No exit to Nasdaq

The current crop of mature start-ups must bide their time, or sell.

The current crisis has found the high-tech and venture capital industries in better shape than one might have expected. On the one hand, the warnings of firings and company closures have been ringing out loud and clear across the industry, but at the same time, we have seen the formation of a tier of dozens of mature, and even profitable Israeli start-ups with revenue streams and customers that pay. This tier of companies is the Israeli high-tech industry's pool of potential exits either by way of an offering on Nasdaq or a through a high-priced acquisition, once the exit gates reopen.

How many companies like these are there? It depends who you ask. The optimists will name 70 companies that look strong, and which are capable of surviving a couple of lean years and emerging from them stronger. The less optimistic will single out 30 companies, of which 10 were supposed to be have gone public as early as 2009. Who are these companies? How are they characterized? Which fields do they operate in? We have tried to answer all these questions here, with the aim of revealing the cream of the local industry.

The upper layer, the top ten, consists of companies that have already filed prospectuses, some of which have even talked to underwriters, and most have declared their intention of raising capital from the public in 2008-2009. These include online advertising technology startup Eyeblaster Inc., which filed a prospectus ahead of the IPO that was scheduled for July-August and has been postponed indefinitely; IP semiconductor developer Wintegra Inc., which was set to float in June 2006, but then decided to abandon the offering and is now waiting for a fresh opportunity; WiMAX and LTE chip company Runcom Technologies Ltd.; broadband chipset maker Copper Gate Communications Ltd. and indoor wireless access solutions company MobileAccess Inc., for which 2008 would have been an ideal time to go public; as well as companies such as mobile web technology company InfoGin Ltd., enterprise IT optimization software developer OpTier Inc., and car safety technology company Mobileye NV, which have mentioned 2009 as a suitable time for an offering.

Lee-Bath Nelson, general partner at venture lending fund Plenus Venture Lending Fund, which provides loans to early-stage start-ups, feels that an assessment of a mature company should start before anything else with its management, "This is the most important thing - A mature company needs to be able to survive when times are tough," she says. Aside from management, Nelson also stresses the importance of the customer base and knowing to manage it, and adapting to changing demand, something that does not exist at small companies whose market segment is small.

Nelson believes that the tier of mature companies attests to the market's maturity and the companies' potential success, but she is not optimistic about the state of the markets. "I think that when Nasdaq opens up, the threshold will be even higher than what we have been used to. You have to bear in mind that you need to look the company's breakeven point. A company targeting the consumer market won't be balanced even if it has $100 million in investment. On the other hand, a software company that already has annual sales of $30 million will be able to see Nasdaq on the horizon." Nelson sees mature companies focusing on semiconductors, software, and Internet, what she calls a "healthy spread."

The fading prospect of listings on the public market is not just negative. History shows that Israeli venture-capital backed companies which floated were not always an unqualified success. In retrospect, at least some might have preferred to remain shielded by the secrecy of being privately-held, and provided their investors, entrepreneurs and employees a different type of exit. The troublesome record of companies that floated in 2006-2007 requires the start-ups of today to think differently if they want to hold a successful public offering, by, for example, raising additional capital at later stages, something which is all the more relevant at a time when Nasdaq's gates are closed.

According to Gary Liebler, managing partner in private equity fund Shavit Capital Fund GP LP, which specializes in later stage investments, there are dozens of companies like these today which, because of the scarcity of offerings, now seek to hold an extra, fairly large financing round, in place of a public offering. Liebler, who believes that there are unlikely to be any offerings in the next eighteen months, sees more potential for acquisitions in the near future, many of which will be made more out of a lack choice. "I think we'll see mergers and acquisitions in the near future, but those companies that are fairly strong will prefer to wait since the prices in future will be better," he says.

Israeli high-tech has been accustomed over the last two decades to assessing the success of activity by the exit strategy. This entails a dual course of working towards an offering while simultaneously looking for a sale. Alternatively, many companies look at the sale option before the company has matured sufficiently to enable it to go public. The closure of the capital market's gates has also limited the potential for making an exit at high values. Those companies that are still on the acquisition trail are there largely because of developments in their own markets.

Attempting to single out potential acquisition targets is pointless, since initiatives like these can come from any company anywhere. However, on looking through the most notable names in the industry, a number of companies emerge as ones whose markets exist and will reach saturation point within a year or two, something that will oblige them to agree a sale while they can. Another scenario is that companies whose markets are being eyed by high-tech giants will become acquisition targets for those giants, which see them as an opportunity and are willing to pay a generous premium. Companies such as flash technology company Flash Networks Ltd., PHP software developer Zend Technologies Ltd., enterprise security company Imperva Inc., fabless semiconductor company Wisair Ltd., optical communications start-up BroadLight Inc., medical informatics company dbMotion Ltd. end user performance solutions company Aternity Inc., WAN solutions company Expand Networks Inc., and even OpTier, could all make it to Nasdaq. However, the markets they operate in are fairly developed, so there is a good chance that an exit in these companies in the next two years could actually happen through an acquisition.

One company which was en-route to Nasdaq and had to postpone its plans is Runcom. The company recently raised $10 million, and company founder and CEO feels that opting not to go public isn't such a calamity. "I feel fine," he says. "Had we floated, the share could have crashed like those of other Israeli companies, because the WiMAX chip market still hasn't taken off. Generally speaking, being a private company isn't a bad thing. We wanted our offering to be a success."

Hadad denies that Runcom was forced to raise funds because Nasdaq is closed. "I decided we needed $20 million in cash, because we couldn't have gone forward and felt secure with what we had. It gives me the security of knowing that the company can continue to move forward even if the market does crash. Listing on Nasdaq is like being a singer on stage with all the spotlights trained on him. If you're not ready for it, don't go on."

MobileAccess was already mature enough to make an offering more than a year ago. The company's general manager Yehuda Holtzman said in an interview with "Globes" a year and a half ago, that it was considering the next stage in its expansion. "Globes" reported six months ago that MobileAcess had begun talks with underwriter in the hope of floating before the year is through, something which, as things stand present, is unlikely. "We couldn't actually have listed had we wanted to, but at this stage in the company's life and business, not making an offering doesn't bother us," Holtzman told "Globes". "We never set ourselves a timeline for floating. We feel comfortable where we are now."

Published by Globes [online], Israel business news - - on September 25, 2008

© Copyright of Globes Publisher Itonut (1983) Ltd. 2008

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