Jerusalem Venture Partners (JVP) founder and managing partner Erel Margalit looks exhausted. It could be because of the regular flights abroad, the intensive work, but maybe it's because JVP, the fund he founded at the beginning of 90s, has entered a dangerous tailspin. This is no trivial matter for someone who until not long ago was considered an investor with the most glittering touch in the Israeli venture capital industry, with three consecutive rankings on "Forbes" magazine's prestigious Midas List, the $675 million in assets under management, and two famous exits - the sale of Chromatis to Lucent, and Netro to SP Telecom, both for about $5 billion - Margalit has become a genuine legend. So the question now is, has the man who became a legend in the local venture capital world simply lost it, as some people in the sector are alleging, or is this a steep fall that will be the prelude to an even steeper climb back?
List of leavers
One of the main reasons for the doubts surrounding JVP can be traced directly to the personal conduct of its team members. Only the other week it was revealed that Itzik Ben Bassat, who was brought in amid much fanfare three months ago, is among those leaving the fund, adding to the long and distinguished of 11 other people who have quit JVP over the last four years, including former Ministry of Finance director general and current Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) chairman Aharon Fogel, Fortissimo Capital founder and managing partner Yuval Cohen, Israel Cleantech Ventures general partner Glen Schwaber, and former JVP studio manager and current Benchmark Capital partner Elie Wurtman.
All these departures would have been more understandable had they been in a more frenetic industry such as the high-tech sector with all its start-ups and temptations, but only rarely does one hear of partners moving from one place to another, or leaving the management group of a fund in the venture capital industry, before the fund has completed its activity. The partners manage the fund for up to 12 years by investing in, and fostering companies through to a successful exit, and with any luck, a high return. In this world, when you become a partner in the fund, you're in no rush to move, certainly not when the fund is doing well.
"The 12 partners that have left amount to around 20 young companies that don't need this kind of hassle," says a former colleague. "Ben Bassat had already been appointed to a number of company boards. Now he's leaving." "These are shocks that young companies who need stable investors could do without," says another venture capital executive, who knows Margalit well, and says that while he is a "charming person", his unsettled mood is having a bad effect on his work.
Industry sources add that the fact that Margalit is, in effect, the sole owner of JVP, with the partners benefiting solely from the profits of the management company which Margalit wholly owns, works against him, and that in most other funds the management is held by several senior partners.
Margalit changes direction
"There's a difference between noise and the truth," responds Margalit in an interview with "Globes" weekend magazine "G". "As for the departures, there has been considerable turnover throughout the entire industry. Partners are becoming company managers, and others come from the operational field and want to play the role of 'coach'. We've made big changes, and they should have suited everyone. Those who didn't feel it suited them left. That's fine."
Margalit, 46, doesn't say so explicitly, but he is clearly peeved by the fact that he is not getting the appreciation and credit he feels he deserves, given his impressive track record. "No fund has ever had exits like these," he says. "Netro and Chromatis, each went for $5 billion. We demonstrated an ability to do big things. Once the big successes were behind us, we expanded to the US, Asia and Europe too. I moved to New York, and we built an international fund, but in 2001 the world changed. We had just finished raising the fourth fund, which was supposed to make further investments in telecommunications, but then we stopped and began to think things over. I could have carried on. Netro was a mega success and I was the first to invest in it. The same goes for Cogent and other companies, including those that didn't make it.
"We built companies focusing on semiconductors, software and media, and after we bought the incubator in Jerusalem in 2002 I had two options open to me. I could either continue running the fund as an international one with an office in Israel, or make it an Israeli fund which invests in other fields. It was a personal decision, among other things. I was clear about what I wanted to do here, and that was to start from scratch because I that's what I enjoy doing, and focus on investment in media and technology companies."
Margalit is referring here to his vision to make Jerusalem, where JVP is headquartered, rather than Herzliya Pituah, or Tel Aviv, the world's multimedia capital. He is investing whatever it takes to turn that vision into reality. Although there are those within the local venture capital community who maintain that he is on the verge of collapse, Margalit promises great success.
A challenge to Pixar
Over the last five years, he decided to switch from being a fund specializing in telecommunications investments to one specializing in technology for the content and multimedia world. Action soon followed his decision, and in 2004 he founded JVP studio from the remains of the Jerusalem Software Incubator, formerly owned jointly by the state and Gad Zeevi. In March 2006, Jerusalem Animation Lab was founded, and Douglas Wood, a leading Hollywood producer, moved to Jerusalem, to set up a studio that sought to challenge the animation giants Pixar (creators of "The Incredibles" and "Finding Nemo"), and DreamWorks (creators of "Shrek" and "Madagascar"). In between, Margalit also opened in Jerusalem "The Laboratory", a combined café, restaurant, and center for dramatic arts. The studio was set up at the same time as Margalit was attempting to raise $100 million to turn the old railway station in Jerusalem into the largest animation studio outside of the US. Megalomania or realistic vision? Time will tell.
Globes: Why not continue with what you were good at?
Margalit: "Because I believe that Israeli high-tech's next stage, if it wants to compete with China and India, has to be in something new. We'll lose ground to them in standard R&D. It's true that there's a myth that we're good solely in technology, but I believe that there's a massive world-class force of creativity over here. I think that what Michal Rovner is doing is entrepreneurship - taking art to the international market and making a success of it. That's what we did at Cogent and Netro. It's not just about money, it's part of a vision to create companies in certain fields. It's what life's all about."
Why especially media?
"I was inspired by a three-dimensional presentation that I saw in one of the shows at the laboratory. Sometime later, we teamed up with Mike Schulhof, now a senior adviser with the fund and one the giants of the media world on the West Coast. We discovered that many of the media giants are Jews who feel it's important to do things in Israel. They, for example, are some of the investors."
Funds usually don't make changes in strategy like these. They raise the capital on the basis of their track record in a certain field.
"The change was approved by some of the investors. I therefore thought that we also needed to undergo an internal process before we started raising capital for a new fund. You have to realize that once you've raised the fund, making changes is difficult. So we made the change during the fourth fund. We announced the move, which led to the scaling down of activity overseas. Those people who had been with me for years had to decide whether they liked the change and whether it suited them, because anyone who did decide to stay would obviously have to commit to staying on in the long-term. The fact that some people didn't like it is perfectly in order. They weren't partners in the third fund, but in order to make them partners in the fourth fund, a long-term commitment was essential. "
Are you working in collaboration with local funds?
"Sure. We're collaborating with Walden, Evergeen, Gemini, Vertex, Giza, and others. We will continue to do so in future. Israel has a critical mass of funds, and the people in the industry are good at what they do, and have had successes and failures. That said, I'm sure that some colleagues in the industry have a thing or two to say about us."
They say you're dictatorial, and that people can't work with you. Do you consider yourself a team player?
"I was center in Israel's national youth basketball team, so I consider myself part of group. Sepaton (an IT company that JVP helped rescue. B.F.) could have not have been saved without team work. You have to able to come with ideas that others can take, tinker with, and improve on. I am surrounded by media people who are smarter than me. I work in a team. I think that perhaps some other people had a problem with team work."
What sort of exits are you promising investors?
"JVP is a deal maker, because our job is to deliver a return on the money. We're not thinking about how we can sell the companies for $150 million, we're going for the big time. Every quarter we host the investors at the Mishkenot Sha'ananim center and give them an updated report. That's how we stopped ourselves from sinking in the telecommunications world. We took a new direction and believe that it will be a great success."
And how are the returns?
"The returns on the fourth fund from 2000 are going to be excellent. Investors told me that it will be among the top five funds globally in this calendar year. I believe that part of the success is thanks to the fact that we didn't find ourselves sinking in the telecommunications world that we're familiar with, but instead we thought it over and took a new direction."
Do you have any money left for new investments?
"JVP 3 raised a further $22 million, after the first $160 million ran out, although the opportunities didn't. The fourth fund was big, and we took some credit in the form of recycled money. Reaching an arrangement at a time of change is easy. We're making new investments, and we have several tens of millions of dollars (around $35-50 million, according to estimates, B.F.) with which to continue investing.
Where's the exit?
Margalit sounds complacent, but the cycles in the venture capital world are familiar. A new fund is raised every four years. Some firms in the US raise one every two years. Margalit, on the other hand, has not raised a fund since 2001, and he is trying to raise one now. Still without any exits by media companies or animated films, but with an entire operation ticking away. The thing that could work against him in his dealings with the fund's investors is, as mentioned earlier, the departure of the funds' partners. Investors in funds attach great importance to steady teams.
"Venture capital investors will not be in such a hurry to invest in a fund operating in non-traditional fields like these," says a senior executive in the investment world. "We haven't heard of any other venture capital fund that produces animation as a start-up. What are they planning to do at JVP? Float the film on Nasdaq? Sell it? Market it themselves? The ones that don't sell and invest in funds are institutions such pension and insurance funds. Can you see them recording in their reports that they're invested in animated films? What's more, we don't see a steady team there that can run together for ten years. How much longer can Margalit go it alone?" The executive adds, however, that "it would be interesting to be there and see the studios, and see if they are doing something that's different. I hope it goes well for him."
Margalit, in all honesty, do you think you can raise another fund?
"What do you think?"
I think that if the market situation stays as is it is right now, there's a good chance.
"So do I."
Published by Globes [online], Israel business news - www.globes.co.il - on August 22, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007