Israeli start-up Microheat is making waves in the global auto industry. Founded seven years ago, the company develops and makes a device that uses washer fluid to de-ice and clean car windshields, mirrors, and headlights. Microheat is currently raising capital from private investors, and plans to hold an IPO over the next eighteen months, at a company value of at least $500 million.
Microheat chairman Peter Neustadter, the company’s original investor, says, “Right now, we’re in the middle of an $8 million private placement, which the company needs to grow quickly. We raised $14 million in our preceding round a year ago, led by US investment house Oppenheimer, which assembled a group of private investors. Our plan now is to avoid the need to raise any more capital before an IPO. It’s important for us that investors in the company, none of which are venture capital funds, regard an IPO not as an exit, but as another stage in the company’s development. We believe that Microheat can be a multi-billion dollar company.”
Neustadter is a veteran of the global auto industry, who has invested in both MobilEye Vision Technologies and Microheat. He found Microheat a decade ago. “I was looking for technology companies in Israel that could offer products in the automotive sector,” he explains.
Entrepreneur Solomon Franco, was studying law in Britain when he discovered that it took time for ice to melt on his car windshield before he could drive. He decided to give up his law studies, returned to Israel, and met Vycheslav (Slava) Ivanov, now CTO of Microheat, then a new immigrant from the Soviet Union, who had worked for the Russian space agency. Together, they founded Microheat.
Since neither Franco nor Ivanov had a background in the auto industry, the technological solution that they developed differed greatly from all the other solutions in the market. Neustadter was the first to invest in the company, injecting $1.25 million in 1998. “I invested because everyone I spoke with in the industry said it was a breakthrough. The idea was to develop a prototype, sell it, take early retirement, and spend my time on the beach. It didn’t happen,” Neustadter reminisces.
Neustadter says that two years ago, after lengthy negotiations, General Motors-GM (NYSE: GM) signed a cooperation agreement with Microheat, giving the latter the status of a tier 1 partner. Neustadter says, “This concept is less recognized in Israel, but it is quite familiar in the global auto industry. A company the size of Microheat doesn’t usually attain such a partnership; most of the ones that do are successful billion dollar companies.”
The agreement signed two years ago is being implemented now. This month, GM began selling two models of new cars in which Microheat’s product had been installed. The product will be advertised in GM’s clips and advertisements, and all the auto agencies have been briefed to present it as the next big thing. Sources close to Microheat say that the agreement with GM could generate $90 million in revenue for Microheat over the next two years.
"Globes": What exactly does your product do?
Neustadter: ”It’s a small device that heats the water that cleans ice and dirt off the windshields. The device includes a microchip that also heats the windshield in order to prevent condensation caused by a difference in temperatures from fogging it. Anyone starting the car on a snowy day knows that it will take at least several minutes to melt or scrape off the ice on the windshield. Microheat’s product does it in a minute or less. Furthermore, according to laws that went into effect in Europe this year (and will go into effect in Japan next year), the device also de-ices the headlights and the side-view mirrors. Microheat’s product also uses energy and water more economically. We have tried the device not only at low temperatures, but also at high temperatures. It turns out that it also does a better job of cleaning a layer of dust off the windshields, headlights, and mirrors.”
The company has an R&D and testing center in Netanya, and a manufacturing plant in Michigan. It has cooperation agreements with many auto manufacturers around the world, including Hyundai (KSE: 11760), Nissan Motor (Nasdaq: NSANY), Volvo (Nasdaq: VOLVY), Mercedes-Benz, BMW, Kia Motors, DaimlerChrysler AG (NYSE: DCX), Audi, and Fiat (NYSE: FIA). Microheat president and CEO Gary Pilibosian says, “We’ll begin deliveries of the product to BMW in February 2006, and to Hyundai in August 2006.”
Neustadter adds, “I hope that, within five years, the product will be installed not just in luxury cars, but in all new cars. GM currently offers the product to buyers as an option. Since investment by companies in integrating the product in new cars is $10-15 million, it’s obvious to us that installation of the product will gradually spread to all new models.”
An enormous market
Pilibosian says that Microheat’s target market is huge. “73 million new cars were manufactured this year. In China, for example, the market is growing rapidly. The new laws require auto manufacturers to install cleaners for headlights and side-view mirrors, at a cost estimated at billions of dollars a year. We predict that this law will also be passed in the US and other places around the world. We predict that by 2009, our product will be installed in 11% of the world’s cars. We therefore focused over the past two years in building a strong management and a board of directors composed of prominent industry personalities. The fact that the three most prominent people in our industry left giant corporations to join us proves that they have confidence in the company’s future.”
What about competition?
”At least for now, we don’t know of any other company that is developing, or which has launched, a product that is close to ours in effectiveness. As of now, at least, we have no competition.”
Not one of the giant companies has tried to buy your product?
Neustadter: ”We were in negotiations with one company for a year, but when we realized that they only wanted to learn more about our inventions, we called it off. We’re building a company that will be a giant company one day, and for now, we’re not selling. The market we’re addressing totals $8 billion.”
Why didn’t venture capital funds take part in the company’s financing round?
Microheat VP legal affairs Gal Golod: ”It was a strategic decision, because this is not a field in which venture capital funds invest. Furthermore, we wanted to retain our flexibility and freedom of action.”
Neustadter mentions that MobilEye, in which he invested, also received no investments from venture capital funds. “We hope that the two companies succeed in surprising the auto industry, and become global leaders from the least expected place Israel,” he says.
GlenRock Israel, Leon Recanati’s investment company, has invested several million dollars in the Microheat. GlenRock Israel director of investments Ziv Kop said today, “Microheat is exactly the type of company that we’re looking for a company that managed to successfully get through the transition from a development company to a real company that does business. This is GlenRock’s strategy to invest in companies in which other venture capital funds don’t invest.”
Published by Globes [online] - www.globes.co.il - on September 26, 2005