expect you to have a real presence in China. And the service level that these guys are used to is very high. You need to hold the customer’s hand.
“So it became clear to us that while there’s a lot of small, interesting technologies that the Chinese customers will have an interest in, it’s going to be very difficult for these companies to go in and conquer the market on their own.”
One answer was to create a Chinese platform company to buy their products and resell them in the Chinese market. JVP got wind of just such a company being put together by Lip-Bu Tan, founder and chairman of Walden International, San Francisco. The company, United Platform Technologies, or UP Tech, is a Beijing-based telecom equipment provider. It raised a $58 million first round in April. Backers besides Walden and JVP include Morgenthaler Ventures, Menlo Park, and New Enterprise Associates, Baltimore.
JVP is still evaluating what kind of presence it needs in China. At the moment it is orchestrating a business development effort with eight portfolio companies. But clearly the firm is among a handful of venture firms that have taken steps to capitalize on their belief in a bright future for the country.
“I think that the Chinese people sort of have a quiet understanding with the Chinese authorities that there’s going to be a big movement forward but it’s going to be primarily through the economy and through the business— and that other things will follow,” Mr. Margalit said. JVP’s $20 million first fund came mainly from wealthy investors in New York. Its fourth and current fund has an impressive roster of limited partners, including Grove Street Advisors LLC, which invests on behalf of the California Public Employees’ Retirement System and others; Horsley Bridge Partners; and Massachusetts Institute of Technology.
While many VCs are scaling back, JVP intends to keep growing. Mr. Margalit said it plans to add a partner in New York and one in Israel. The firm currently has five general partners, two in New York, one each in London and Jerusalem, and Mr. Margalit, who divides his time between New York and Jerusalem.
