Sources inform ''Globes'' that European venture lending fund Kreos Capital recently invested a total of $37 million in seven Israeli companies, bringing the total number of investments since the beginning of the year to 14. Kreos Capital recently closed its third fund on $260 million. The seven companies that recently received loans from the Kreos are Finjan Software Inc., Celtro Inc., Power Paper Ltd., iamba Networks Inc., Deep Breeze Medical Diagnosis Ltd., Xeround Systemsand Civcom Inc..
Finjan, which borrowed $12 million from Kreos, is one of Israel's oldest software companies. It was founded in 1996 by serial entrepreneur Shlomo Toubol and since then it has raised $45 million from a series of investors, among them Cisco Systems Inc. (Nasdaq: CSCO), and Microsoft Corp. (Nasdaq: MSFT), as well as venture capital funds Benchmark Capital, Star Ventures, Bessemer Venture Partners. It has also received investment from Eric Benhamou. The company started out as a software solutions developer and later branched out into developing hardware-based solutions. Finjan now focuses on content security solutions and is targeting the enterprise market.
Celtro, which received $6 million, was founded in 2003 as a spin-off from ECI Telecom Ltd. (Nasdaq: ECIL), by chairman and CEO Ron Zor, and COO & CFO Zohar Heiblum. The two are also partners and managers of Momentum Management, which specializes in the formation of companies on the basis of unexploited technologies.
Celtro develops backhaul systems for the optimization of cellular operators' transmission infrastructure. The company's technology boosts efficiency on networks enabling operators to increase threefold the volume of call traffic transmitted over their infrastructures. The technology was originally developed at ECI's NGTS division, and later converted for cellular use in Celtro following its spin-off as private company. Celtro has raised $19 million to date, from a series of investors, among them, Cedar Fund, Genesis Partners, Challenge Fund - Etgar, and Plenus Venture Lending Fund.
Power Paper, which also received a $6 million loan from Kreos, was founded in 1997. The company specializes in the development of micro-powered technologies and devices. Its products include a wafer thin, flexible and environment-friendly battery that can be pasted or laminated onto any surface. The battery is fitted into a micro-electric patch that can used to deliver cosmetic ingredients into the skin or installed in radio frequency identification labels on toys or other products. Power Paper has raised $60 million since it was founded, from Banc of America Equity Partners Ltd., Amadeus Capital Partners Ltd., PolyTechnos Venture Partners GmbH, Millennium Materials Technologies Fund II LP, Yasuda Enterprise Development Co. and Toppan Forms Ltd. of Japan, and EDB Investments Pte Ltd. of Singapore. The company's Israeli investors include Ganden Technologies Ltd., GlenRock Israel, Clal Industries and Investments Ltd. (TASE: CII), Israel Infinity Venture Capital, and Millennium Material Technologies Fund.
iamba, which received $5 million from Kreos, has developed a platform for high speed communications over optical networks to end users. The technology is designed for use by traditional wireline telephony companies which face competition from cable companies for high-volume communications transmission to end users. The company's platform was developed on the basis of gigabit passive optical networks (GPON) technology, now considered the next generation in high speed optical communications transmission.
Deep Breeze, which also raised $5 million, is a medical device company co-founded in 2001 by president and CEO Dr. Igal Kushnir and Meir Botbol. The company has developed a unique device for the imaging of lung activity. It has raised $25 million since it was founded from a series of investors, including Vitalife Life Sciences Venture, Nisko Industries (TASE: NSKO), Aviv Venture Capital, and others. Deep Breeze's product has already been given CE Mark certification and it is due to receive US Food and Drug Administration (FDA) approval later this year.
Xeround, which received $4.5 million, was founded in 2005. The company develops subscriber-centric database solutions for large-scale telecommunications providers. Its solutions enable telecommunications providers to increase their revenue and make their activity more efficient. Xeround has raised $14 million to date from Benchmark Capital and Giza Venture Capital. The company was founded by Dr. Gilad Zlotkin, formerly VP engineering at Class Data Systems, and then director of engineering at Cisco after it acquired Class Data.
Civcom, which raised $1 million from Kreos, was founded in 2000. Excluding the latest loan, it has raised $32 million to date from, among others, Ascend Technology Ventures, Concord Ventures, Pitango Venture Capital, and Jerusalem Venture Partners. The company develops and produces dynamic and efficient optic components for use in communications, testing and measurements, and military applications.
Growth without drastic dilution
The current rate of activity has made Kreos one of the active funds in a field that is still not crowded. Venture lending activity parallel to venture capital financing. Venture lending funds provide loans to companies that have received venture finance. The loans bear interest and are for a set period, enabling funds to return investors their capital plus a handsome return within a relatively short space of time.
Kreos invests about one third of its funds in Israeli companies. The fund's founding partner and controller of Israel operations, Raoul Stein, told "Globes" a month ago, that "the fund would be allocating $360 million for investment in Israel over the next three years." The current investments are part of this.
Kreos was one of the first enterprises in Europe to offer venture lending and venture leasing services. Since it was founded, the fund has carried out 200 deals in 12 European countries and Israel worth a total of $500 million.
Stein says that the rate of deals in Israel was higher in recent months because a good many companies and funds are looking for partners like venture lending firms that can give companies "breathing space" so that they can continue growing without drastically diluting the holdings of the existing partners. "We're seeing a lot of companies that have reached the interim stage, are earning $10 million a year, and need additional finance in order to speed up growth. This is a good opportunity for us."
Stein says that during 1998-2003, Kreos invested €170 million in 70 deals. "These were good years for deals like these. In 2003 we raised a second €105 million." But then Stein and his partners discovered that the venture leasing market had dried up so they decided to switch to venture lending. In 2006 they started raising the new fund.
"Venture Capital comes to us"
Globes: There's a feeling that people in Israel are still unfamiliar with venture lending. There isn't even a word for it in Hebrew.
Stein: "Not just in Israel. When we started, they didn't what it was in Europe either. Outside of the US, nobody really understood what it was about. On the other hand, in 2005 the market opened up dramatically. Today, people in the venture capital industry know the sector well, and we’ve reached a state where the venture capital funds are approaching us and offering us partnerships in deals."
Why?
"Because that way, they don't necessarily have to bring in another venture capital partner. We are largely silent partners, and the company's equity is less diluted when we grant a loan"
The groups that are active in this on the Israeli market choose companies that are fairly mature.
"We like to enter early and exit early. We work with funds that will continue to support the company for at least the first three years, thereby ensuring the return of our loan. It's important to remember that we get our loan back even if the company is not a success."
What kind of return do you make on the money?
"A good return can range from 15% to 20%. Compared with the returns that venture capital hopes to get, this is considered low, but on the other hand our risk is a lot lower. We've made some good returns. We like to take risks compared with the other venture lending funds operating in Israel. This is what differentiates us from the competitors."
How do you decide whether or not to grant a loan?
"We carry out assessments, but ours are less thorough than those of venture capital. I won't conduct a thorough check of a company's technology, but I will look at the market. We enter together with venture capital funds that conduct thorough assessments of their own, and we're often willing to enter on the basis of their research. We will never get involved in the selection of employees or formulation of company strategy."
Published by Globes [online], Israel business news - www.globes.co.il - on June 4, 2007
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