Dov Moran: $1 billion sales is less than 1% of the market

Dov Moran's Modu plans an IPO in Tel Aviv, while question marks still hang over its cell phone concept.

To an onlooker, Modu, the current baby of Dov Moran, could look like an established company in its field, with a long history, and a proven record. The company's prospectus, published last week in advance of an IPO on the local market, reveals a company that is a start up in every respect.

It's a start up in which $100 million have been invested (an investment that has yet to prove itself worthwhile), with a grand vision that clashes with a cruel reality, and that has yet to justify the media hype it has generated ever since it emerged from Moran's imagination.

"Modu came into the world with a lot of noise, because that was our strategy," says Moran in a special interview with "Globes". "We wanted to start big, not small, because we believed we had a revolutionary idea. A year after we founded the company, the market changed. The financial crisis had consequences we could not have foreseen."

Moran is no different from other entrepreneurs and CEO who find in the crisis an excuse for this or that failure, but in his case, perhaps because of the forthcoming IPO, it is easier to extract an admission that he made apparently wrong decisions post-crisis.

Modu, which develops modular cell phones, started out as a developer of cell phones that could connect to other devices (such as a PC or a television), but had to switch focus, and invested most of its efforts in developing its first product, Modu 1, after the software house that was supposed to produce the operating system for the device went into liquidation and disappeared.

"We took upon ourselves the role of software subcontractor, and that was a mistake," Moran acknowledges. "That decision caused us to invest a great deal, both financially and psychologically, in the wrong place, and so the first product was launched more than a year later than originally planned."

You said yourself that you chose to start big, but from the peak you can only go down. Perhaps you should have stayed on a back burner, thereby avoiding creating antagonism.

"I agree with you that the media noise created antagonism, towards the company and towards me, but that's the strategy we chose. We gambled. We decided to make a noise, to raise a lot of money, and to sprint ahead, and we did indeed raise a lot of money, and we created international awareness, but it didn't work as planned.

"I didn't set up Modu to become rich. I'm rich enough."

So you admit you made mistakes.

"My mistaken decision was not to stop when the software house went. As far as the media noise is concerned, we made a decision, and the fact that the decision did not turn out well for us doesn't mean that we were wrong when we made it."

Still, perhaps you shouldn't have come out with bombastic declarations, and should have been a little more realistic about the company's future.

"It's not a matter of being realistic or not. Had the market not changed in the way it did, the first Modu might have been launched on schedule, and with the right product environment, things might have looked different."

In its short three-and-a-half year life, Modu has managed to change its business model, and for Moran, even if he won’t admit it, it's hard to stay calm when he is forced, as he puts it, "to read incorrect things about the company."

Modu, as the prospectus explains, has developed two mobile telephones. The first is the "Modu T", while the second is a WiFi-based device ("Modu W"). Both devices, like other smart phones, have a variety of uses, but Modu strives to distinguish them from the others through their light weight and compact dimensions, and, no less importantly, through their lower price.

Moran describes the Modu T as a solution that lies between feature phones (mobile telephones with a limited range of applications) and smart phones (such as the iPhone), and points to a forecast of research company Gartner that even in the distant future, most people will be unable or unwilling to finance the purchase and upgrade of expensive smart phones, and will therefore mostly use feature phones and devices such as the Modu.

Thanks to this projection and others, Modu has so far raised $124 million ($104 in equity investment and a further $20 million in the form of a convertible loan), a large sum for a company set up three years ago. In the current offering, Modu will attempt to raise (in shares, bonds, and warrants) tens of millions more the final amount has not yet been decided at a minimum valuation of $120 million before the money.

The company's performance is still a long way from justifying such heavy investment, and there is a question mark over whether it ever will, but such doubts don’t dent Moran's optimism. "We live in a changing world, and as part of the change, our personal computer goes with us everywhere, as evidenced by the success of tablet computers such as Apple's iPad," he says. "This is a life-changing product. When I bought one, I stopped using the smart phone I had."

But if the iPad is wiping out the smart phone, why should Modu have a future?

"Because the smart phones will eventually go back to their roots and will mainly be used for making telephone calls. But we will still need to be connected everywhere we go, and to those places where we won’t take a tablet computer, such as to a restaurant or a party, we will take a smart phone."

Nevertheless, Modu is in a very competitive market, and is contending against giants like Apple and Google. This is not a virgin market, and Modu is not inventing the wheel.

"I have never gone into a virgin market, and I have never said I was inventing the wheel. Modu is bringing a good product to a huge market that is not saturated with players. Therefore, even taking a small market share will represent a great achievement. A billion dollars in sales sounds like a huge number, but it's less than one percent of the entire market. It's hard, but doable."

Modu's choice of the local capital market for its IPO is perceived as a default choice. The company's existing investors did not want to continue investing in it, and it had no choice but to turn to the local stock market and pay the price of exposing its numbers at an early stage of its life.

"I did have a choice, namely to raise more money from non-Israeli venture capital funds, but most venture capital funds do not invest in companies with valuation above $10 million. On the other hand, private equity funds do invest in such companies, but in Israel there aren't funds like that, and foreign private equity funds don't invest in non-local companies. There are no entities in Israel suitable for follow-on investment in companies like Modu."

Moran admits that it won't be easy to persuade investors that he is on the right course. "It's difficult, but I hope we will blaze a trail or similar companies," he says.

At this point, Moran mentions Wintegra, which was sold last week to US giant PMC Sierra for $240 million, and gave up on a Nasdaq IPO. "A company like that should have been floated in Israel," he says, adding with unsurprising pessimism, "It's hard to grow companies in Israel. There's no high-tech industry here, only a start-up industry, and that's very sad."

"In order to change the situation, we have to educate Israel's investment institutions, such as pension companies that manage our money, to invest more in high-risk companies, but I'm not sure they're ready for that.

"It would be enough if the pension funds were to invest just a small proportion of their money, a few percent, in technology companies for such investments to give them value and for Israel's high-tech industry to flourish. You can't blame them; the main blame lies in misguided regulation"

As an example, Moran mentions Prudential Securities, one of the main investors in his previous baby, M-Systems, before it was sold to SanDisk. "Prudential is like Menorah in Israel, except that it has a fund for investment in growth companies. The success of the fund is a success for Prudential, for those insured with the company, and for the companies in which Prudential invests," says Moran, admitting that educating the institutions in Israel in a new way of thinking is no simple task.

"But," Moran concludes, "I'm not deterred by difficult tasks."

Modu is owned by Dov Moran (35.9% - equity investment $13.5 million), Idan Ofer (14.8% - $20 million), SanDisk (8.6% - $5 million), Kingston (6.7% - $5 million), private investment firm Rhodium (in which Tom and Dafna Kaplan are invested) - (6.2% - $15 million), Generali (6.1% - $10 million), the Genesis fund (5.2% - $5 million), and the Gemini fund (5.2% - $5 million).

Published by Globes [online], Israel business news - - on November 4, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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